The epoch of credibility of the assurance
UNIVERSITY OF AMSTERDAM
Amsterdam Business SchoolBachelor Thesis Final Version Marjolein Valerie van Hage 10171649
BSc Economics and Business Accountancy & Control University of Amsterdam Supervisor: C. Clune
Statement of Originality
This document is written by Student Marjolein Valerie van Hage who declares to take full responsibility for the contents of this document.
I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have
been used in creating it.
The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.
Abstract
For many years the reporting of a firm’s environmental performance in sustainability reports has been the major topic of discussions. Companies can issue a report about their social and
environmental performance that might influence a user’s decision without any compulsory assurance. The influence of global companies, that has the same size as countries, raises the
discussion about the importance of transparent reports of the financial and non-financial results of these companies. Especially scandals like Enron and WorldCom, that provided sustainability reports, enhances the discussion about voluntary reporting and the choice of
assurance. This paper examines how management and audit firms affect the quality and nature of assurance on sustainability reporting. The paper argues about the differences between assurance by accountant assurors and consultant assurors. Furthermore, “the
added-value” of the assurance on sustainability reporting and the impact management has on the perceived assurance. The main conclusion is that assurance should be the fundamental aspect when companies provide their stakeholders with nonfinancial information to make it credible. This information should be transparent, accountable and reliable because the impact of global
companies with revenue that exceeds the GDP of some countries. Most of all, it is made obviously clear by all researchers that general accepted standards would be a step closer to
Samenvatting Nederlands
Al vele jaren is de rapportage van de milieuprestaties van een bedrijf in de rapporten van duurzaamheid het belangrijkste onderwerp van discussie. Bedrijven kunnen een rapport uitgeven over hun sociale en milieuprestaties, wat het besluit van een gebruiker kan beïnvloeden, zonder een verplichte controle door een externe partij. De invloed van internationale bedrijven, die dezelfde grootte als landen hebben, verhoogt het belang van transparante rapportages van de financiële en niet-financiële resultaten van deze bedrijven. Bovendien, een discussie waarin triple-bottom-line rapportage; sociale, milieu- en financiële verslaglegging centraal staat en dus de duurzaamheid rapporten die bedrijven vrijwillig opstellen. Dit verslag onderzoekt wat de invloed van management en accountantskantoren is op de kwaliteit en de aard van controle op duurzaamheidsverslaggeving. Het onderzoek bekijkt de verschillen tussen betrouwbaarheid van de controle door een accountant en consultant. Daarnaast wordt de "toegevoegde waarde" van de controle van
duurzaamheidsverslaggeving en de impact die management heeft over de vermeende betrouwbaarheid van de controle uitgediept. De belangrijkste conclusie is dat controle op duurzaamheidsverslaggeving van essentieel belang is om het geloofwaardig te maken wanneer deze informatie ter beschikking wordt gesteld aan aandeelhouders. Doordat de omzet van internationale multinationals groter kan zijn dan het BBP van sommige landen, moet deze niet financiële informatie transparant, betrouwbaar en geloofwaardig zijn. Het belangrijkste is dat de meeste onderzoekers aangeven dat algemeen aanvaarde standaarden voor de controle op duurzaamheidsverslaggeving een stap dichter bij betrouwbare
Table of contents
1. Abstract ………2
2. Introduction ……….6
3. Background………...9
3.1 CSR………9
3.2 Guidance means flexibility………...11
3.3 Assurance ………..12
3.4 Transparency ……….14
3.5 Harmonization ………...15
4. Literature review ……….16
4.1 Audit firms versus non-audit firms ………...16
4.2 Management capture ……….22
4.3 Improved credibility ………..…26
4.4 Standards ………29
5. Conclusion ………...31
2. Introduction
For many years the reporting of a firm’s environmental performance in sustainability reports has been a major topic of discussions. Recent research from García-Benau, Sierra-Garcia and Zorio (2013) point out that the impact of the crisis on financial reporting has resulted in a significant increase in companies issuing sustainability reports. Even though many
researchers (Ball et al, 2000; O’Dwyer and Owen, 2005; Edgeley et al, 2009) consider assurance fundamental to credible sustainability reports, García-Benau et al did not find a significant increase in the assurance provided.
Furthermore, every year all government expenses and performance is discussed and reviewed by many external users and government has to justify their actions and behavior. In contrast, companies can voluntary issue a report about their social, environmental and
economic performance without any compulsory assurance. A report like this might influence a user’s decision. The importance is noted by Ballou et al (2006) as “Wal-Mart’s annual revenues exceed the gross domestic product (GDP) of Austria; Exxon Mobil’s revenue is greater than the GDP of Argentina or Turkey; and General Motors’ revenue is more than the combined GDP of Colombia” (p. 5). Austria is ranked number 21 on the list of largest countries in the world, Argentina is listed 22nd and Turkey 25th. Moreover, “the combined GDP of Columbia and the Philippines are those from the number 42 and 43 of largest countries in the world” (Figure 1, Ballou, 2005, p. 16).
Adams (2004) points out that “The moral arguments for greater corporate accountability arise from the increases in size, power and global spread of multinational companies and increased awareness of the impacts of companies on the environment and local communities” (p. 4). The influence of global companies, which have annual revenues that are equal to or larger than many countries’ GDP, raises the discussion about the importance of transparent reports of the financial and non-financial results of these companies. Furthermore, the discussion of triple-bottom-line reporting; of social,
environmental and financial reporting, and thus the sustainability reports that companies provide voluntarily. “The reports should go beyond financial and shareholder issues to
include topics such as environmental sustainability and corporate governance” is the response of 90% of the investors, portfolio managers and securities analysts in Ballou et al (2006, p. 4) their survey. This could mean that expects do not consider the current situation as the
The concept of sustainability reporting started in the 1990s with only a few
environmentally conscious firms deciding to report on environmental performance. Recent research from EY (2013) shows that 95% of the Global 250 (the biggest firms worldwide) issue sustainability reports. EY explains the benefit of sustainability reporting as follows:
“A focus on sustainability helps organizations manage their social and environmental impacts and improve operating efficiency and natural resource stewardship, and it remains a vital component of shareholder, employee, and stakeholder relations.”
The majority of the global 250 are issuing sustainability reports and, therefore, the topics and information presented in those reports are influential. Ballou et al (2006) points out that management feels the need to report on the social and environment performance of their company, as they cannot stay behind competitors. Providing transparency on risks and performance is a common reason for sustainability reporting. Not only are external factors important, but management also provides themselves with more information internal, about the company performance and the performance in the industry they belong to (Simnett et al, 2007, p. 7). The sustainability reports increase the quality of information and can help the company strive toward innovation. According to EY (2013) ‘improved reputation, increased employee loyalty and increased customer loyalty’ are in the top five ‘ways that sustainability reporting provided value’. For management, it is preferable that the presentation of their sustainability report portrays effective performance and positive future prospects. Besides, it is not unlikely that they would influence that mainly positive results are included in the report.
