VW cheated and harmed us all. Some of us are more harmed than others. If you own stock, you have seen your net worth decline. If you own one of the affected cars, your troubles are just beginning. If you work for VW, your job may be jeopardy. If you live on the planet, your air is more polluted.
VW’s story is one of fraud, but why is it so troubling? All frauds are troubling, but VW’s lies seem particularly egregious. VW cast itself as a sustainable company. In their 2014 sustainability report, the company declared the following:
“For the Volkswagen Group, sustainability means that we conduct our business activities on a responsible and long-term basis and do not seek short-term success at the expense of others.”
Could the fraud have been prevented or detected earlier? Perhaps. I contend that assurance of sustainability reports could make a difference. In audits of financial statements, the auditor’s opinion states whether reasonable assurance has been obtained that the financial statements as a whole are free from material misstatement, whether due to fraud or error. Following professional auditing standards, auditors obtain this reasonable assurance from substantial testing of data systems and underlying information.
Audits do not provide absolute assurance; nothing can. Frauds will occur and have always occurred. Detecting fraud is difficult when multiple people collude to hide it. We can make it harder for them to do.
Was VW’s sustainability report assured? Yes, but it was a “review” or “limited” assurance. What does limited assurance mean? The procedures were limited to inquiring of key personnel, understanding the company structure, documenting systems, visiting sites, performing data comparisons, and examining internal and external documents. Limited assurance is just that, limited.
If we are going to depend on the information in sustainability reports, we need more than limited assurance. We need “reasonable assurance.” This can be done using procedures similar to that of an audit of financial statements. Will this cost money? Sure, but the fallout from fraud is much more costly for all of us: company, employees, customers, suppliers, and the environment.
We had some interesting discussions! One topic in particular stood out for me. Why would companies have their sustainability reports assured when in many countries the reporting is still voluntary? This a great question! Presumably, they would have their reports assured because they get something out of doing so. There is value added when reports are assured but what will it take to increase the assurance rate?
I read a recent article in Forbes by Cindy Lubbers of CERES about how to get more companies to provide environmental, social, and governance (ESG) disclosures. The suggested solution was for stock exchanges to require more ESG disclosures. I think this is a great idea. The same would be true for assurance.
If stock exchanges can require more disclosures, they can surely require assurance of the information. This would definitely improve the information being provided to investors. If investors are relying on this information to make decisions, they should be able to have confidence that the information is reasonably accurate. Security exchanges are in a unique position such that they can set the standards for the companies that list with them. It is in their best interest to promote transparent and efficient capital markets. Adding a layer of assurance is a way to build trust and create long-term value.
In my next blog, I will talk about the qualities I think are needed by assurance providers.
Assurance sounds so reassuring! Something that is assured should give you confidence that it is credible. Shouldn’t it?
Consider the case of audited (assured) financial statements conducted by independent CPAs. Let’s say that they give an unqualified or “clean” opinion to a company’s financial statements. After reading such a report you should have confidence that the numbers are “fairly” presented. But what does fairly presented mean? It does not necessarily mean that the company is doing well. It only means that the numbers and information contained in the report fairly represent what is going on with the company. Financial statement audits are done in accordance with generally accepted auditing standards, and the final audit report must use standardized wording. Indeed there aren’t a lot of choices in how the audit is done or in how the report is worded.
What about assurance for sustainability reports? Unlike financial statement audits for publicly held companies, assurance isn’t required and standards are still developing. Yet demand for report assurance is increasing as more people depend on sustainability reports to make decisions about these companies. They want to be assured that the information in the report is accurate.
What are the options for report assurance? There are several choices to be made. First, who is doing the assuring? There are many groups (e.g., accountants, consultants, engineers) that do this work and each of them has a different perspective on report assurance. Second, which standards do they use in evaluating the report? Some standards are intended to evaluate stakeholder engagement and materiality processes while others are intended to attest to the accuracy of the information presented. The scope of the assurance also varies. Some companies, for example, only have their greenhouse gas (GHG) emission disclosures verified while others have a review of the entire report conducted.
In my next post, I will talk more about these different assurance options.
In the past few weeks, I have read a lot of published GRI G4 sustainability reports. A whole lot! It was exciting to see so many organizations reporting. The people who wrote them ranged from novice to experienced reporters. Some were great reports with seemingly transparent details about their environmental and social impacts. Some were not as forthcoming.
For example, one of the GRI human rights indicators, (G4-HR12), requires reporting the “number of grievances about human rights impacts filed, addressed, and resolved through formal grievance mechanisms.” While a few of the companies disclosed that there were mechanisms to deal with human rights violations, they then reported that the number discovered was confidential. Why is the number confidential? Why did they bother to report this indicator at all? It does their stakeholders no good to say there were problems, but that they have chosen not to disclose them. Let’s hope their stakeholders demand answers to such questions.
I felt much better about the transparency of companies that did report how many grievances were filed and how many were resolved. But should I feel better just because they published the numbers? Are these numbers accurate and how would a reader know? As external stakeholders, how would we know if anything in the report is trustworthy? Getting companies to publish sustainability reports is progress, but the next push in sustainability reporting is assurance of report content by independent, third parties.
Stay tuned for my next blog posts when I talk more about assurance.