Extended External Reporting (EER) Assurance

Editor's Notes

• #2: Welcome, everyone, to this webinar on Extended External Reporting or ‘EER’ By way of introduction, I am Lyn Provost, EER TF Chair and IAASB Public Member. I took over from the outgoing chair, Marek Grabowski, from March this year, and have been on the EER TF from the inception of the task force. we hope everyone is coping with these challenging times we appreciate that many of you will have experienced, at least, some disruption, so thank you for making time to join this webinar, the webinar provides opportunity for us to talk through some of the key concepts and issues affecting the public interest, then within that context the key points of the guidance. We will consider questions half way through the presentation and at the end of the session. Feel free to submit any questions or comments as I make the presentation. the closing date for consultation responses has not changed, but we hope that this webinar will help in the process of completing your responses we value all your responses and it is really important that we get as much feedback as possible on the consultation – especially now as, after this, we are on the ‘home stretch’ to finalising the non-authoritative guidance for publication
• #3: [talk through screen points]
• #4: So, what exactly do we mean when we talk about Extended External Reporting? EER covers many forms of reporting on a wide range of subject matters, including those you see on the screen – these are just some examples It is a fast-growing area as non-financial matters, such as climate change impacts, become more important to investors and other stakeholders in their decision-making In a number of territories, regulators are calling for greater transparency and disclosure of non-financial information by companies, recognising that the management and disclosure of these matters by entities may be as important as traditional financial management to an entity’s ability to sustain itself, and for users to be able to be able to make informed decisions about the entity.
• #5: As EER reporting becomes more important to stakeholder decision-making, it is also important that stakeholders are able to have greater trust in what is being reported As part of the initial research undertaken on this project, we identified four factors that are key in helping to enhance trust in EER reporting: A sound EER reporting framework, which allows objective, consistent measurement or evaluation of the underlying subject matter Strong governance by entities to ensure that there is high quality information: on which they base their own business decision-making, and to enable them to report accurately, completely and in a timely manner to their stakeholders Consistency of what is reported in the EER report with what stakeholders know from wider sources of information, including industry norms and media reports External assurance by a skilled/competent assurance practitioner who is independent of the organization. In this webinar, I’ll focus on this last point and how external assurance serves the public interest by enhancing trust, as well as: How some of the characteristics of EER engagements may challenge the ability for assurance to serve the public interest and How the IAASB’s non-authoritative EER guidance is designed to address those challenges
• #6: So, to the first point – How does external assurance provide public interest protection? The IAASB’s authoritative standard for performing EER assurance engagements is ISAE 3000 (Revised), which includes stringent requirements, for example: For the practitioner to determine whether there is a rational purpose to what the practitioner is being asked to assure – in other words, to consider the entity’s request for assurance from the point of view of whether it is likely to meet the intended users’ decision-making needs. If there is not a ‘rational purpose’ the practitioner is not able to accept the engagement. So, for example, if the intended users of the EER report were interested, for their investment decision-making, in an entity’s climate change strategy and ability to be sustainable in the future, but the entity requested the practitioner to assure only its greenhouse gas emissions during the period, that would be highly unlikely to pass the ‘rational purpose’ test The practitioner is also required to apply appropriate competence and capabilities and exercise professional skepticism and professional judgment. The assurance practitioner’s skills and training enable a rigorous, objective approach to be brought to bear on the reported EER information; their competence involves having sufficient expertise in both assurance skills and techniques, and in the subject matters being reported Then there is a requirement to design and perform procedures to obtain persuasive evidence that the reported EER information is free of material misstatement, also taking account of contradictory evidence that might come to light that may cast doubt on the reported EER information. On the basis of the evidence obtained, the practitioner reaches an assurance conclusion that is expressed in an independent, written report.
• #7: All well and good, BUT: There are circumstances that may arise that have the potential to limit the value of assurance to the public interest. These circumstances may be more commonly found in EER reporting and assurance than in financial statement reporting and financial statement audits. So, what are the differences? Let’s take a look….
• #8: First, we need to look at what the elements of EER reporting are as it is important to understand how they relate to each other: For convenience, let’s break EER reporting down into four elements: First, what is it that users want information about to be able to make their decisions? For example, it may be the equality of its employee pay between genders, or what hazardous waste it generates and how that waste is disposed of, or what the entity’s climate change strategy is – this ‘what’ is the underlying subject matter Then ‘how’ is the underlying subject matter to be measured or evaluated? For example, how would ‘employee’ ‘pay’ or ‘hazardous waste’ be defined so that it was clear as to what should and should not be included. For example, ‘pay’ might include all of base pay, benefits, bonuses and overtime pay or may only include some of these; similarly ‘employee’ might include full and part time employees or full-time equivalents, certain grades of staff etc. These ‘rules’ or ‘definitions’ are known as the criteria By applying the criteria to the underlying subject matter, the result is the information being reported and assured or the ‘subject matter information’ as it is known – this is what the users will use to make their decisions. Underpinning these three elements are the systems, processes and controls the entity uses to record, process and report the subject matter information in a logical, orderly and consistent way.