However, sustainability reporting is providing more information for stakeholders. These stakeholders should be able to rely on credible information. In 1997, Micheal Power already pointed out “Without the dimension of independent validation, these schemes would have some kind of economic values for organizations, in the same way that internal auditing does more generally, but they would fail to connect the organization to more public
regulatory structures” (p. 126). There are no reporting standards for sustainability reporting; there is only guidance a company can follow. This flexibility can cause management to choose to show only the parts of the company’s environmental performance that are
beneficial for their management purposes. This refers to the term ‘greenwashing’ (INTOSAI, 2013, p. 29). Besides, it is questioned by Connelly et al (2011, p. 95) whether management only wants to signal that they are devoted to ‘sustainable business practices’. Guthri &
Farneti (2008) claim that the flexibility and greenwashing “might increase the temptation for reporters to cherry-pick performance indicators and leave some essential information out of the report in order to make it look better”.
Nonetheless, only one-third of all the sustainability reports issued are externally verified (O’Dwyer, 2011). Verantix (2013) explains that there are six ‘major global suppliers of sustainability assurance’, which includes the Big 4: the four biggest accounting firms in the world (Deloitte, PwC, EY and KMPG). A common concern with audit firms is the independence of the auditor, which is caused by ‘agency theory’; management is paying the auditor to form an opinion about the information in the company’s reports. This is even more of an issue with sustainabiulity reporting as opposed to financial audits, because the reports and assurance are voluntary. O’Dwyer and Owen’s analysis “…raises question-marks regarding the independence of the assurance exercise, as well as revealing a large degree of management control over the assurance process” (2005, p. 205). Therefore, this paper examines how management and audit firms affect the quality and nature of assurance on sustainability reporting. This is achieved by analyzing empirical evidence provided by previous research and describing the results that apply for this research. The paper will start with background information about Corporate Sustainability Reporting, Assurance, Standards and Harmonization. Afterwards the sub questions will be answered in the literature review. The literature review is structured as follows:
1. What role do audit firms have in the perceived assurance on sustainability reports and who can be the alternative?
2. What influence does management capture in the sustainability report and the assurance process?
3. How to ‘add value’ by assurance and improve credibility in sustainability reports? 4. Is harmonization of reporting and standards the solution for problems regarding
credible sustainability reports?
The paper ends with a conclusion, in which this paper seeks to answer the research sub questions and the examination stated as main topic.
3. Background
In this section the main concepts of this paper are introduced. The following subjects are discussed; Corporate Sustainability Reporting, guidelines and standards, assurance, transparency and harmonization.
3.1 Corporate Sustainability Reporting (CSR)
“Sustainability reporting is a tool to increase transparency and accountability in the issues that traditional financial reporting is not dealing with.” This is the main explanation INTOSAI gives in their publication about sustainability reporting (2013, p. 2). INTOSAI stands for International Organization for Supreme Audit Institutions, they’ve investigated the current status of sustainability and the different approaches for verifying assurance on those reports. According to their paper the sustainability reporting significantly grew in the twenty-first century; the twenty-first reports are dated in the late 1980s and still new companies issue sustainability reports each year.
More organizations are driven by external parties or internal reasons to provide information that goes beyond the conventional financial reporting (Ballou, 2006, p. 3).
Stakeholders are especially looking for more non-financial information. Connelly et al (2011) refer to the signaling theory to explain the troublesome that many external users face when analyzing the level of sustainable performance or commitment from a company. Research conducted by EY shows that 61% of sustainability manager’s reports state “…that risk management is one of the three top reasons for their firms” to report about environmental performance (2012, p. 3). Ballou states that “the worldwide growth of socially responsible investment funds, investment rating systems such as the Dow Jones Sustainability Index and investment policy disclosure requirements also have put financial pressures on companies to make these nonfinancial disclosures” (2006, p. 3). Furthermore, Ballou (2006) questions the agenda from management to report environmental performance when there is no legal obligation to spent money on a report for stakeholder fulfillment beyond the obligator financial statements. Ballou answers this with the benefit of future prospect, due to the fact that there is a higher efficiency in forecasting when the environmental performance is also taking into account. Besides, the information also demonstrates to stakeholders “the extent to which their enterprise risk management processes are effective” (p. 3).
Figure 1 – Research from EY ‘Value for sustainability reporting’ (2013, p. 3)
According to INTOSAI (2013) and EY (2013), among the global 250 almost every company issue a sustainability report of some kind. The external motivations they name for reporting are: “improve stakeholder communication, improve accountability and transparency, create a positive and trustworthy image and build trust in the public sector” (p. 15). Figure 1
illustrates the reasons for sustainability reporting EY found in their research (2013). This implies that a good sustainability report will increase the trust stakeholders have in the company and, as a consequence, the value of the company will rise. This would be an
incentive for management to ‘pick’ what to report. In the paper from INTOSAI there are also some internal reasons listed, “gain better information, improve risk management, improve performance, save resources and money and improve staff satisfaction” (2013, p. 16).
Management decision making is based on the information provided. However, the question is whether or not they decide provide the actual report with true information, because they aim to show their efficiency to stakeholders and other interested parties.
There are two types of sustainability reporting, named by INTOSAI (2013), that are most common to use; a separate report from the financial annual report or integrated
reporting. Integrated reporting means that it is possible to include the sustainability report in the annual financial report. In 2011, EY and Boston College, performed empirical research on the benefits and the added value of providing a sustainability report. They found, in a review of more than 7,000 sustainability reports worldwide, that; “sustainability disclosures are
being used to help analysts determine firm values and that sustainability disclosures may reduce forecast inaccuracy by roughly 10%” (p. 2). Kolk (2003) found that, especially in the industrial sectors, sustainability reporting is widely used to inform stakeholders. In contrast, financial sectors are reporting the least, in particular insurance, communication and media. Furthermore, the biggest global companies are most common to include nonfinancial information about their social and environmental performance (p. 289).
There are still researchers claiming that the sustainability reports do not relate to the actual social environment of businesses – e.g. Gray (2012) claims that most sustainability reports issued are not providing users with the nonfinancial information that reflects the true sustainable performance of the firm.
3.2 Guidance means flexibility
“The financial audit is statutory, annual, verificatory external, based on GAAP and focused upon financial accounting whereas environmental audits are voluntary, of variable frequency, managerially orientated, internal, relative to varied standards of performance and focused on environmental issues” (Power, 1997, p. 134). There are two major sustainability reporting frameworks, analyzed in value of sustainability reporting by EY and Boston College in 2013. The first, Sustainability Reporting Guidelines G3, is designed by GRI (Global Reporting Initiative) and was used by 4,981 companies in 2013. It is designed for all public and private organizations, and based on the following core subjects; organizational governance, human rights, labor practices, the environment, fair operating practices, consumer issues and community involvement and development. According to Ballou (2005, p. 5), the United Nations Environment Program is one of the organizations that launched these ‘established criteria that could eventually serve as the basis for generally accepted reporting standards for addressing stakeholder needs related to corporate sustainability’.
