Evolving stakeholder needs
The world is grappling with complex challenges such as climate change, the depletion of natural resources, technology disruptions and the impact of global pandemics like COVID-19. Traditionally, corporate reporting has been mainly centred on the financial performance of an entity. This is now evolving as stakeholders are interested in not only the financial position and financial performance but also in the nature of products and services produced by the entity, their business models, and the related impact on the environment and wider society.
South Africa continues to be one of the most economically unequal societies in the world, as indicated by the latest available Gini coefficient. The Gini coefficient is a measure of the distribution of income in a country and provides an index to determine the income and wealth inequality within a nation. In an ideal situation where income is perfectly distributed, the Gini coefficient is equal to 0, whereas a Gini coefficient of 1 represents the highest inequality. The latest officially published Gini coefficient for South Africa that was calculated in 2015 was 0,65 points, which is heavily weighted towards inequality.
These challenges have not only resulted in a demand for greater transparency of the financial results of entities but also in the need for entities to report on broader aspects of the business operations as they relate to environmental, social and governance (ESG) matters in order to provide stakeholders with insight into the future sustainability of the entity. Increasingly, investors and analysts are incorporating ESG considerations in their decisions and the demand for assurance on these broader matters as reported on in the entity’s extended external reporting (EER) is increasing,
Importance of the assurance function
The assurance function plays a crucial role in enhancing investor confidence, thereby promoting the stability of the capital markets. In this continuously evolving business world with its opportunities and perils, auditors need to be responsive to thechanging needs of the stakeholders in repositioning themselves to ensure that they retain their role as the conscience of the capital markets and protectors of the public interest.
One can argue that auditors are best placed to offer assurance on EER given the position of privilege that they have when it comes to having insight into an entity’s activities and information. Auditors are also best positioned to be able to connect the financial information to other reporting areas. However, for the profession to take a lead in this area, auditors will need to go beyond the traditional route of providing assurance on the financial statements alone.
The combination of internationally recognised reporting frameworks and assurance standards and highly skilled assurance providers, complemented by useful guidance on the assurance process, is crucial in ensuring the credibility of EER of entities.
Developments in the standard-setting area
In the area of EER, two main assurance standards are used to perform assurance engagements:
- International Standard on Assurance Engagements (ISAE) 3000 (Revised), Assurance Engagements Other Than Audits or Reviews of Historical Financial Information (ISAE 3000 (Revised)), as issued by the International Auditing and Assurance Standards Board (IAASB)
- AccountAbility 1000 Assurance Standard (AA1000AS), as issued by the AccountAbility Standards Board
ISAE 3000 (Revised) is premised on the basis that the members of the engagement team performing the assurance engagement are subject to a recognised Code of Ethics for Professional Accountants related to assurance engagements and that the practitioner is a member of a firm that is subject to International Standard on Quality Control (ISQC) 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements (ISQC 1). In South Africa, auditors are required to comply with the Independent Regulatory Board for Auditors’ Code of Professional Conduct for Registered Auditors (revised November 2018) and all professional accountants firms that provide auditing services are required to comply with ISQC 1. This further supports the notion that in South Africa, auditors are in a good position to provide assurance on EER-related engagements.
On 18 March 2021, the IAASB approved the non-authoritative guidance on applying ISAE 3000 (Revised) to EER assurance engagements.
EER encapsulates many different types of reporting that provide information about the financial and non-financial consequences of an entity’s activities and includes information relating to ESG considerations reported on by an entity. EER may also include future-oriented information relating to these matters.
The aim of the IAASB in issuing the guidance is to promote the consistent high-quality application of the Standard in EER assurance engagements to:
- Strengthen the influence of such engagements on the quality of EER reporting
- Enhance trust in the resulting assurance reports
- Increase the credibility of EER reports so that they can be trusted and relied upon by their intended users
Such aims, however, may never be achieved in the absence of transparent, consistent and comparable reporting frameworks and standards.
In the context of financial reporting, International Financial Reporting Standards (IFRS) developed by the International Accounting Standards Board (IASB) provide a framework for comparable financial reporting for entities across the world. Within the EER space, currently no globally recognised framework has been issued by an international body. Rather, a number of reporting frameworks exist, which is not conducive to comparability.
A common form of EER is a sustainability report issued by an entity that combines the economic performance of the entity with the social and environmental matters of interest to stakeholders. In order to create transparency, consistency and comparability in sustainability reporting, the International Financial Reporting Standards Foundation has made a proposal to establish a global sustainability standard-setter alongside the IASB, namely the Sustainability Standards Board (SSB). This standard setter would build on the existing frameworks and standards in order to develop a global set of sustainability reporting standards.
Those charged with governance have the responsibility to produce transparent, consistent and comparable EER of high quality. Given that auditors are best placed to connect EER to the financial statements that they provide assurance on, they may be best placed to enhance the credibility of these reports. Standard-setting bodies and regulators should work together to promote internationally recognised frameworks that result in transparent, consistent and comparable reporting.