Business relationships in difficult times
CPAs are the preferred choice.
A new era for reporting and assurance
Environmental, social and governance, or ESG, considerations have increasingly become a core part of investment analysis and a top priority for corporations and communities. There has been an acceleration in the number of companies reporting on ESG risks and opportunities; a dramatic shift in the range of stakeholders (investors, employees, customers and others) demanding ESG prioritization; an evolution of laws and regulations on ESG matters; and massive fund flow into ESG investment strategies as the finance sector increasingly recognizes the importance of ESG factors to long-term performance and corporate value.
Yesterday’s focus on only financial statements is giving way to an integrated approach that brings financial information together with broader business reporting. In particular, investors and other stakeholders seek robust ESG information, and organizations across all industries are endeavoring to provide it.
Transparent reporting on ESG risk management and ESG opportunities allows investors and other stakeholders to assess how well prepared a company is for potential changes related to its operating environment and for market trends that could have a material impact.
Obtaining assurance over a company’s ESG information is essential to help ensure that reporting is of high quality, reliable and comparable.
To increase stakeholders’ confidence in the reliability of ESG information, corporations are engaging independent Certified Public Accountants (CPAs) to perform assurance engagements on their ESG information. A number of measurement and reporting methodologies are applied in the preparation of ESG information in accordance with recognized sustainability standards, requiring deep professional knowledge and expertise to obtain assurance. Research indicates that, among other benefits, assured ESG information results in a lower cost of capital; research further indicates that the benefits are more pronounced when an independent public accounting firm provides the assurance.1, 2,3
Reliable, comparable and relevant ESG information begins with quality reporting by company management. CPAs can help at this stage, and other steps along the way, to build credibility and trust.
Who wants assurance on ESG information?
Company-reported ESG metrics and disclosures are being relied on by an increasingly diversified stakeholder base, both within and outside companies, to evaluate risk, drive internal operations and make investment, purchasing and employment decisions.
Board of directors
Because investors increasingly see ESG issues as a window into business viability and the future of company performance, boards may want to assess whether public-facing disclosures about ESG are of high quality.
Investors are increasingly focused on ESG information because they find such information helpful in understanding the resilience of a company’s long-term value-creation strategy, and the information enables them to manage their investments based on ESG risks and opportunities.4 Third-party assurance can enhance confidence in ESG information by providing insight into the reliability of management’s assertions, data and disclosures. In addition, investors increasingly look to published ESG ratings and data provider reports to make decisions (for example, ratings on ESG indexes including the CDP [formerly known as the Carbon Disclosure Project] and Dow Jones Sustainability Index [DJSI]); external assurance on the ESG information can contribute to improved ratings performance.
Management may want to seek assurance from a third party to obtain an independent opinion or conclusion on its ESG reporting prepared in accordance with suitable criteria.5 Assurance by a third party can be an important tool to enhance management’s confidence in its ESG data management and reporting processes to better inform strategic decision-making and understanding of performance against goals.
Obtaining assurance on ESG information can also support companies in
signaling to their stakeholders the importance of ESG reporting to the company,
identifying limitations of controls and reporting systems around ESG reporting,
raising awareness of the importance of the quality of ESG information at the board and C-suite level and
driving better decision-making based on higher-quality ESG information.
Many believe that key ESG factors (such as corporate culture, human capital management and climate change strategies) promote corporate success and value. Therefore, these and other key ESG matters likely will be increasingly important to corporate competitiveness and reputation, especially with future investors and consumers who have a keen focus on corporate culture and approach to ESG issues.
Customers, suppliers and prospective employees also may rely on a company’s ESG information to make decisions, and assurance by a third party could enhance the reliability of such information. For example, information on a company’s ESG practices in the supply chain may affect whether a customer purchases a product from that company or chooses to purchase it from a competitor.
Why is assurance
on ESG information needed?
Obtaining assurance on ESG information enables a company to convey its commitment to providing quality, reliable and comparable ESG information to a growing and increasingly diversified stakeholder and investor base. Assuring ESG information helps identify opportunities for improvement of systems and processes surrounding the collection and reporting of ESG data and, ultimately, more reliable and decision-useful information.
Producing accurate, reliable ESG information in turn results in the following:
Increased stakeholder trust and confidence in the information.
Improved communication and collaboration among parties responsible for financial reporting and ESG reporting, which may be different.