The second framework is International Integrated Reporting Council which is used by global organizations made up of regulators, companies, the accounting profession, investors, NGOs, and those involved with standard setting (EY, 2013, p. 20). The IIRC’s core subjects are; organizational governance, human rights, labor practices, the environment, fair operating practices, consumer issues and community involvement and development.
According to Adams (2002) some of the external verifiers are very cautious with verifying complete statements, because they want to diminish the criticism about the content of the reports and the public reasons for management to report. Besides they point out that
they would prefer to use agreed standards. Furthermore, Adams concludes that “This raises serious concerns as to the value of the responsible care guidelines as anything but a
legitimating tool and insurance policy” (2002, p. 749).
3.3 Assurance
KPMG (2011) claims not only improved credibility but also improved management information as most important to gain from assurance on their sustainability reports. Assurance statements provided on environmental performance is also a check for management that their environmental management systems work properly and provide reliable information. KPMG research shows that they want to ‘raise the bar on data integrity’ (2011, p. 3). Their research provides an inside look on the credibility of the sustainability reports. Accordingly “Assurance often provides: Opportunities to identify and drive process and performance improvements through the organization” (KMPG, 2011, p. 3).
There are two globally used ‘standards’ to guide third-party assurors for providing assurance on sustainability reports, namely the ISAE 3000 and the AA1000 (INTOSAI, 2013, p. 27) but there is still no general accepted standard. The ISAE 3000 has two types of
assurance, “limited” and “reasonable”. The AA1000, from AccountAbility, also has two types, the limited type and a type two that looks at the reliability as well. In figure two the standards are compared based on focus, scope and users.
Figure 2 – “Characteristics of the most widely used assurance standards” (INTOSAI, 2013, p. 28)
An important note made by Andon et al (forthcoming, p. 12) is the auditor
independence, in particular the absence of independence. Several scandals in the past years, such as Enron and WorldCom, have been central in discussions about the role of the auditor during financial audits. Therefore, the Sarbanes Oxley Act has been implemented since 2002. This act included new rules about internal controls and rules during the audit. Ballou et al (2005) describe the response from auditors to establish improved methods using this act to
verify the financial statements and not trouble the appearance of being independent. They also claim that the absence of independent assurance diminish the quality of the information. Andon et al (forthcoming) and Everett et al (2005) discus questions that are raised about the independence of auditors in new audit opportunities, among which sustainability reporting, the several principals of accountants, like independence, are considered miscellaneous by experts in new audit spaces.
The new audit opportunities ask for creativity of applying the well-known rules and standards in another fields where the first movers are trying to print their mark. There is no standards-setting body yet to provide assurors with the right set of tools for assurance on environmental performance (Andon et al, forthcoming, p. 36).
In the discussion about independence and standards, a definition of assurance should be provided. “The International Federation of Accountants (IFAC) defines third-party assurance as ‘a process in which a practitioner expresses a conclusion designed to enhance the degree of confidence that intended users can have about the evaluation or measurement of a subject matter that is the responsibility of a party, other than the intended users or
practitioner, against criteria’” Park and Brorson (2005, p. 1096). They also state that
verification by an external party enhances the credibility of the data provided by management in the report about the ethical, social and environmental performance. INTOSAI (2013) (and many others for that matter [e.g. Adams, 2004; Simnett et al, 2007]), comply with Park and Brorson (2005) in the opinion that assurance improves the credibility of sustainability reports, just like in financial audits. Although, the reports are hard to compare due to the freedom of scope for sustainability reporting. Still, from all the reports issued every year, only one-third seeks to perceive external verification (INTOSAI, 2013; Adams, 2004; O’Dwyer and Owen, 2005).
There are three main categories of assurance providers and they provide 90 percent of all assurance statements, namely the Big 4 Accounting Firms, certification bodies and
specialist consultants (O’Dwyer, 2011). According to Brendan O’Dwyer (2005, 2011) “Corporate management have taken control of the entire process of production of the reports with the result that info is collected and disseminated only if it is deemed appropriate to advance the corporate image, rather than seeking true transparency and accountability to stakeholders”.
There are companies that choose not to assure their sustainability reports by a third-party, even though this would make their report more credible. Park and Brorson found four
reasons for companies not to assure: “The fee of the assurance provider is too high, third-party assurance does not add any value to the report, there are many things to be done until we are ready for third-party assurance and there is no pressuring need for us to commission third-party assurance for our report” (2005, p. 1100). EY complies with this, because they show results from a recent study that “found that readers are more likely to believe negative disclosures than positive disclosures in reports. In order for disclosures of positive
performance to have the same weight and credibility as negative disclosures, the positive disclosures had to be assured – even if the negative disclosures were not assured” (2013, p. 17). In contrast EY claims that “Independent assurance of stainability disclosures can help make a persuasive case for the report’s seriousness and reliability” (2013, p. 17).
In the EY and Boston College survey (2013, p. 17), 35% of the report-issuing companies have some part of their sustainability report assured, about half of the assured reports are assured completely. This is remarkable when offset against the importance of external assurance according to investors and analysts. A survey from Accounting for Sustainability, shows that 77% of the investors and analysts consider assurance as one of the two highest indicators of importance and call it the “vital part” of a company’s sustainability reporting (EY, 2013, p. 17).
The discussion in the assurance question is whether assurance on sustainability reports provides credibility or not. INTOSAI (2013) state that no matter the outcome, the auditing to reports is always important. Within this discussion about whether or not external assurance should be used by companies to make their reports more credible, a company has to consider by whom to assure. Several researchers assume or found evidence that audit firms have the knowledge and experience to provide reliable and accountable assurance statements for sustainability reports (EY, 2013; O’Dwyer and Owen, 2005) Although, further research might prove otherwise (Paragraph 4.1).
3.4 Transparency
According to Park and Brorson (2005) the main reason for the problems arising with the transparency of reporting beyond financial information is due to the absence of transparency as the true objective of reporting. Management hires the provider of assurance to enhance credibility for stakeholders, which may clouds the objective of the auditor. Park and Brorson (2005, p. 1096) and Power (1997) point out that the reporting about social/environmental performance’s ‘lack of transparency’. This is explained by Ball et al (2000) as the key
instrument for the quality of sustainability reporting. Kolk (2003) even claims that ‘failures such as Enron could be mentioned in this regard’ (p. 290).
