Editorial Note: We are delighted to publish the following article by Professor Michael Kraten of Houston Baptist University. It was originally published in this month’s issue of The CPA Journal; we thank Journal Editor-In-Chief Rick Kravitz (who is himself a frequent contributor to our blog) for permitting us to transmit the article to our Section members. We encourage our members to peruse the contents of this month’s issue at CPAJournal.com.
How many standards can a sustainability accountant possibly follow? Three dozen comprehensive standards are published by the Global Reporting Initiative (GRI), and 77 industry-specific standards are issued by the Sustainability Accounting Standards Board (SASB). In addition, 17 sets of metrics are promulgated within the Sustainability Development Goals (SDG) of the United Nations, 15 components of integrated reporting are defined by the International Integrated Reporting Council (IIRC), and the AICPA, not to be outdone, chimed in earlier this year with its new guide, Attestation Engagements on Sustainability Information.
Sustainability standards are growing in length and complexity; as a result, the length and complexity of corporate sustainability reports are growing as well. The 2018 sustainability report of Volkswagen (VW), for instance, runs at 108 pages. The report of its European rival Fiat Chrysler Automobiles (FCA) is much lengthier, at 148 pages.
Some analysts complain that such reports are filled with “green-washed” public relations content. Others disagree, claiming that the European Union’s Directive on nonfinancial reporting ensures that the sustainability content is meaningful on an individual report basis and comparable across multiple reports.
To be fair, the latter group of analysts can cite examples of meaningful and comparable data. VW’s report, for instance, includes a section entitled “GRI Content Index”; it cross-references its published data to the standards of the Global Reporting Initiative. FCA’s equivalent section, the “GRI Standards Content Index,” serves the same purpose.
But are readers of sustainability reports missing out if they only pay attention to the sustainability report data and the underlying standards? Should they also pay attention to the assurance letters issued by public accounting firms and printed in the reports? After all, if the assurance letters are not sufficient, then all of the information in the reports, greenwashed or substantive, is of dubious value.
Consider, in comparison, the annual financial statements of business entities. They would obviously be less useful if public accounting firms were to use extremely limited assurance procedures during their annual audits. Their assurance procedures would be even less useful if auditing firms could offer different levels of assurance to different clients.
Indeed, spending a little less time worrying about the data in the sustainability reports and a bit more time considering the limited assurance letters may lead to the conclusion that confidence in the validity of any of the report data may not be warranted.
Volkswagen
Consider, for instance, Volkswagen’s 2018 report. The table of contents lists a two-page “Independent Assurance Report” on pages 104 and 105. That assurance letter, issued by PricewaterhouseCoopers, is called “Independent Practitioner’s Report On A Limited Assurance Engagement On Non-Financial Reporting.” How much assurance does it actually convey?
The letter notes that PricewaterhouseCoopers is required to “plan and perform the assurance engagement to allow us [i.e., the CPA] to conclude with limited assurance that nothing has come to our attention that causes us to believe that the Company’s Non-financial Report … has not been prepared, in all material aspects, in accordance with” the relevant standards.”
This double-negative structure raises some flags. In essence, the CPA is only required to conclude that nothing came to his attention to cause a belief that something is not right. Metaphorically speaking, an ostrich that buries its head in the sand during a desert storm could satisfy that level of assurance about the weather.
The letter continues by listing eight assurance procedures that were performed by the CPA. It notes that PricewaterhouseCoopers obtained an understanding of the structure of the organization, conducted inquiries regarding the preparation process, analytically evaluated selected disclosures, compared selected disclosures, and so on. There are, however, almost no detailed disclosures of the nature of the inquiries that were made, the disclosures that were selected for analytical evaluation or comparison, or anything else. Interestingly, PricewaterhouseCoopers does list a single specific procedure in its letter; it notes that it performed an “assessment of the aggregation of Scope-3-GHG-emissions (categories 1 and 11) on group level.” That procedure may have been necessitated by Volkswagen’s recent global emissions scandal. (For more on the Volkswagen case, see “The Volkswagen Diesel Emissions Scandal and Accountability” by Daniel Jacobs and Lawrence P. Kalbers, on p. 16 of this issue.). Nevertheless, no other detailed procedure is disclosed in the report.
Finally, the letter concludes with a disclaimer that it “is not intended for any third parties to base any (financial) decision thereon. Our responsibility lies only with the Company. We do not assume any responsibility towards third parties.” Thus, PricewaterhouseCoopers’s letter is not designed to serve the needs of the readers of Volkswagen’s sustainability report, despite being the sole assurance letter that is included in that very report.
Incidentally, although Volkswagen’s 2017 sustainability report is comparable to its 2018 report, one cannot compare these two documents to its 2016 report. Although a synopsis of the 2016 report is posted online, the full 2016 report has been deleted from the Internet. It is left to readers to wonder what was in the full report and why it is no longer available.
Fiat Chrysler Automobiles (FCA)
Fiat Chrysler Automobiles’ table of contents likewise lists a two-page “Independent Auditor’s Report” on pages 139 and 140. That letter, issued by Deloitte, is called “Independent Auditor’s Report on the Sustainability Report.” Deloitte does not explain why it refers to itself as an auditor and not as a practitioner (as PricewaterhouseCoopers does).
Furthermore, Deloitte’s letter contains the same double negative language as PwC’s, concluding that “nothing has come to our attention that causes us to believe that the Sustainability Report … is not prepared, in all material aspects, in accordance with” the relevant standards.
The Deloitte letter lists seven bullet points of assurance procedures. Certain details are excluded from the Deloitte report but are included in the PricewaterhouseCoopers report, and vice versa. For example, PwC’s explicit statement about its GHG emissions assessment procedure is missing from Deloitte’s letter. Conversely, Deloitte’s letter explicitly refers to analyses performed on “minutes of the meetings,” and the receipt of a “representation letter signed by the legal representative” of Fiat Chrysler. Such language is missing from the PricewaterhouseCoopers letter.
Finally, Deloitte’s letter does not contain a warning that it “is not intended for any third parties to base any decision thereon,” or that Deloitte does “not assume any responsibility towards third parties.” PricewaterhouseCoopers’s letter, as noted above, includes these disclaimers.
The Limitations of Limited Assurance
Should stakeholders worry about these facts? On the one hand, it is important to keep in mind that the sustainability movement has succeeded in compelling global corporations to issue more than 100 pages of data each year. Even if significant portions of the reports are filled with green-washed information, the remaining (and perhaps some significant) portions of the reports may contain useful data.
On the other hand, it is also important to keep in mind that the limited assurance of these public accountant’s sustainability letters provides, in certain respects, even less assurance than detailed agreed-upon procedure letters. After all, an agreed-upon procedure letter contains detailed descriptions of the procedures that are performed and the findings that are produced by the procedures. In contrast, the limited assurance letters in these sustainability reports contain very little detailed information and only reach vague, double-negative conclusions regarding the findings.
Furthermore, the descriptions of the procedures in the letters are inconsistent from company to company, and the disclaimers regarding the use of the letters by third parties vary remarkably from firm to firm. Such inconsistencies and variations greatly reduce the value of the assurance reports, and thus of the sustainability data that are included in them.
Clearly, there are significant limitations to the limited assurance letters in the sustainability reports. Perhaps, in addition to lobbying for improvements in sustainability reporting standards, public interest advocates should consider lobbying for the development of more stringent sustainability assurance standards.