CEAOB releases guidelines on limited assurance on sustainability reporting

Committee Of European Auditing Oversight Bodies (CEAOB) releases guidelines on limited assurance on sustainability reporting

The European Audit Oversight Bodies Committee (CEAOB) issued guidelines on limited assurance for sustainability reporting, aimed at facilitating consistent practices across EU Member States until formal standards are adopted at the European level. These guidelines clarify expectations for statutory auditors and assurance service providers during the transitional period mandated by the Corporate Sustainability Reporting Directive (CSRD). The document addresses fundamental aspects such as ethics, material misstatements, fraud risk, and forward-looking information, offering practitioners an approach to providing limited assurance on sustainability information reported under the European Sustainability Reporting Standards (ESRS).

Introduction

The introduction of the Corporate Sustainability Reporting Directive (CSRD) led to significant changes to the corporate sustainability reporting in the European Union (EU). Adopted on January 5, 2023, the CSRD requires large companies to prepare sustainability statements starting from January 1, 2024, in accordance with the ESRS. Others will follow later.  These statements are subject to assurance requirements to enhance their reliability (read more on limited vs reasonable assurance here). The CEAOB guidelines provide non-binding recommendations on limited assurance, serving as a temporary reference point until the European Commission adopts formal standards by October 2026. The goal is to bridge the gap and ensure consistency in assurance of the sustainability reports across jurisdictions. It is to be noted that the International Standard on Sustainability Assurance™ (ISSA) 5000 has been formally approved by the International Auditing and Assurance Standards Board (IAASB) on September 20, 2024.

Key Points Addressed

1. Objectives of the Guidelines  

The guidelines serve as an interim measure to guide practitioners through the limited assurance process, providing clarity in the absence of a formal international standard aligned with the CSRD. They ensure a common understanding of assurance practices to mitigate fragmented approaches across Member States.

2. Ethics, Engagement Acceptance, and Quality Control

Although the guidelines are not exhaustive, they emphasize compliance with relevant ethical provisions as outlined in the Audit Directive and Audit Regulation. Practitioners must also meet specific requirements for engagement acceptance and establish quality control systems for limited assurance engagements. While ethical guidance and engagement acceptance details are covered by existing regulations, the guidelines highlight the importance of maintaining professional independence throughout the assurance process.

3. General Approach to Limited Assurance Engagement

The guidelines recommend adopting a consistent approach to limited assurance engagements on sustainability reporting, distinguishing them from reasonable assurance engagements. Limited assurance involves less extensive procedures compared to reasonable assurance, but practitioners are still required to perform procedures designed to obtain sufficient evidence that the sustainability statements are free from material misstatements.

4. Material Misstatements

A core element of limited assurance is evaluating whether material misstatements exist in the disclosures provided by entities. Misstatements could be qualitative or quantitative and may result from errors or omissions. Practitioners use professional judgment to determine if identified misstatements are material based on their potential influence on the intended users of the sustainability reports.

5. Fraud and Non-Compliance with Regulations

Practitioners must remain vigilant throughout the assurance engagement to detect any signs of fraud or non-compliance with applicable laws and regulations. Should irregularities be identified, practitioners are required to communicate them to the entity and, where necessary, to competent authorities.

6. Procedures for Risk Identification and Assessment

Understanding the entity’s environment and its internal control systems is vital for assessing the risk of material misstatements. Practitioners use various techniques, such as inquiries, analytical procedures, and physical inspections, to gather sufficient knowledge. In cases where time constraints exist, such as during the first year of engagement, practitioners may focus on identifying disclosures most likely to contain material misstatements.

7. Responding to Identified Risks

Once risks are identified, practitioners design appropriate responses to address those risks effectively. Depending on the level of risk identified, practitioners may apply various assurance techniques, including inspection, recalculation, observation, or analytical procedures. The scope of procedures is adjusted to ensure that enough evidence is collected to support the limited assurance conclusion.

8. Forward-Looking Information and Estimates

Sustainability reporting often contains forward-looking statements, such as targets, policies, and action plans. While practitioners are not required to guarantee the accuracy of these projections, they must evaluate whether these statements are reasonable and prepared using appropriate methods. Similarly, estimates used by entities should be scrutinized to ensure compliance with qualitative characteristics, such as faithful representation.

9. Communication and Collaboration

Effective communication between practitioners and statutory auditors is essential, particularly when evaluating the consistency of sustainability statements with financial statements. Additionally, where multiple assurance providers are involved, cooperation among practitioners is mandated to ensure alignment and prevent the duplication of work.

10. Limited Assurance Report

The guidelines detail the format and required contents of a limited assurance report, which must include specific entity information, the scope of engagement, and the practitioner’s conclusions. The conclusion is expressed in negative form, indicating whether anything has come to the practitioner’s attention that would lead them to believe that the sustainability information is not fairly presented.

Conclusion

The CEAOB guidelines for limited assurance on sustainability reporting provide critical interim guidance during the transition to full compliance with the CSRD. By emphasizing the importance of consistency, ethical practices, and targeted risk assessment, the guidelines support practitioners in enhancing the reliability of sustainability disclosures. This framework aims to build trust in sustainability information, which is crucial for stakeholders relying on this data for decision-making. As the European Commission works towards the adoption of formal assurance standards, these guidelines play an essential role in maintaining the integrity and comparability of sustainability reporting across Member States.

Source : finance.eu.europa.eu