Also Adams (2004) argues about transparency and claims that:
“A good ‘ethical’ report should be transparent and represent a genuine attempt to provide an account which covers negative as well as positive aspects of all material impacts. To be accountable, reports need to demonstrate corporate acceptance of its ethical, social and environmental responsibility. Such acceptance can be demonstrated through a clear statement of values with corresponding objectives and quantified targets with expected achievement dates. Companies should then report performance against those targets. Reports should give a balanced view of key ethical issues facing the company” (p.732).
Furthermore, the expectations from assurance provided on sustainability reports are as high as those from financial audits. The level of credibility and the accountability of the verifier’s knowledge are not that common in practice as one would theoretically assume (Andon et al, forthcoming; Power, 1997). Especially after the financial crisis the critic about transparency of nonfinancial data has risen and caused the believe that the content of the reports does not reflect the true and all-embracing environmental performance of the companies” (García-Benau et al, 2013, p. 1529). EY (2013) and Simnett et al (2009) all point out that there is a positive link between a firm issuing a sustainability report, providing more transparency and the value of the company. EY also found, in a 2012 study, that commitment to social and environmental performance by companies improved their share price with 4,4% a year (2013, p. 12).
3.5 Harmonization
In the literature review harmonization of standards, setting one standard that is used among all assurance providers, is analyzed. Several experts (Power, 1997; Ball et al, 2005) point out the importance of general accepted standards. They claim there is a need “to help ensure stability of world organizations in assessing their reply to these responsibilities” (Ball et al, 2005, p. 4).EY (2013) argues that there is a trend towards harmonization of reporting standards, especially the AccountAbility 1000 which is mentioned as step towards general accepted standards. The standards do, however, have to provide more reliable and
should also be applied between countries, due to the wide variety of reports among countries. Furthermore, the reports are considered broad and cover different parts of the social and environmental performance. Kolk (2003) found in their study that only 60% of the reports examined, covered all tree “triple bottom line” items; Environmental, Social and Economic (p. 287). Most of the times this was all covered in the same report. From the remaining 40 percent, most reports covered the environmental and social impacts.
Literature Review
In this paragraph existing empirical evidence is used to seek answers for the sub questions by reviewing results of prior research papers to research the assurance on sustainability reports.
4.1 Audit firms versus non-audit firms
In order to examine the credibility of assurance, it is important to discuss who provide assurance and how statements on sustainability reports are obtained. Especially the position of the major accounting firms are questionable. Therefore, in this subparagraph is discussed ‘What role do audit firms have in the perceived assurance on sustainability reports and who can be the alternative?’.
The main goal from assurance on sustainability reports is the “promises to provide assurance regarding the reliability and completeness of this reporting” (O’Dwyer, 2011, p. 1231). According to O’Dwyer, “This attention to auditability – the ability to audit—and in particular the processes through which auditability is negotiated and determined prioritizes an
examination of a number of issues that are central to obtaining a deeper understanding of how sustainability assurance practice is being constructed” (p. 1232). Park and Brorson found with research in Swedish companies that the external verification on sustainability reporting improved the quality and was seen as advance to establish better internal control systems (2005, p. 1105). Furthermore, “power (1996,1999) maintains that practitioners make new subject areas auditable (i.e., make it possible to “audit” new areas) by simultaneously creating a consensus around a stable and legitimate knowledge base for audit practice and an auditable environment to which this knowledge can be applied” (O’Dwyer, 2011, p. 1234). Andon et al (forthcoming, p. 33) claim that there should be looked at new audit spaces with a different perspective, namely ‘highly uncertain, trial and error process’. This perspective is supported
by Malsch and Grendron (2013) and also O’Dwyer (2011) who describes ‘the process of making new areas auditable as involving trial and error experiments’. He even claims that these experiments are “the development of technologies providing assurors with specific mechanisms to tackle data in sustainability reports has evolved in an iterative manner through various on-site experiments characterized by trial and error and improvisation” (2011, p. 1245).
Within this new audit spaces, environmental sustainability reporting has a central role. The research paper of EY states that “Independent assurance of sustainability disclosures can help make a persuasive case for the reporter’s seriousness and reliability” (2013, p.17). This is considered more important over the last year due to the financial crisis in 2008, García-Benau et al discus that is may have “raised the question whether assurance of CSR reports could be a threat for business, bearing in mind the generalized initiatives to cut costs” (2013, p. 1528). Their results are “that the number of CSR reports increased significantly with the crisis”. But their results show no significant increase in the assurance on reports; “The absolute number of assurance reports keep increasing, yet not in a significant higher pace” (2013, p. 1539).
Andon et al (forthcoming, p. 1) are looking for a better understanding of the ‘dynamics of the new audit spaces’, which they define as “novel auditing and assurance services that extend beyond the traditional financial attest audit domain in areas such as sustainability auditing and value-for-money auditing”. In their research they conclude that “In new audit spaces, core elements of auditing, as conventionally conceived, are transmogrified as they travel”. They name that the success of the new audit spaces is mixed, which implies that it is not lucrative for every company. They conclude that “Dominant players in the financial audit field (which includes the professional accounting bodies and Big 4) hold the potential to influence the emergence, nature and construction of new audit spaces, as they seek to annex and colonise new assurance opportunities by attaching them not only to their historical expertise in financial audit but also to the symbolic characteristics of independence, integrity and ethics” (forthcoming, p.7; O’Dwyer, 2011). O’Dwyer explains this with “the size and perceived reputation and assurance competencies of the Big Four accounting firms have propelled them to their new dominant position in the global market” (2011, p. 1238). Ball et al (2000. P.6) conclude that ‘the trend towards Big Four provider dominance is widely expected to escalate’. This, they explain, is because smaller ‘nonspecialized consultancy assurance providers’ are less common for providing assurance, because their ‘assurance
services are not a major part of their product portfolio’. Although O’Dwyer, Andon et al and Ball et al discuss the influence the audit firms can have in the market of providing assurance on sustainability reports, some others conclude that the actions to jump at this chance for new services from audit-firms was relatively (Gray et al, 1992; Power, 1997). Which, according to Ball et al (2005) might be caused by the Machiavellian approach from the accountant assuror.
According to Andon et al (forthcoming) the “current hegemonic status of professional accountants” is not considered a natural one; “Rather, the accounting profession’s dominant position of accounting professionals as cultural intermediaries with significant symbolic value is often subjected to trails and challenges (as was the case in the aftermath of the recent global financial crisis)”. This is supported in the research of Ballou et al (2005, p. 7), they claim that “Auditors of public companies are facing many challenges associated with providing services for clients beyond the audit of financial statements, management’s
assessment of its internal controls over financial reporting, and the auditor’s evaluation of the client’s internal controls over financial reporting.”
