Recognizing the crucial role of audit and assurance in sustainability reporting, the International Auditing and Assurance Standards Board (IAASB) announced in May 2023 its decision to expedite the consultation process for the proposed new standard on sustainability assurance, known as International Standard on Sustainability AssuranceTM (ISSA) 5000. More background information can be found here.
Highlights of the Proposed Sustainability Assurance Standards
Some of the noteworthy aspects of the proposed standard are as follows.
- ISSA 5000 will be framework neutral, which means that it can be used for assurance on information reported under any sustainability framework or criteria, which can result in” sustainability information that is relevant, complete, reliable, neutral, and understandable”.
- ISSA 5000 is a stand-alone standard, which means applying other existing IAASB auditing or assurance standards is not required.
- The standard is practitioner agnostic, which means that any assurance practitioner can use it provided they adhere to the ethical requirements as outlined in existing codes like those of IESBA and is a member of a firm that applies quality management standards equivalent to those of IAASB’s quality.
- The decision on whether the ISSA 5000 standard should be mandatory depends on the regulatory bodies of the respective jurisdictions. Many entities may still require assurance on sustainability reporting even while it is not mandatory as a result of demands from other stakeholders.
The six priority areas for which IAASB worked to provide more clarity are
- The difference in work effort between limited and reasonable assurance, including the sufficiency of evidence.
- The scope of the assurance engagement.
- The suitability of the reporting criteria, including addressing concepts such as “double materiality.”
- Evidence, including the reliability of information and what comprises sufficient appropriate evidence.
- Materiality in the context of assurance engagement, including materiality in the context of narrative and qualitative information.
- The entity’s system of internal control and its impact on the ability of the practitioner to obtain sufficient appropriate evidence
A brief overview of some of the above topics is as follows.
Limited vs Reasonable Assurance: Addressing this issue in an overarching manner was concluded as an important issue because
- Limited vs Reasonable Assurance : As we pointed out in one of our earlier articles on assurance under the proposed US SEC Climate Reporting Rules and EU CSRD(read more here), several companies intend to transition from “limited assurance” to “reasonable assurance”.Limited assurance is typically based on less rigorous tests and evidence than reasonable assurance and is naturally less reliable. As a result, there will be an increase in the reporting costs when a firm transitions from limited assurance to reasonable assurance. The IAASB attempts to define the “differential work effort” between limited and reasonable assurance and also the applicability of these two types of assurances within a single engagement.
- Review vs Audit: A related topic is the difference between review and audit. As per the ISSA 5000, the level of assurance this is provided by a review is limited insurance and the level of assurance that is provided by an audit is reasonable assurance. The confidence provided by a limited assurance is less than that provided by a reasonable assurance.
- The Scope or Reporting boundaries: The key objective of the standard is to provide the assurance practitioner to clearly set the reporting boundaries, which can be very complex given that the value chain may be involved and may vary by jurisdiction.
The details of the detailed description of these and other critical assurance elements can be downloaded from the IAASB website here.
June 2023 and July 2023 saw the culmination of the frenetic activity by the EFRAG, European Commission and the IFRS Foundation that led to the adoption of the European Sustainability Reporting Standards(ESRS) and the International Sustainability Standards Board (ISSB) (Read more here). These two standards are expected to be the key standards covering the major part of the global economy, and the finalization of the global assurance standards for sustainability reporting will go a long way in implementing the standards effectively.