Greater coverage by analysts because an improved information environment reduces forecast errors and allows for the convergence of analysts’ expectations about a company’s future profitability.6
Increased comfort among equity investors funding capital to entities that obtain assurance over ESG information to signal that their social and environmental risks are being effectively managed, translating to lower cost of equity.7 High ESG-rated companies have been less exposed to systematic risks — risks that affect the broad equity market or market-like sectors or industries — than low ESG-rated companies.8
Lower average cost of debt of high ESG-rated companies compared to that of low ESG-rated companies. Effective governance, one of the core elements of ESG, is known to reduce a company’s default risk, which directly affects its cost of debt.9
Potentially reduced interest expense in connection with sustainability-linked loans, the interest rates of which adjust based on whether a company meets a predetermined ESG goal, such as reducing carbon emissions.
What is assurance
on ESG information?
ESG assurance is a process whereby an independent practitioner10 performs procedures, obtains evidence and, after obtaining reasonable or limited assurance about the information, expresses an opinion or a conclusion designed to enhance the degree of confidence of decision-makers using that information. CPAs are the people best qualified to provide assurance, and they stand ready to work with companies by offering a variety of advisory and assurance services. An independent public accounting firm can provide the following services (subject to applicable independence requirements).
ESG advisory services are flexible in scope and performed under the AICPA’s consulting standards.11 Deliverables are subject to agreement between the CPA and the company and are not external facing.
An ESG assurance readiness assessment will evaluate governance and leadership support; human capital (having the right people with the right skills, education and experience to identify impediments to readiness and develop workable solutions); data processes and internal controls; evidence available to support the information; and information technology. Once a readiness assessment has been completed, company management may have a better understanding of what is necessary, including whether the criteria applied are suitable and available, its reporting processes, internal controls, the evidence available and governance related to ESG information, to provide the basis for an attestation engagement at the desired level of assurance.
A materiality assessment can help a company identify and prioritize ESG risks and opportunities, understand current performance against peers, and assess the value implications and change initiatives needed to mitigate ESG risks. This may assist management with understanding the ESG issues relevant to a company, developing and prioritizing a strategy, assessing the business case for change and evaluating sustainable investments.
Support for organizational transformation can help anticipate impacts to the operating model and recommend specific steps to be taken, for example, with regard to diversity-and-inclusion policies for a more inclusive workplace or transitioning investments and reducing emissions for a low-carbon future. This may include support for capital or research and development investment decisions; deals; workforce and skills development; products and services design; and customer experience decisions.
Types of engagements
An independent public accounting firm can perform a review or examination engagement based on attestation standards, which results in the issuance of an independent accountant’s report. It is designed to enhance the reliability of ESG information by expressing a conclusion or opinion on that information. A CPA expresses a conclusion or an opinion based on the level of assurance obtained:
The objectives of an examination engagement are to obtain reasonable assurance (a high but not absolute level of assurance) and express an opinion about whether the ESG information is in accordance with the stated or referenced criteria, in all material respects. A practitioner obtains the same level of assurance in an examination engagement as the practitioner does in a financial statement audit; as a result, there may be less risk of users of the information misunderstanding the level of assurance than in a review (limited assurance) engagement.
The objective of a review engagement is to obtain limited assurance and express a conclusion about whether the practitioner is aware of any material modifications that should be made to the ESG information for it to be in accordance with the stated or referenced criteria. Review engagements are substantially less in scope than examination engagements and result in a meaningful but lower level of assurance.
Choosing the level of assurance
The significance of the ESG information to decision-makers (internal and external) who will use it is one of the factors management should consider when determining the level of assurance. Companies that present ESG information along with their financial information may want to obtain reasonable assurance, commensurate with the level provided for their financial reporting. There may also be legal and regulatory12 requirements that determine the level of assurance for some or all of the ESG information reported.
A practitioner can assist the responsible party13 in understanding the requirements for each level of assurance and other considerations, including whether
a review or examination will meet the objectives of the intended users.
users will understand the difference between examination and review engagements and, consequently, will not place greater reliance on a review engagement than is warranted.
Additional factors affecting the level of attestation service that company management seeks from the practitioner would include the nature of the intended users. An examination may be more appropriate than a review when ESG disclosures and metrics are expected to be used for investment decision-making.
Another consideration that may be relevant is a cost-benefit analysis of the different levels of assurance as it relates to the expectations of users of the ESG information and their desired level of confidence. Different levels of assurance can be provided for different elements of the reported information; however, it is important that the sustainability information presented, and the associated scope of the assurance engagement, are not misleading.
Why trust assurance on ESG information
to a CPA?