Furthermore, O’Dwyer (2011) claims that stakeholder involvement might be the solution for determining materiality in the assurance on sustainability reports, which is, according to O’Dwyer suggested by some big 4 firms. He also states that “the big 4’s proposals for stakeholder involvement also produce greater comfort for assurors in that stakeholders take responsibility for issues of reporting completeness and materiality” (p. 18) However, Andon et al suggest that stakeholder involvement is important, but they point out that stakeholders “lack of knowledge about materiality and the whole audit profession”, which is not only considered a challenge but also a problem. Ballou et al (2005, p. 8) describes the main issue as follows: “There should be no such concern regarding an
additional assurance service in which independent auditors examine a report to see whether a set of management assertions about nonfinancial quantitative information is materially misstated based on the criteria on which the reporting is based”. Auditing scandals (such as Enron and WorldCom) might be the reason that auditors are careful moving in this new audit space because “Failure to address these challenges could result in severe negative
consequences for auditors, such as lost business assurance opportunities, and for investors, such as substantial fraud by organizations issuing CSRs” (Ballou et al, 2005, p. 14)
According to Andon et al (forthcoming) majors accounting bodies pointed out that they need more standards, or more developed standards, that include more stakeholder
involvement in order to make their statements more accountable. Furthermore, Power found that most knowledge about sustainability auditing is not found in the financial auditing procedures but has to be obtained in new ways to attain reliable assurance statements.
Therefore accountant assurors are not upfront in all expertise per se and not all the knowledge is with the audit firms yet” (1997, p.139).
Several researchers question, just like Power, “the ability of financial auditors to provide environmental audits” (2000, p.136), he is not the only one who believes that auditors might not be the right assurors for sustainability. According to O’Dwyer (2005, p.214) some claim that accountant assurors are only considered sufficient because ‘the name of the firm’. Andon et al suggest that ‘automatically assuming the persistence of professional accountants’ for the assurance process on sustainability report “may prove to be mistaken” (forthcoming, p. 33). Moreover, “The assumption that large audit firms are high-status providers of assurance does not necessarily translate as the financial audit field intersects with other fields” (p. 35).
However, there have also been claims that audit-firms are the first to come in mind, and evidence supporting their quality. EY and the Boston College Center (2013) their results show “evidence that assurance conducted by large accounting firms may be considered superior in quality due to the firms economies of scale, professional codes of ethics, and the reputational capital that they bring to their engagements” (p. 17). As for the figure below their results show that most assured reports are provided by the accountant assuror and the scope is the entire report. As for Simnett et al (2007) “We classify members of the auditing profession as the higher quality assurance providers”
Figure 3. Assured reports by provider type and scope of assurance. (Results in EY and Boston College Survey (2013)).
The question whether audit firms should provide the assurance or other organizations is answered by Ballou, Heitger and Farmer (2005, p. 10) with “The assurance service
opportunity is great enough that other organizations likely will provide such services if the public accounting profession fails to act”. They even claim that “Auditors need to be aware of the challenges and work necessary to reduce the risks associated with providing assurance for corporate sustainability reporting before the window of opportunity is lost for the public accounting profession”. This is also suggested by Power (1997).
The empirical study O’Dwyer and Owen performed in 2005 shows significant evidence that “the accountant assurors were also far more likely to draw attention to the respective responsibilities of report assurors and preparers than were consultants” (p. 215). Their research was to identify different assurance statements on sustainability reports
provided by different assurors, accountant and consultant assurors. Their research also shows that consultant assurors included a statement regarding the assurors independence more often than the accountant assurors, for most accountant assurors ‘simply labeling’ the statement ‘independent’ was the case” (p. 216). These statements provided by consultants “offered a more complete description of the degree of independence prevailing in the reporter assuror relationship” (p.216). O’Dwyer and Owen conclude that this means that “The accountants’ reluctance to mention their credentials suggests that they may rely on their brand name, as opposed to any substantive work, to convey an impression of assurance” (p.226). The same result was found by Ball et al (2000), they even claim this apply to most accountants and “suggest that their authors are, not surprisingly, mindful of any potential legal liabilities arising from their assurances” (2000, p. 8). O’Dwyer and Owen also found that “Accountant assurors (53%) were more likely than their consultant counterparts (30%) to spell out the exact level of assurance pursued” (p.217). They conclude that the assurance from consultants is more developed “which certainly offer more in terms of robustness and fullness” (p.223). Besides they use terms as “much more focus on the issues of completeness, fairness and overall balance within their opinion statements” and their evidence show a more “evaluative approach”. About accountant assurors they conclude they “tend to adopt a cautious approach that largely focuses on the issue of consistency of information appearing in the organization’s report with underlying data sets” (p.225) and “to verify data collection procedures and
accuracy” (p. 226).
Similar empirical research is performed by Edgley et al (2009) and earlier research by Ball et al in 2000, both with comparable and supporting evidence. According to Edgley et al
“The accountant assurors focused far more on the general benefits of strengthening internal systems to improve the reliability of information produced, while the consultant assurors preferred to discuss the stakeholder benefits” (2009, p.542). The earlier evidence from Ball et al support O’Dwyer and Owen with their analysis that “these ‘leading edge’ statements from accountant assurors raises fundamental questions concerning the independence of
verification” (2000, p. 1). They point out that “The first, and possibly most telling, indication of the ‘quality’ of an attestation lies in the degree of independence exhibited by the ‘verifier’ (2000, p.7). Furthermore, they discuss the independence of verification by consultants which might provide less issues due to no “intertwining of the auditor and the auditee” (2000, p. 18). They also support that accountant assurors declare the correctness of the data presented in the reports, rather than the essence and perspective of the data in the reports as consultants focus on in their assurance (pp. 15, 16).
As for O’Dwyer and Owen (2005), they thinks it’s ironically that “consultants would appear to adopt a more strategic approach to the assurance exercise, which might be
considered as adding ‘value’ to the process from the perspective of external stakeholder groups” which they to be “exactly the approach one might have expected from the Big 4 providers given the trends in financial auditing (p. 226). This all confirm the “increasingly clear distinction is evident between the approaches of accountant and consultant assurance providers” (p.225).
However, O’Dwyer and Owen (2005) conclude that the evidence imply that the valued name of audit-firms is enough to provided assurance and improve the quality of those assured sustainability reports.
There is even another angle on the role of the audit firms in sustainability reporting assurance, according to Power (1997, p. 135) they can “make an important contribution to the training of environmental auditors and the implementation of environmental audits.” Besides “It is more likely that a relevant physical scientist or engineer would be the appropriate person to provide such verification because of such disclosures” (p.140). The meaning of ‘such disclosures’ represent the technical issues auditors might face as they do not have all the knowledge and expertise about specific environmental areas. Moreover Power says “claims for the relevance of accountants in the environmental audit field are strengthened, perhaps unintentionally, by the vision of a more integrated relation with the financial audit” (p. 140).
