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Lakshmi Kant Garg
Executive Summary
Sustainable development is the key to success of any organization. This article examines the concept of sustainability accounting / reporting and its key factors such as, social environmental and economical. It throws light on the principles for providing assurance on sustainability reports and the role of an accountant therein. The article also covers the importance of sustainable wealth creation in the context of good corporate governance.
Sustainability means meeting the needs of present generation without affecting the ability of future generation to meet their own needs. Working for sustainability doesn't mean stop using of natural resources, which are essential to run a legitimate business. it only means to protect the wastage / misuse without forgetting that the long term survival of that business as well as many ohter businesses depends on those reources.
The author is a member of the Institute. The views expressed herein are the personal views of the author and do not necessarily represent the views of the Institute.
It is important how an organization works towards protection of resources which are limited in supply so that the development may be sustained. One has also to establish an equilibrium between the development and conservation of resources. The subject of Environmental accounting and reporting has emerged with this backgrounded only some times back and it has now become the most important part of sustainability accounting / reporting.

If a company is committed to sustainable development, the management has to adopt a holistic approach to decision making in which all dimensions of sustainability i.e. Socio economic factors, eco-efficiency, environmental factors, etc., are given appropriate weight and consideration. It has to put in place such systems and procedures of reporting that reports, environmental and other impacts caused by company's products and services. The opens up varying degree of questions, viz.:
  • What exactly we mean by Sustainablity Accounting / reporting;

  • What should be the format of reporting;

  • Whether any assurance is require on such reporting and is so, what should be the principles applied while giving such assurance;

  • How could sustainability reporting be correlated with the financial statements;

  • Role of an accountant in sustainability accounting / reporting & providing assurance services.

    Examination of above issues is the scope of this article.
Most of the Accountants feel that what has the accounting profession got to do with environement or sustainability reporting. But since early 90's the world's largest accounting bodies regional organisations particularly in Europe have developed a serious thinking on these subjects and it has now been established that the accounting profession has been centrally involved in corporate sustainability. There is no clear cut definition of sustainability accounting developed so far, but one of the research report on the subject defines this as accounting for social economic and environmental aspectsw of decision making.
It may be measuring and costing physical emissions and social externalities so as to compute sustainable level of profits and reporting on the economic, social and environmental aspects of organisatioal activity. It should be an approach that creates long term share holder value by embracing opportunities and managing risks deriving from social, environmental and economic developments. It is to harness / gear market potential for sustainability products and services and at the same time successfully reducing and avoiding sustainability costs and risks. Let us deal with the issue of formatingn of report for sustainability that would help understanding the issue further.
Globally, there is no clear cut fotmat yet prescribed for sustainability reports. The debate is on as to whether this report should be covered in the annual report or be made a part of financial statements or be issued on stand-along basis. Some consensus is reached on the last alternative for the purpose of issuance of assurance certificate. The other issue is that there are no legal obligations to issue sustainability reports hence different formats are in existence & the selection of approrpiate method depends on company's choice. Some of the companies who have started giving information on sustainability are adopting different reporting pratices. So there is a need to bring harmonization in reporting framework. This in itself would be major issue to tackle with.
Another issue is undefined class of users for such reports. In case of financial statements, investors ar defined class of users. It is from there perspective that preparers make judgements about what to report and how it should be presented. A sustainability report could also be used as a type of financial report as invenstors may make economic decisions based on its contents. A stand alone report would normally include some disclosure indicators. It seems that user groups of financial and sustainability reports may be different with some members in common. Further different users may have different views as to the relevance and materiality of performance indicators.
What information should Sustainability reports contain - Qualitative, quantitative as well as supplementary information. It should concentrate meeting the information needs of non-investor stakeholders. The GRI (Global Reporting Initiative) guidelines recommend the following to be included in sustainability reports:
  • A statement from CEO of an organisation

  • Brief profile of an organization

  • An executive summary and key indicators

  • Key indicators of sustainability may be the use of packaging material, employee retention rates, net profit earnings, consumption of resources per unit of product.

  • Vision and Strategy

  • Policies, structure and management systems (the systems information may include management accounting, financial accounting, environmental management, health and safety, human resources related information)

  • Performance (through environmental, economic, social and integrated indicators)
The concept of stakeholders has started changing the thinking around. Previously the over-emphasis on share-holder's interest caused adverse relationship between the shareholders and the stakeholders (mainly the employees). The concept of sustainability is important in the context of corporate governance. The business has to account for the value addition to the natural and human capital also. It is therefore important to disclose the environmental, social and economic performance.
Society will lose if financial capital is raised at the cost of natural capital. The raising of natural capital would involve complete redeisgn of business models, its roles and responsibilities. Counting what is not countable is the greatest challenge. Shattering of a huge ice shelf weighing billions of tons in Antarctica may easily tell the cost of industrial activity to the environment. Good corporate governnance framework has to therefore take care of triple bottom line approach, say, profits (economical), planet (environmental) and people (social)
There is an International Standard on Auditing i.e. ISA 100 on Assurance Engagements; that may be looked into. It identifies a minimum set of information that should be disclosed in assurance related engagements, which is as under:
  • Title to the report

  • An addressee

  • Description of the engagement and identification of subject matter

  • A statement to identify the responsible party and describe the practitioner's responsibilities