A CPA’s role as a leading assurance provider
Research shows that of the top global companies that obtain assurance on their ESG information, the majority engage an independent public accounting firm to provide the assurance.14
One force driving this trend is the CPA’s ability to assure both ESG information and financial information. This is rapidly becoming more important as companies move toward presenting ESG information along with financial information and as stakeholders increasingly expect to be able to place the same reliance on ESG information as they do on audited financial information. Research findings suggest that the improvements in ESG reporting quality resulting from assurance are greater when a CPA provides the assurance (compared with nonaccounting assurance providers) and that CPAs are capable of preventing reporting errors for their clients.15
Additionally, CPAs comply with rigorous and widely recognized requirements for independence, firm systems of quality control and subject matter16 competency. Although non-CPA firms may, in some cases, disclose that they adhere to similar ethical standards and requirements, such interpretations of independence may not be grounded in a sufficiently thorough understanding of the relationship between financial and nonfinancial reporting and investment decisions. Regardless of the level and scope of assurance, the independence of the assurance provider is crucial to the integrity of the reported information and to the value of that information to the marketplace.
CPAs are pioneers in the ESG movement
The priority status of ESG reporting, as well as the assurance services that elevate its credibility, are fairly new realities for many executives. For the CPA, however, these concepts are well-established areas of expertise.
Accountants have long been leaders in ESG programs, dating back to 1998 when they assured Royal Dutch Shell’s first ESG report, Profits and Principles — Does There Have to Be a Choice?
CPAs have further demonstrated their role as pioneers in ESG’s evolution through key leadership positions, including serving as active contributors to many of the world’s recognized ESG think tanks and corporate reporting organizations that take a broader perspective on value creation. These organizations include the United Nations Global Compact, World Business Council for Sustainable Development, Global Reporting Initiative, the Financial Stability Board’s Task Force on Climate-related Financial Disclosures and the IFRS® Foundation’s International Sustainability Standards Board.
The results of the profession’s specialized guidance, qualifications and record of leadership provide an ever-strengthening body of knowledge and deep insight into ESG reporting and assurance.
Market differentiators: Standards, experience and expertise
Objectivity, credibility and integrity are the qualities valued most in assurance providers. These core qualities — in addition to independence, professional skepticism and commitment to quality — are what consistently guide the judgment and performance of CPAs, as required by professional standards.
Today, these same qualities also distinguish CPAs as the leading providers of assurance services for ESG information, along with the following differentiators:
An obligation to protect the public interest
Strict adherence to accountancy laws and professional codes of conduct, including maintaining independence
Adherence to continuing professional education, ethics and experience requirements, including attending specialized training
The requirement to maintain a system of quality control
An informed perspective on ESG opportunities and risks
Risk management experience
Deep expertise in attestation techniques and procedures
Proficiency in measuring business performance factors against suitable criteria and in applying best practices to the assurance process
Proven experience incorporating the necessary specialists into assurance engagements to deliver seamless services
Expertise in assisting companies in driving performance improvement by integrating ESG information with other company financial information — CPAs have a significant level of knowledge about the relationship between company strategy, action and disclosures and the decisions of financial statement users, such that assurance from a CPA supports the design and implementation of controls and reporting systems with investors in mind.
Insights into testing the reliability of data and promoting improvements in the quality of the reporting function
Analytical skills in financial and management services
Proven experience responding to changing economic conditions and stakeholder expectations
Experience in reporting on compliance with various established standards and frameworks
Your financial statement auditor can help
As companies expand ESG reporting, they will need to establish new processes to gather internal information across divisions to understand their activities, drive change across their organizations and communicate these efforts to the outside world. Obtaining any level of assurance by practitioners involves the evaluation of processes, systems and data, as appropriate, and then evaluating the evidence obtained and the results of the procedures to form a conclusion in a review engagement or an opinion in an examination engagement.
ESG reporting has historically taken place separately from the preparation of financial statements. However, there is increasing interest by investors and regulators in the disclosure of ESG information, along with financial information (including SEC submissions17 such as proxy statements, annual reports and quarterly reports). As noted earlier, there is growing appreciation of the value in having some or all of the information in said disclosures be subject to external assurance in accordance with attestation standards (such as the AICPA attestation standards) by an independent CPA.
Performing a review or examination engagement of a company’s ESG information is considered a permissible service for the independent public accounting firm providing the company’s financial statement audit, subject to pre-approval from the audit committee. In fact, the knowledge obtained from the financial statement audit may be beneficial in planning and performing the ESG assurance engagement and can help drive efficiencies in the ESG assurance engagement.