A common claim on the assurance process by both accountant and consultant verifier is the independence of the auditor, because they get hired by management. Therefore, in order to evaluate the impact on the assurance, in the next paragraph management capture is discussed.
4.2 Management Capture
According to most research papers management still has a lot to say in the assurance on sustainability reports and besides, “Managerial capture is seen by many researchers as a severe problem” (Edgley et al, 2009, p. 535). Furthermore, Kolk states that “Overall
suspicion about corporate behavior and accountability has been fuelled following accounting scandals of especially Enron and WorldCom” (2003, p. 280). Therefore in this paragraph the question ‘What influence does management capture in the sustainability report?’ is central.
Ballou et al describe sustainability reporting as “A fast growing opportunity for misrepresenting information is available utilizing the practice of releasing reports containing nonfinancial information aimed at informing various stakeholder groups on the effectiveness of the organization in managing various risks that threaten its ability to satisfy these
stakeholders” (2005, p. 1). They claim the “lack of auditing associated with many of the reports issued” (p. 2) and argue that “the external report may well be an added bonus, spun off from a management exercise” (p. 6). Ballou et al even point out “the practice of reporting the results of a management exercise to an external constituency is confusing, if not
manipulative (2000, p. 6).” This is also found in the earlier research by Power (1997), he states that “environmental auditing has emerged from its diverse and dirty origins in the private world of corporate transactions to connect with, and exemplify, broader regulatory sensitivities and agendas” (p. 126). Even in the most recent research sustainability reporting is still referred in terms as ‘effective management tool’ and ‘managerial capture’ by García-Benau et al (2013).
In their academic paper Burrit and Schallegger (2010, p. 843) argue about the critical perspective at corporate sustainability reporting, which basically says that sustainability “leads to distorted information being provided to managers as a basis for their decision making”. They also believe that sustainability reporting ‘can lead to corrections to the conventional accounting systems’. However, their managerial perspective views
tools which can support decisions to be made in a set of diverse circumstances by diverse actors”. This points out he fundamental issues regarding management role in sustainability reporting, management provided themselves with more information but is also criticized which information they publish. The critic is not misplaced because external users question the content of the report, “They express concern that reporting processes have become prone to ‘managerial capture’ in that corporate management have taken control of the entire process of production of the reports, with the result that information is collected and disseminated only if it is deemed appropriate to advance the corporate image, rather than seeking true transparency and accountability to stakeholders (O’Dwyer and Owen, 2005, p. 209). Several empirical evidence show that management has more control over the assurance process of the sustainability reports than should be conventional” (Edgley, 2009; O’Dwyer and Owen, 2005; Adams, 2004).
Furthermore, the main finding from Ball et al (2000, p.1) is “The disturbing conclusion revealed is that current verification practice exhibits a ‘managerial turn’ rather than representing corporate commitment to external transparency and accountability”. Supported by Power (1997, p.128) with “it is an internal practice which has grown outwards to connect with regulatory programmes and which is experimenting with forms of external reporting”. Gray (2012) describes management reasons for sustainability reports as follows: “But what seems increasingly clear is that there seems to be every reason to believe that business-case reasons increasingly dominate the motivations to report - but that those motivations are proving insuflicient to bring about substantive and reliable reporting from companies globally” (p.72).
The influence of management is under the loop because it should represent the fair value of a firms environmental performance, and according to EY “New research suggest that the value of disclosure also extends to the firms balance sheet” (2013, p. 12). Besides, the social and sustainability reporting is hard to understand for the readers, their absence of knowledge might cause them to misrepresent the issue reported even more. According to Ballou et al (2005) this “opens even wider the door to potential fraud with a regular financial audit where fraud already is known to be a major challenge for numerous parties” (p.13).
Edgley et al (2009) performed interviews for their empirical research looking at managerial capture. Their interviewees all mentioned that they consider assurance on sustainability reports mainly provides value for management but it should provide more value for
stakeholders instead. They point out three main benefits “improving management systems, enhancing reputation and defending management’s position” (p. 538). These results are also found by Ball et al (2000), together with that sustainability reporting assurance is also valued by management because it confirms (or not, for that matter) their internal control systems, which makes them able to rely on for decision making (Edgley et al, 2009, p.538).
In evaluating the issues arising in sustainability reporting assurance one will find the managerial influence is possible due to one basic major issue, ‘the principal-agent problem’ in the Agency Theory. This is explained and discussed in most research by several experts (Connelly et al, 2011; O’Dwyer and Owen, 2005; Gray, 2000; Ball et al, 2000 and García-Benau, 2013). Ball et al (2000) describes that the problems in the assurance of sustainability reports arise from the assuror that is hired and payed by ‘the agent’ rather than ‘the
principal’“. In this case the agent is management and the principal are external users,
especially stakeholders. Therefore the agent might have authority in the process of assurance. O’Dwyer and Owen found that management “are thus able to place restrictions on the areas of performance and reporting upon which the assurance provider can bring to bear
independent judgement” (p. 217). Besides, the costs of assurance statements are relatively low compared to the costs of issuing the report, so why not pay a bit more to enhance credibility? Ball et al point out that stainability reporting is seen, for management, in terms of: “more as a bonus, spun off from pre-existing internal management exercise” (2000, p. 17). They claim this is also the case for assurance, they name is “a bonus activity”. This is
supported by Power who states that “independent validation is developing more as an ‘add on’ or extra service (1997, p. 128). Even more recent research from Burrit and Schallegger (2010) show that sustainability reporting should be used for more improved management decisions than is the case (p. 829).
However, recent research (Edgley et al, 2009) shows that management capture is starting to get less, but still significantly present. The reason for the improvement is due to more stakeholder involvement, or as Edgley et al say “stakeholders are being increasingly included in the process as it matures” and therefore, “beginning to provide dual-pronged benefits” (p. 542).
The positive thing that Gray (2012) notes about management that issue a
sustainability report is “through social disclosure a management may signal their awareness of and competence in dealing with social and environmental matters that have reputational,
risk and/or financial consequences for the company (p. 78). Although some might argue whether this is positive for stakeholders or not.
Interesting note by García-Benau et al (2013) is the signaling theory applied in the issues with sustainability reporting and assurance (p. 1530). They refer to previous research from Connelly et al (2011) who define the ‘key premise’ of the signaling theory as “Firms use costly signals to communicate underlying qualities or intentions to those who may desire to know such information” (p. 88). They also apply this theory to sustainability reporting as “It is difficult for investors and consumers to know which firms are genuinely committed to sustainability, so firms may use costly Sustainability initiatives to reduce information asymmetry” (p. 88).
