In my last blog, I wrote about VWs limited assurance report on its latest sustainability report. I think limited assurance makes sense for sustainability reports after a high level of assurance has occurred. In VW’s case, this high level of assurance never had occurred.
How do we get companies to have their sustainability reports assured at a higher level? I suggest that high level assurance be done every other year with limited assurance to be performed in the years in between. This idea has some parallels to financial statement audits.
Every year public companies publish full financial statements, which are audited once a year. In an audit, considerable testing is performed on the systems that provide the data and the data itself. This testing includes gathering corroborative evidence such as checking calculations, obtaining third party confirmations, inspecting assets, and comparing valuations to external markets.
In the accounting profession, a “review” engagement of financial information is limited assurance and is often done in the interim period between the publication of full financial statements. In the interim period, companies issue financial information but not complete statements. During a review engagement, testing or other corroborative procedures are not done; instead, the auditors make inquiries and flag and research inconsistencies. After these limited procedures, the auditors state that they are not aware of any “material” modifications that should be made to the interim financial information for it to be in accordance with the relevant accounting principles. “Material” means it is big enough that it would affect your decisions about the company.
To illustrate, this is an example schedule for audits and reviews.
- Audit, big deal done every year
- Review, first quarter
- Review, second quarter
- Review, third quarter
- And back to the audit
When these review engagements are done between audits, there is in essence an audit benchmark. During the audit, the data systems and controls have been evaluated; extensive testing has been done. The audit provides reasonable assurance that the information is not misstated in a major way due to errors or fraud. Limited assurance can be done in between audits because the audited financial statements serve as a benchmark upon which to assess subsequent financial information.
This could work for sustainability reports where limited assurance (review engagement) occurs between high level assurance. The costs would be less than doing a high level of assurance every year. As demand for assurance on sustainability reports increases, this would be an important step in achieving higher level assurance.