• #9: Let’s look at how the characteristics of EER information may differ from financial information and result in challenges to the ability of assurance to serve the public interest. First, the underlying subject matter (or USM as I may call it for ease) The underlying financial performance that is reported in an entity’s financial statements is: fairly uniform in its nature largely historical quantifiable measured and disclosed using well-established generally accepted accounting standards EER underlying subject matters, on the other hand, may be: range, for example, from health and safety incident, to equality of employee pay, to an entity’s intellectual capital, to its strategy to address potential climate change impacts relate to past or future conditions, or a mix of both complex and less readily quantifiable, subject to greater estimation uncertainty or the need for subjective judgment measured or evaluated using a range of different reporting criteria, including criteria developed by the entity, itself. This means that, for EER assurance: the precision and certainty of measurement or evaluation is affected, and there is greater opportunity for subjectivity and bias in reporting that makes judgment more difficult; and there may be a greater need for professional skepticism than in a financial statement audit to exercise these more difficult judgments, there is a need for greater subject matter competence to understand and be able to challenge what has been reported there is a need for clearer communication in the assurance report so users understand the wider range of variables involved.
• #10: We’ve spoken about the fact there are well-established accounting frameworks for measuring and disclosing financial performance. For EER: there is a large number of diverse frameworks – while some may be more commonly used than others, there is no ‘generally accepted EER framework’ the frameworks often establish a set of high level principles, but do not give sufficient detail to enable objective, consistent measurement or evaluation when applied by different practitioners – this means that to be suitable as criteria, the frameworks need to be further interpreted and developed by the entity Some of the challenges for assurance practitioners, include that criteria may be: selected from multiple frameworks developed by the entity – either in part or in full – with greater preparer choice, opportunity for bias, undue emphasis or omission insufficiently developed such that they would not result in consistent measurement or evaluation of the underlying subject matter more difficult to make available to users because the criteria may not have been documented or may not be ‘packaged’ suitably to be made available in the same way as a generally accepted framework would be all of which may mean need for greater practitioner competence to exercise judgment and professional skepticism
• #11: Given the challenges we have discussed in relation to: Underlying subject matter (ie the nature of the ‘what’ is being measured) and the Criteria (ie the range of ‘how’ it may be measured) it is clear that the resulting subject matter information may result in inconsistent or not comparable information. Also, we need to remember that financial reporting is usually subject to regulatory requirements, whereas EER information is often voluntarily prepared without the rigor of regulatory requirements or scrutiny. All of the challenges we have discussed mean: there is more opportunity for choice by the entity of what is reported and assured; as a result the EER report may not reflect what the entity uses for its own decision-making It is difficult to determine whether there may be material misstatement, especially when information is expressed qualitatively, or to do with future conditions or events. There is also not a common basis for assessing the aggregate impact of misstatements. For example if misstatements are identified in discrete ‘topics’ within the subject matter information, such as GHG emissions or health and safety incidents, or governance processes, all of which are included in the report as a whole, it is difficult to assess what the overall impact on the EER report may be, and what would be likely to affect user decisions. It is also difficult to identify and communicate what is the information that has been assured and what is ‘other information’ that has not been assured, in a way that users understand what they can have greater confidence in, and which areas of the report may not warrant that degree of confidence.
• #12: Lastly, let’s look at the systems, process and controls for preparing the subject matter information – the fourth of the four elements we identified earlier. For financial statement reporting, systems and controls are usually more developed than for EER reporting. There is also a double-entry system of bookkeeping that, in part, acts as a check over the financial information. As EER reporting is comparatively new, and evolving fast, the systems, processes and controls may also be developing and being improved. These EER systems therefore may not: Provide a consistent basis for preparation of the subject matter information Prevent or detect and correct misstatements Be integrated into the entity’s decision-making in running its business In addition, preparers of the subject matter information may look for advice from their assurance practitioners, who often have experience of assuring systems, processes and controls. Giving such advice could result in a self-review threat for the practitioner if, for example, the practitioner were to provide recommendations for systems and controls, and, at a later stage, be in a position where they were evaluating those systems and controls as part of their evidence-gathering procedures. Such actions would both compromise the practitioner’s independence and breach the requirements of their professional bodies.