Critic from Ball et al (2000) is about the content of assurance statements, they never state when the environmental performance is not correct. When that might be the case assurors simply do not provide assurance on that topic, they will issue a partial statement. Ball et al conclude that “Whilst the prevalent approach to the verification process we have observed may well prove beneficial to corporate management in identifying the strengths and weaknesses of their control systems for environmental risks and hazards, it is difficult to see how it contributes in any meaningful fashion to external environmental transparency and accountability” (2000, p. 19). Therefore, in the next paragraph is discussed how credibility can be improved, and thus transparency and accountability.
4.3 Improved credibility
For a report to ‘add value’ it is considerably important to be credible, which can be perceived by assurance. As discussed earlier, accountant assurors and consultant assurors face many challenges in perceiving assurance due to the lack of knowledge, standards and managerial capture. In this paragraph credibility is discussed and ‘How to ‘add value’ by assurance and improve credibility in sustainability reports?’ is the main topic. Credibility can be discussed based on some criteria as ‘added-value’, reliability and completeness. These concepts will be analyzed in the context of sustainability reports.
O’Dwyer and Owen (2005) explain that this is an “opportune time to empirically evaluate recent assurance statement practice, focusing in particular on how it enhances accountability and transparency to stakeholder groups” (p. 208) due to the discussions around the
(2013), after the financial crisis in 2008 even more companies issue sustainability reports. A common seen opinion is that there are still quite some challenges to face for assurors but the quality of assurance is developing (Edgley et al, 2009).
Sustainability report assurance statements ‘have been criticized for their lack of clarity about the detail of the assurance process’ (Edgley et al, 2009; Deegan at al, 2006a,b, Kolk, 2003). Besides the critic on clarity and transparency, there has also been critic by, for example, Adams(2004) about the accountability that sustainability reporting should provide to stakeholders but lack to present about the nonfinancial, social performance.
Most researchers believe that assurance will increase the quality and credibility of sustainability reporting (García-Benau, 2013, p. 1530). Even though some might argue (Park and Brorson) that it does not matter whether or not a company uses third-party assurance for them both having “difficulties in verifying that the assurance process actually results in increased credibility” (2005, p. 1105). All-embracing question from Ball et al “If, as our findings suggest, a company is already committed, via an existing consultancy arrangement, to the expense of an environmental audit and/or an external report, why not commission a third-party statement. Which may add something to the report’s credibility” (2000, p. 18). Several researchers see third-party assurance as fundamental in establishing credibility on sustainability reporting (Power, 1997; Adam Evans, 2004; Edgley et al, 2009). “A review of other empirical work done to date suggests that the value added by third-party statements is questionable. It does, however, provide a starting point in devising an evaluative framework to address whether third-party statements add value to corporate environmental reports (Ball et al, 2000, p. 3). Furthermore, Ball et al mention that “the degree of assurance provided by verifiers is limited” (2000, p. 3) and “very few statements add value to reports by
commenting on environmental policy” (2000, p. 16). This means that assurance should add-value to the report but the quality of the assurance that is provided is not adding add-value at the moment. Although, according to Ballou et al (2005) conclude that limited assurance is already providing more credibility than no assurance. The problem of not enough added-value could be explained with several reasons, one which is found in the empirical research from Ball et al. They found that on 13% of the assurance providers is looking into the ‘environmental performance per se’ (2000, p. 13). The focus should be on the real environmental performance in order to possibly add value for external users.
Accusations of a lack of completeness and credibility in reporting have been most prominent (O’Dwyer, 2005, 2001; Adams, 2004; Owen, 2000). However, according to O’Dwyer and Owen (2005) the main reason for this is the ‘limitations of scope’ which causes “the crucial issue of completeness of reporting being ignored in their opinions” (p.222) for most verifiers. According to Adams(2004) some sustainability reports aim on the
“sustainability of the business rather than environmental sustainability” (p. 732). The accountant interviewees that O’Dwyer and Owen spoke to in their research also named the terms ‘accuracy’ and ‘reliability’ of the information provided by management, traced out of internal systems, as problem for these issues. However, the consultant verifiers they spoke to, “tended to portray a more re-assuring picture for the reader, with statements
predominantly providing assurance as to the accuracy, reliability and completeness” (p.223). Especially the named terms like completeness and reliability seem to matter in adding value for external users. Ball et al name “The notion of a ‘true and fair’ environmental report assures the constituency of that report”, but they also establish the opinion that the content of the reports is built of information provided by management and is taken out of the regular internal systems (2000, p. 3). Adams (2004) is critic about the completeness of the
sustainability reports, especially negative results are left out. Most companies claim that they perform triple bottom line but fail to present the complete performance. This might affect that assurance does not make external users rely on the reports more (Ball et al, 2000; Gray, 2006).
In their paper Ball et al refer to a study performed in 1996 by Kamp-Roelands: “The study did, however, find that third-party statements have the potential to add value to future corporate environmental reports (2000, p. 3).” This is in contrast with the conclusion Ball et al formulate out of the examples they use which states that, for external users, it is not clear on what criteria or proof an assurors based his statement to verify the report. They conclude “Thus little value is added by the verification statement in terms of increased transparency of performance or environmental accountability (p. 12). Furthermore, “Where verifiers make assessments against policy, these assessments add little: their concern is with relative rather than absolute performance: and the stamen lacks any explanation of the risks and
consequences associated with non-achievement of the policy objective and of improvement” (Ball et al., 2000, p.16). Andon et al discuss that this credibility of assurance and the added value is related to the financial audit, which is applied in the sustainability audit. These new audit spaces are specific and therefore is argues among ‘A range of researchers,
commentators and professional organizations’ what these principles for financial audits mean for the credibility in new audit spaces (forthcoming, p. 9). Andon et al also state that
“strategic advice may also emerge in new audit/assurance reporting in response to demands from users less concerned about independence when this advice is seen to enhance the quality (relevance and reliability) of the information they seek to rely on” (forthcoming, p. 18).
O’Dwyer and Owen (2005) also look into materiality, completeness and
responsiveness as “they are central to our examination of the extent to which assurance practices enhances accountability and transparency to organizational stakeholders” (p. 219). Their results show “54% of the sample made specific reference to instances of weaknesses in the organizations’ underlying systems, management practices, reporting procedures or overall performance” (p. 221). Furthermore, Ball et al mention that users should not rely too much on the majority of the sustainability reports just because it is externally verified, because the fact that an assuror verified the reports alone should not enhance all credibility (2000, p. 14). O’Dwyer and Owen conclude that “Unless, emerging guidance starts to deal with this issue assurance statement practice will fail to enhance accountability and transparency to
organizational stakeholders” (2005, p. 224).
One of the questions Cazier et al (2011) try to answer in their research “Does a sustainability report from an independent, third party auditing agency have a greater impact on consumer behavior than an organization’s self-generated sustainability report (p. 4)?” Their result (using the statistic measurements in a t-test) is as follows: “a positive and
significant difference in consumer behavior toward a company with a published sustainability report versus a company with no sustainability report. However, no significant difference was found in consumer behavior based on the origin of the sustainability report” (p. 11). This implicates that for users there is little to no value added by the assurance of a third-party on a sustainability report. Thus, so far some contradictory results about the credibility of assurance on sustainability reports. Most interested parties and researchers expect that third-party assurance will enhance the credibility and add value for stakeholders, but thus far not all evidence supports this hypotheses.