  • Identification of parties to whom the report is restricted, if that be case and for what purpose it was prepared

  • Identification of the standards under which the engagement was conducted

  • Identification of the criteria

  • The practioner's conclusion, including any reservations or denial of a conclusion

  • The report date

  • The name of the firm or the practitioner and the place of issue of the report
As per ISA 100, Assurance engagements performed by professional accountants are intended to enhance the credibility of information about a subject matter by evaluating whether the subject matter conforms in all material respects with suitable criteria, thereby improving the likely hood that the information will meet the needs of an intended user.
This guidance available in ISA 100 may be greatly helpful in providing assurance reports in generality. There are certain reporting problems in assurance on sustainability reports like absence of Generally Accepted Reporting Standards. Disclosures of scope, criteria, level of assurance, standards applied, etc.
The assurance on different kind of services such as web-trust services is commonly heard these days. Assurance may be termed as different from audit or certification which has specialised meanings. The level of assurance that may be provided should be documented as there is a lesser possibility of providing high level of assurance due to the following reasons:
  • No legal obligation of assurance on sustainability reports;

  • No prescribed ethical or reporting standards for providing assurance;

  • Less quality of reports to allow meaningful assurance;

  • Subjective aspects of reporting matters;

  • Available procedures may not provide sufficient evidence;

  • The assurance provider should determine the level of maximum assurance that may be provided based on the subject matter of report, and the evidence likely to be available.

  1. Competence: The assurance provider should achieve / gather competence by appropriate experience and qualification. He should organize co-operation withe experts.

  2. In case of Joint assignments, the report may besigned by either but the responsibility should be clearly segregated and that fact should be reported. The standards of auditing on joint Audit may also be referred to.

  3. In case the assurance provider is unable to collect sufficient approrpiate evidences in support of disclosures made in the report, he should state the fact in his report.

  4. The engagement should be planned and performed in a manner that reduce to an acceptable level, the risk of reaching inappropriate conclusion.

  5. The compliance of laws and regulations is the responsibility of management and he should obtain writen representation from management to the effect that all non-compliance is disclosed

  6. Materiality threshold should be agreed between the organisation and the assurance provider.

  7. The report should explain the scope of engagement, responsibilities of parties involved and the level of assurance provided.
The assurance providers, if they are the accountants should make use of multidisciplinary teams for such work i.e. professionals with expertise in various environmental, social and economic factors may be employed to ensure that the firm has the overall capability to provide required assurance. Otherwise there may always be the risk of other assurance providers (non-accountants) questioning the legitimacy of report by the accountant who have no expertise in matters relating to sustainability reports.
The assurance reports may increase the credibility of sustainability reporting and increase confidence of stake holders in an entity. Futher the company may benefit from ther expertise of assurance providers through formal advice or joint working. They may review companies' systems, processess and internal controls, reporting weaknesses to the company and offering insights having long term business implications.
The expectation gap' may create major limitation on the assurance reports. The user may assume that there is more assurance than actually is present. He may not properly appreciate the nature & level of assurance provided. Perhaps the dialogue with stakeholders or extending the scope of asurance may help resolving the issue.
The subject matter of assurance should be evaluated and measured against appropriate standards / bench-marks. The criteria for reporting should be tested against relevance, reliability, neutrality, understandability and completness.
The assurance should be given by applying a comprehensive approach i.e. the accounting approach in which the an independent assessment of companies; reported information is carried out; the social audit in which an independent third party report is given without any report from the company; and the consultancy approach wherein the companies seeking assistance from external consultants and extending their involvement to reporting.
The preparation of report is the responsibility of management. The assurance provider like an auditor under accounting approach, by applying well developed standards / guidance conduct the assurance and give reports based on his assessment of risks and evidences available. Social audit is a broad term and may in itself cover environmental and economic aspects. In social audit approach, external person conducts the audit approach, external person conducts the audit in particular areas and with or without co-operation from the company. The major sources of evidence are external dialogues with stakeholders. If that be the case, then it would not form part of assurance on sustainability report because preparation of sustainability reports is responsibility of management and one has to report on those reports. A recent development of social audit is that where a company collaborates with social auditor that give rise to joint reporting or one where the company reports information on which social auditor comments. Under the consultation approach, the company takes the benefit from involvement of experts. It focus on the quality of environmental management system.
It may be concluded that in essence the comprehensive approach is the accountancy approach, enhanced through accommodation of aspects of stakeholders dialogue taken from the social audit approach and the well developed understanding of management systems and processess developed through consultancy methods. the following steps briefly describes the assurance reporting process:
  • Consider acceptability of assurance assignment
  • Agree subject matter, scope and terms of engagement
  • Plan the work
  • Testing the reliance to be placed on systems
  • Perform substantive procedures
  • Obtain management representation
  • Carry out appraisal of sustainability report
  • Consider other information issued by the company
  • Issue the report
  • If published, check agreement with original
  • Remain alert to factors that indicate the assurance report is no longer be relied upon
The assurance on the economic aspects of sustainability report may be considered for followinig group of stakeholders:

Government and the community
A corporation may be said to be an on organisation whose responsibilities extend beyond increasing the equity for its shareholders. It has to give security to its employees dealers, customers, vendors, etc. All these components; health and well-being dependes on the well-being of a corporation. The sustained growth of all these stakeholders. There need to be given a serious thinking on the subject here in India.

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