• #13: So, we have seen how the characteristics of EER reporting may present challenges to practitioners and, consequently, have the potential to limit the value of EER assurance in protecting the public interest. The EER non-authoritative guidance is being developed to assist practitioners in overcoming these challenges. By providing guidance that aids consistent, high quality application of the IAASB’s ISAE 3000 (Revised) standard by practitioners, especially in addressing the challenges we have talked about Trust in EER assurance reports may be enhanced, which, in turn means Greater user confidence in the reliability of entities’ EER reporting, and The ability to strengthen the influence of EER assurance on the quality of EER reporting. We are sometimes asked about how this last point works, and it is worth looking at this a bit more closely. If practitioners: have clear guidelines on how to approach the identified challenges, are able to apply a consistent and robust approach to EER assurance engagements and, consequently are equipped to articulate their expectations to preparers of EER information, together with their reasons this can ‘raise the bar’ on the consistency and quality of entities’ EER reporting, which, in turn, can enhance comparability of information and user decision-making.
• #15: The rest of this webinar will focus on how each chapter of the EER guidance addresses the challenges we have discussed. While, everyone is welcome to stay on the webinar, this second part is aimed primarily at practitioner attendees as they may wish to understand the challenges and the guidance in more detail.
• #16: As you can see on the slide, the introduction to the guidance: explains how to use the guidance includes a diagram that gives an overview of the requirements of the standard, and indicates how the requirements of ISAE 3000 (Revised) are addressed by each chapter in the EER guidance - I’ll come back to this diagram shortly The guidance makes extensive use of examples and diagrams.
• #17: I am not going to go into this slide in great detail other than to explain that: the 2 chapters on behavioural aspects are those on (i) competence and capabilities and (ii) professional scepticism. These are placed first in the EER guidance as they are needed from the start throughout the performance of the engagement we have used icons – circles with PS and PJ inside them throughout the rest of the guidance and in Supplement B, where examples illustrate the exercise of professional judgment and professional skepticism – there are, of course, other places in the guidance where these concepts are discussed, but the icons are currently placed only against the examples the two chapters on qualitative and future-oriented information are placed at the end of the guidance. The reason for their placement at the end is that the considerations covered in earlier chapters are now discussed in chapters 11 and 12 in the specific context of qualitative and future-oriented EER information, so you need to have the earlier context of chapters 1-10 to be able to apply the guidance to these types of EER information. And we have adopted a what, why and how format to reduce complexity.
• #18: This is the diagram I was referring to that appears in the introduction to the EER guidance. The green boxes show the requirements of the standard The brown boxes show the chapters in the EER guidance The green arrow show how the requirements ‘map’ to the chapters or that earlier chapters relate to later chapters Grey text indicates requirements that are not directly addressed in the guidance as they were not identified as a challenge.
• #19: As I said, chapters 1 and 2 cover competencies and professional judgment and professional skepticism, including, in chapter 1: The need for both assurance skills and subject matter expertise on the team The competence and responsibilities of the engagement partner and, in chapter 2: the behaviours needed to exercise professional skepticism possible impediments to being able to exercise professional skepticism factors that may increase the need to exercise professional skepticism and how competence in exercising professional skepticism and professional judgment may be acquired Chapter 3 – refer to slide
• #20: Chapters 4, 5 and 6 cover the matters shown on the screen. I am not going to talk through all of the points, but would like to make the point that these three chapters are very closely linked with each other, which is why they are positioned as they are. So, criteria may be set out in a framework, or may be developed by the entity or a mix of both. Most often, there will need to be, at least, some further development of the criteria in order for them to be suitable. Even if a framework is used, frameworks are often set out as high level principles, rather than as detailed instructions on how to measure or evaluate the underlying subject matter. Each entity will therefore need to further develop those framework principles into a ‘basis of preparation’ or methodology so that there are suitable criteria that can be applied and made available to users. Of necessity, when the entity develops its own criteria, or further develops framework criteria, it will need to have a systematic process for doing so, so understanding the entity’s system of internal control, including the processes for developing the criteria and the basis for the subject matter information may be important, and as part of that process, identify its material reporting topics, considering both the purpose and intended users of its EER report This is not to suggest that the practitioner necessarily carries out extensive procedures on the system of internal control when considering the pre-conditions, including the suitability of criteria, at pre-acceptance of the engagement. It is an iterative process, requiring the exercise of professional judgment. However, the more complex and extensive the organizational boundary, and the more diverse and complex the subject matter, the more likely it is that understanding the system of internal control may be an important part of considering the suitability of the criteria before accepting the engagement. Note the change of title for chapter 6. We heard a lot of feedback from phase 2 that materiality process for preparing a report was confusing with assurance materiality thus the change