4.4 Harmonization of Standards
The literature reviewed above indicates that the assurance on sustainability reports does not add sufficient value for stakeholders to rely on. Especially the guidelines and the use of those guidelines in sustainability reports are criticized by experts. Therefore, the question ‘Is
harmonization of reporting and standards the solution for problems regarding credible sustainability reports?’ is raised.
Andon et al discus that sustainability reporting could be applied “into the debates on the assurance of Integrated Reports, where the development of assurance is currently being restrained by concerns regarding the auditability of data and the extent and nature of user demand for assurance in the new domain” (forthcoming, p. 19). This is supported by O’Dwyer and Owen (2005) with the argument that the reason that some only provide partial assurance on the report is because guidelines are not able to provide what standards in financial audits can. According to Power (1997) the current level of assurance is not as accountable as the assurance on financial reports, which is because assurors analyze the sustainability report instead of measure them to standards. Every verifier provide their
assurance statement with their own twist which makes it hard to compare the statements (Ball et al, 2000).
Most researchers deem the current guidelines as not sufficient for reliable reports for external users (Power, 1997; O’Dwyer, 2011; Ball et al, 2000; Guthri and Farneti, 2010; Ballou et al, 2005) and most of them suggest standards as a tool to enhance quality and credibility. As Guthrie an Farneti explain (2010) the need for standards is born due to
management ‘cherry-picking’ which guidelines they would like to use, and which guidelines will provide the best picture of the company for stakeholders. Their results show that 32% of the GRI components are implemented in the analyzed sustainability reports in their sample (p. 363). Besides, they claim that the guidelines are too broad for every sector, which makes it impossible to use all GRI elements in some industries. These GRI guidelines are the most widely used at the moment and some argue that those can be the basis of general accepted standards (Ballou et al, 2005). However, “it has yet to be recognized in this capacity by a regulatory body” (p. 10), which is unlikely for the current guidelines because the critics claim to much flaws (as supported by Edgley et al (2009)). Besides, Gray (2006) claims that “an organization reporting against GRI will, at best, be producing an approximation of TBL reporting” (p. 37), which results in difficulty to assure sustainable performance. Gray also points out that nobody can prove that the current format of reporting is considered real triple bottom line. As for O’Dwyer and Owen (2005) they found empirical evidence that only 29% of the cases the third-party verifier could relate a specific topic in the sustainability report to a guideline or standard.
In the British accounting review, O’Dwyer and Owen (2005) compare three difference current guidelines, the AA1000, FEE and GRI. First of all, the GRI relates to the
independence of the third-party assuror and includes that this is more important than in FEE. Besides, GRI is more specific about the context and put higher value on reliability. Where GRI and FEE are engaged in the evaluative approach, the AA1000 aim at adding more value for stakeholders, which is more difficult as guidelines according to O’Dwyer and Owen. They also noted that the AA1000 standards include some of the main guidelines of the GRI. Adamsalso compared the above guidelines and conclude that the AA1000 is especially focused more on the process of assurance than GRI who are providing more information regarding the content of sustainability reports.
The logical conclusion when the results from O’Dwyer and Owen (2005) are
compared with earlier evidence from similar research provided by Ball et al (2000) it that the quality of assurance is increasing and the scope of standards/guidelines is broader and
improving. In the discussion about increasing quality of assurance the main opinion is that “a higher level of assurance will lead to higher levels of stakeholder inclusivity” (Edgley et al, 2009, p. 554; O’Dwyer and Owen, 2005). Ball et al (2000) clearly point out that the lack of standards make the internal system from a company the only evidence than can be audited, which compared to external evidence provided during financial audits, is not reliable enough for auditors to provided broad statements. As mentioned earlier, it is hard for users to rely on the information provided and the assurance perceived.
Even though it is widely expressed among accounting bodies, stakeholders and standard reporting instances that there is a need, there is still resistance for global standards. This according to O’Dwyer (2011) who describes that this problem arises with the
discussions about the “critical scrutiny given widespread claims that it is failing to increase the visibility of corporate social and environmental impacts” (p. 1231).
Many researchers argue that the current guidelines do not include enough specific anchors for assurors to provide credible and accountable statements to enhance the quality of the sustainability reports and add value for stakeholders, but they also lack real solutions to these problems (O’Dwyer and Owen, 2011; Ball et al, 2000). As example Adams(2004) claim that ‘better developed audit guidelines’ would be a solution or more stakeholder involvement is necessary. The same applies to the conclusion of Park and Brorson (2005, p. 1106) who states that “application of generally accepted reporting guidelines and assurance criteria might improve credibility”.
Nevertheless, the discussed standards and assurance are used more and more over time, but management still has a lot to say in the process of providing external assurance on their sustainability reports which might be the reason why the assurance based on guidance has not been shown effective in current research (O’Dwyer and Owen, 2005; Adams, 2004). Most of the times the statements that is provided by the external auditor is directed to corporate management, which indicates that it provides value for them rather than
stakeholders. Considering the stakeholders are the ones who supposed to use the corporate sustainability report, it is questionable why their assurance reports is not addressed to them. Several researchers (Ball et al, 2000; Edgley et al, 2009) found evidence that in almost all cases the results from environmental audits are reported to management rather than external users. The results from Edgley et al show that two-third of the interviewees state that management receive the results from the environmental audit.
Another suggestion pointed out by Kolk (2003) it government regulation for
assurance on sustainability reports, which is started in a new trend in Europe and Japan. But most remarkable critic is from Gray (2012), he analyzes whether or not sustainability reports really report about sustainable environmental issues, which, is in his eyes, not the case. He states that “‘sustainability’ reporting consistently fails to address sustainability and the increasing claims that financial and social performance are mutually determined and determining is probably incorrect and founded upon a tautology” (p. 65).
5. Conclusion
As mentioned in the introduction, this paper examines how management and audit firms affect the quality and nature of assurance on sustainability. An evaluative approach is used to discuss and review empirical research and evidence, it builds upon previous literature to examine the main topic and seeks to answer the sub questions regarding this topic.
The main conclusion is that assurance should be the fundamental aspect when companies provide their stakeholders with nonfinancial information to enhance credibility. This information should be transparent, accountable and reliable because the impact of global companies with revenue that exceeds the GDP of average countries.
First, to answer what role audit firms and non-audit firms have in the perceived assurance it is only possible to conclude that there is no clear distinction between who should provide assurance, accountants or consultants. Accountant assurors are more cautious and