Assurance over ESG reporting, specifically when a financial statement auditor performs it, can enhance the ESG information’s reliability because auditors:
understand the companies they audit (holistically across all functions), the industry, market forces and why certain ESG metrics are important financially as well as from a risk perspective.
have extensive experience in gaining an understanding of the company’s business processes and assessing and responding to risk.
have expertise in evaluating the company’s internal systems and processes for collecting, analyzing and reporting information.
have a long history of and experience with independently evaluating information that the company uses in making capital allocation decisions.
These attributes — combined with the ability to engender the highest degree of trust as independent, external experts — position CPAs as the leading providers of ESG services. As a financial statement auditor, the CPA understands the company, its business processes and how it drives value. As such, the auditor of an entity’s financial statements may be well-positioned to provide assurance services on ESG information.
Ryan J. Casey and Jonathan H. Grenier, “Understanding and Contributing to the Enigma of Corporate Social Responsibility (CSR) Assurance in the United States,” Auditing: A Journal of Practice & Theory 34, no. 1, (February 2015): 97–130.
“ESG and the cost of capital,” MSCI Blog, February 2020.
Brian Ballou, Po-Chang Chen, Jonathan H. Grenier, and Dan L. Heitger, “Corporate Social Responsibility Assurance and Reporting Quality: Evidence from Restatements,” Journal of Accounting and Public Policy (2019).
On March 21, 2022, the SEC proposed amendments to Regulations S-K and S-X in Proposed Rule The Enhancement and Standardization of Climate-Related Disclosures for Investors (proposed rule). As highlighted throughout the proposed rule, it is increasingly important to investors that they have access to relevant disclosures about the collective drivers of short-, medium-, and long-term value.
Suitable criteria are necessary for reasonably consistent measurement or evaluation of the subject matter of an assurance engagement. AICPA Professional Standards require suitable and available criteria that are relevant, objective, measurable, and complete.
The AICPA’s clarified attestation standards, which are codified in Professional Standards, define subject matter as, in an examination or review engagement, the phenomenon that is measured or evaluated by applying criteria.
“The Enigma of Corporate Social Responsibility (CSR) Assurance.”
“The Enigma of Corporate Social Responsibility (CSR) Assurance.”
“ESG and the cost of capital.”
Lorne N. Switzer, Qiao Tu, and Jun Wang, “Corporate governance and default risk in financial firms over the post-financial crisis period: International evidence,” Journal of International Financial Markets, Institutions and Money (2018).
The AICPA attestation standards define a practitioner as the person or persons conducting the attestation engagement, usually the engagement partner or other members of the engagement team, or, as applicable, the firm. The terms practitioner, CPA, and independent public accounting firm are used interchangeably within this brochure.
CS section 100, Statement on Standards for Consulting Services, in AICPA Professional Standards.
The SEC’s Proposed Rule The Enhancement and Standardization of Climate-Related Disclosures for Investors includes assurance requirements for greenhouse gas emissions information.
AICPA Professional Standards define the responsible party as the party(ies) responsible for the subject matter.
IFAC and AICPA & CIMA, Benchmarking Global Practice: The State of Play in Sustainability Assurance, June 2021, p. 6.
“Corporate Social Responsibility Assurance and Reporting Quality.”
See the definition of subject matter in note 4.
The SEC’s Proposed Rule The Enhancement and Standardization of Climate-Related Disclosures for Investors includes assurance requirements for greenhouse gas emissions information.
The American Institute of CPAs® (AICPA®)
The AICPA is the world’s largest member association representing the accounting profession, with more than 418,000 members in 143 countries and a 129-year heritage of serving the public interest. AICPA members represent many areas of practice, including business and industry, public practice, government, education and consulting.
The AICPA sets ethical standards for the profession and U.S. auditing standards for audits of private companies, not-for-profit organizations, federal, state and local governments. It develops and grades the Uniform CPA Examination and offers specialty credentials for CPAs who concentrate on personal financial planning; fraud and forensics; business valuation; and information technology. Through a joint venture with The Chartered Institute of Management Accountants® (CIMA), it established the Chartered Global Management Accountant® (CGMA) designation to elevate management accounting globally. The AICPA maintains offices in New York, Washington, DC, Durham, NC, and
Ewing, NJ. aicpa.org
The Chartered Institute of Management Accountants (CIMA)
CIMA founded in 1919, is the world’s leading and largest professional body of management accountants, with members and students operating in 177 countries, working at the heart of business. CIMA members and students work in industry, commerce, the public sector and not-for-profit organisations. CIMA works closely with employers and sponsors leading-edge research, constantly updating its qualification, professional experience requirements and continuing professional development to ensure it remains the employers’ choice when recruiting financially trained business leaders. cimaglobal.com
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