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US Securities and Exchange Commission

Who Should Provide ESG Assurance?

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Soyoung Ho  Senior Editor, Accounting and Compliance Alert

· 5 minute read

Compounding an already complicated question related to a potential requirement for standardized environmental, social, and governance (ESG) reporting is who should provide assurance of such sustainability information.

Investors have increasingly been demanding ESG information that is consistent, comparable, and reliable.

Third-party assurance can bolster that reliability part. And investors do not necessarily believe that independent auditors should be the ones to check the ESG information, according to the CFA Institute’s comment letter to the SEC.

This is because auditors “don’t have the necessary underlying functional expertise and they are traditionally opposed to providing assurance on forward-looking information,” wrote Sandra Peters, senior head, global financial reporting policy advocacy, CFA Institute.

Accountants or Other Experts?

Large companies also seem to believe that experts other than financial reporting auditors should be the ones to provide the assurance.

More than half, or 264 companies, of the S&P 500 index had some form of assurance over ESG metrics as of June 18, according to an analysis by the Center for Audit Quality (CAQ), published on August 9, 2021.

Only about 6 percent of companies—or 31—got assurance from an auditor, but this includes well-known companies like Google LLC, Netflix, Inc., The Coca-Cola Company, Verizon Communications Inc., United Parcel Service (UPS) Co., and Johnson & Johnson Services, Inc., according to the CAQ’s analysis.

However, the rest—or 235 companies—used services from an engineering or consulting firm. Two companies got assurance from both an accounting and a non-accounting firms.

According to a 2017 survey of CFA Institute members, 69 percent said it is important that ESG disclosures be subject to some form of independent verification. And 56 percent of global respondents chose professional service firms with ESG expertise while 30 percent said public accounting firms were best positioned to do the work.

“While we recognize that the accounting and audit profession identifies assurance of sustainability disclosures as a business opportunity, investors – as noted above – are not sure they are best qualified to provide such assurance,” CFA Institute’s Peters wrote the SEC.

Auditors have the underlying expertise necessary to provide attestation and assurance over accounting data, Peters wrote, but ESG is not typically based on accounting information but rather on climate science, human capital, and other areas of expertise. Such information can be more forward-looking than auditors are traditionally comfortable with.

“We are concerned that the necessary subject matter expertise for providing assurance (e.g., knowledge of climate or human capital issues) does not reside with those in the accounting and auditing profession,” Peters wrote. “We also know from past experience that accountants and auditors are not comfortable with forward-looking information as at every turn, investors are denied forward-looking information from financial statements and disclosures in other parts of SEC filing or registration documents.”

“Accordingly, we are not convinced that auditors are best placed to provide such assurance, and whether their traditional focus on historical information will limit the usefulness of their assurance,” Peters concluded.

The U.S. Chamber of Commerce, also in a comment letter to the SEC, urged the commission to allow a market-developed approach to third-party assurance. The U.S. Chamber cited accounting, engineering, and consulting firms. But companies should be the one to determine it.

However, in a separate comment letter to the SEC, the CAQ said a public company auditor increases investor protection because the auditor can better enhance the reliability of ESG information just as the auditor does with the audits of financial statements and internal control over financial reporting (ICFR). An affiliate of the AICPA, the CAQ represents accounting firms who audit public companies.

“As part of the audit of the financial statements, public company auditors are required to understand the methods, assumptions, data, and relevant controls used by management to develop accounting estimates,” wrote Catherine Ide, CAQ’s Vice President for Professional Practice. “For example, certain climate-related risks may have a material effect on the useful life assumptions of assets reflected in financial statement accounts and subject to financial statement audit procedures. The auditor’s understanding informs the auditor’s risk assessment and development of procedures to obtain sufficient appropriate audit evidence, which serves as a basis for the auditor’s conclusion on the financial statements.”

Integrated Reporting

Meanwhile, 59 advocacy groups, including Americans for Financial Reform Education Fund, Public Citizen, and Better Markets, said whenever appropriate, ESG disclosures should be integrated in the company’s audited financial statements. This would better allow the SEC to enforce the disclosure requirements.

In particular, they said that the SEC should require that CFOs and a board member of medium to large companies to assess and certify the accuracy and completeness of ESG disclosures.

Then an independent auditor should be required to attest to and report on those assessments and certifications, similar to the requirement in Section 404(b) of the Sarbanes-Oxley Act of 2002.

“This integrated audit process will provide an early and important assurance that management and the board have not omitted any material climate disclosures,” the organizations wrote in a comment letter.


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