• #21: The next chapter deals with the use of assertions to consider how different types of misstatement may occur in the subject matter information, and to help the practitioner design procedures to obtain evidence. While the use of assertions is not required by the standard, they are a useful way of thinking about misstatements and in designing procedures. For example, when considering how health and safety data such as injuries might be misstated, it may be useful to think about the assertions explicit or implicit in the reported information – i.e. the entity is asserting that the information is accurate, complete, relates to the current reporting period (cut-off), is properly classified (for example between fatalities, serious incident or minor incident) and so on. The procedures can then be designed to address the risk of misstatement. So, to address the risk of misstatement related to completeness, the practitioner may design procedures to sample from the underlying incident records to the reported EER information as testing in the other direction would not provide evidence to support completeness. The next chapter (Chapter 8) deals, amongst other matters, with the evidence-gathering considerations for both limited ad reasonable assurance, and with how aggregation risk might be addressed when designing and performing assurance procedures in relation to different topics within an EER report or when the subject matter information is qualitative information. Chapter 9 then considers the practitioner’s responsibilities when misstatements are identified.
• #22: Right, on the home straight now, before we turn over to you for further questions or comments…. Chapter 10 emphasizes the importance of communicating effectively in the assurance report; the practitioner’s report is the visible output of the entire assurance engagement and therefore needs to be clear and informative so that users can understand: what has and has not been assured how the subject matter information has been prepared, and the degree of confidence they may have in that information. The chapter discusses various ways in which communication might be enhanced. Provided the elements of the assurance report required by paragraph 69 of the Standard are present, the Standard does allow for some flexibility in how those elements are communicated if that would enhance users’ understanding of what is behind the assurance conclusion. It is also important that practitioner’s reports do not purport to give ‘comfort’ that is not warranted. For example, it would not be appropriate for a practitioner to: ‘certify’ that the subject matter information is ‘correct’ as that may imply more than can be achieved when less than 100% of a population is examined by the practitioner, or when there is inherent uncertainty in measuring or evaluating the underlying subject matter suggest compliance with all of the requirements of ISAE 3000 (Revised) when that is not the case, for example, by stating that the engagement has ‘had regard to’ ISAE 3000 (Revised) – such nuances are not likely to be understood by users of the EER assurance report. As mentioned at the start of this webinar, chapters 11 and 12 deal with qualitative and future-oriented information and cover considerations from pre-acceptance of the engagement through to reporting.
• #23: Alongside the non-authoritative EER guidance, we have published two supplements: Supplement A which contains the Four Key Factor Model for Credibility and Trust in relation to EER reports. I mentioned earlier that in our initial project research we identified four factors that are key in enhancing trust in EER reporting. In part 1 of Supplement A there is further discussion on these factors. Section 2 of this supplement provides background and contextual information. Supplement B contains longer, more complex examples using a range of reporting frameworks. Shorter examples are used within the body of the EER guidance to explain concepts discussed in the guidance. The longer examples are supplementary. Neither Supplement A nor Supplement B needs to be referred to in order to use and understand the EER Guidance – the Guidance is intended as a standalone resource. It is for this reason that the consultation is focussed on the EER non-authoritative guidance document; however we would also welcome any comments you may have on the additional material in these two supplements.
• #24: And finally, a look at the timeline for finalising the EER guidance for publication before we turn to some questions…. [Read out slide]
• #25: Towards the end of the allocated time, draw the session to a close by taking one last question/saying that is all there is time for. Thank participants for attending, for the discussion and contributions. Repeat the closing date and how important it is that we get feedback] Just a reminder to you that it is more helpful in analysing the responses, if The questions are answered in relation to each chapter, rather than as a ‘blanket’ answer about all chapters. So, for example for consultation question 1: Does the draft guidance adequately address the challenges, it would be helpful if responses could answer that on a chapter-by-chapter basis (preferably with subheadings so it is clear what commentary relates to which chapter). Where comments are made for improvement, suggestions for enhancement are better than simply noting that the guidance doesn’t address the challenges. It is otherwise sometimes difficult to know from what angle or context the comment is being made, and therefore how best to address the comment. If the reasons and suggestions for improvement are included in your responses, that will help us to enhance the Guidance in the way respondents would like. That brings us to a close, so thank you again for your time and stay safe!