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Climate change
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How green was my audit?

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To what extent do auditors treat the impact of climate change on large company balance sheets as being a part of their role? Richard Murphy finds that, despite the global importance of this issue, audit firms are still shirking responsibility.

12th Jul 2022
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Growing concerns about the impact of climate change on business performance have increased demand for greater climate-related disclosures at large companies. The quality of those disclosures, however, relies on the seriousness and efficacy of the audits that underpin them. 

With a colleague, Prof Colin Haslam of Queen Mary, University of London, I have been looking at this issue in research undertaken at Sheffield University Management School. The question we have asked is to what extent do auditors treat the impact of climate change on multinational company balance sheets as being a part of their role? 

To answer this, we examined the audit reports of all FTSE 100 companies at the end of 2021 that ended in that year to determine whether their auditors included climate-related issues within the scope of their audit work in that year. Whether climate risks were deemed in scope or not, we examined whether an audit opinion was expressed on the impact of climate-related matters on the financial statements, and whether that impact was deemed to be material or not.

Disappointing results

The results were disappointing, to say the least. We found that 39% of auditors did not refer to climate-related change as an issue of concern when stating the scope of their audit work in 2021. Just 36% of auditors expressed an opinion on the impact of climate change on the financial statements of the companies that they were auditing in 2021 and just two audit opinions in 2021 considered climate-related issues to be of significance. These were of Persimmon plc, where issues relating to flooding risk were discussed and noted as not creating a risk, and Meggitt plc, where issues relating to obligations for mine reinstatement remediation in the USA were noted. But they were considered to be adequately provided for because an adverse opinion was not given. 

While there were other occasions – for example in the case of the two major oil companies in the FTSE 100 – where climate issues were discussed by auditors at length in their report, in these cases the auditors ultimately decided that their client’s business model was satisfactory and that the accounts were true and fair. This is despite being prepared on a basis that many commentators think to be unsustainable and a risk to the planet. As a result, they were among the 34 audit firms offering an opinion on this issue in 2021, only to dismiss it as immaterial to the accounts on which they were reporting. 

Different approaches

There were, unsurprisingly, variances in approach between the audit firms. The auditor who most often treated climate-related risks as outside the scope of their audit work was KPMG: 50% of their audits make no reference to the issue when they were detailing the scope of the work undertaken. In contrast, PwC included climate-related issues within the scope of their work more often than any other auditor – 78% of their audit reports refer to climate or the environment as being within the scope of the work that they undertook.

Among the Big 4 audit firms, EY were most likely to ignore climate change-related issues when offering their audit opinion, doing so in 71% of all their audit reports. This was marginally greater than Deloitte, who did so in 69% of their audit reports. In contrast the audit firm most likely to refer to climate-change related issues when reporting their opinion on financial statements was PwC, who did so in 48% of their audit opinions. This does, however, mean that no auditor in 2021 commented on climate-change related issues in a majority of their audit reports. 

The most common reasons given for not commenting on climate-related matters in the audit report were that:

  • The issue was beyond the scope of the audit (the most common opinion supplied)
  • The effects of climate change were not material within the period analysed by the audit
  • The identified climate risk to the carrying value of assets, whether tangible (for example plant and equipment) or intangible (such as goodwill) was considered to be amply accommodated within the valuation margins available, meaning the risk of additional impairments being required was small, and so was dismissed
  • The issue was simply immaterial.

Some surprising sectors saw no mention of climate-related issues. No auditor referred to this issue as being within the scope of audit work in the case of water companies and paper and packaging companies. The sectors where climate change was most likely to be dismissed as immaterial were telecoms, real estate letting, retailing, software and general manufacturing and distribution. 

In general, the audit reports issue provide little indication of concern about climate change or of a willingness to address issues relating to climate change within financial reporting. Nor was there any indication of consistent approaches to climate change within audit firms.

Avoiding responsibility

Clearly this situation is not good enough. It seems that auditors are doing their utmost to avoid their responsibility on this issue, either pretending that the current definition of going concern lets them off the hook for such long-term issues, or that directors’ reporting outside the accounting framework absolves them from responsibility to consider climate change within it. Both are obviously untrue for an issue of this consequence. 

A financial reporting standard on this issue is now required and the International Sustainability Standards Board approach is inadequate. Such a standard clearly requires that a related auditing standard be delivered. Only then might the audit profession and their clients transform their approach to this issue so that stakeholders receive the assurances they need that the FTSE 100 are taking their responsibility for climate change seriously. At present we are a very long way from that.

Replies (8)

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By Hugo Fair
12th Jul 2022 18:49

Any article that relies on phrases like "Clearly this situation is not good enough" (without demonstrating that this clarity has been expounded) loses credibility faster than a warming planet.

Climate change (and/or degradation of biodiversity and/or pollution generally) are serious topics ... but not obviously a natural part of the general audit process.

"How green was my audit?" ... VERY (if green means what it did in my youth - inexperienced/naïve!

Thanks (5)
Replying to Hugo Fair:
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By AndyC555
13th Jul 2022 13:28

"A financial reporting standard on this issue is now required"

Have a guess at who has written one.

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paddle steamer
By DJKL
13th Jul 2022 10:27

Surely measuring climate issues within a business with reference to monetary measures is itself weak and devalues the measurement process, it effectively sticks a monetary price on the issues rather than an environmental price.

IMHO accountants are not really trained to undertake climate accounting and most attempts seem to be mere lip service to the concept, but why would it be otherwise, countries do not even have consistent measurement re NDCs so if they are fudging measurements/achievements why should it be different further down the food chain?

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By Paul Crowley
13th Jul 2022 11:23

Best to let auditors learn how to audit the bank accounts and numbers first
Those are the things that investors want correct and those are the things that auditors (the big 4) fail on just so frequently
If they need to cheat on ethics exams, then nothing done on green stuff will be accurate anyway

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By AndyC555
13th Jul 2022 13:22

It's hard to take anyone seriously who writes articles under the headline "The Tories are the enemy of the survival of human life here on earth" which Mr Murphy did on his blog on April 11 this year.

But then Mr Murphy also thinks that "[Boris] Johnson is a fascist...I also suggest that this is true of many of his MPs.... those who support the Tories are also supporters of fascist policies." (June 15th) and in a blog written just hours before Johnson announced his resignation, he predicted that Johnson was "within a two party system of government, seeking to turn the Conservatives into his fascist party" before listing a bizarre series of measures he thought Johnson would use to stay in power

It is of course up to Aweb to decide who to have as contributors....Andrew Wakefield, perhaps, on vaccinations, or David Icke on Lizard people... but a cautionary note that some contributors are a little...well...outside the realm of normal thought would be useful.

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Andrew Jackson
By Andrew Jackson
13th Jul 2022 16:50

Hold on a moment, basic accounting principles say that you only provide for something when it's probable you'll have to pay something that you can reliably estimate.

No-one can do anything of the sort at the moment in relation to climate issues: the result of any climate model is incredibly sensitive to your assumptions, so the result of any financial modelling based on it will be doubly so. No matter what the accounting standard is, the error bars on any calculations will be huge, so it will be virtually impossible to prove that anyone's figures are right or wrong.

That means that by including anything like this on balance sheets we'd be rolling the clock back 25 years to the good old days of pick-your-own-number big-bath provisions being used to smooth your results out.

That is NOT progress.

Thanks (1)
Replying to Andrew Jackson:
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By Paul Crowley
14th Jul 2022 13:26

Fictional GDPR penalty provisions are more realistic

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By PChapman
14th Jul 2022 12:11

Lets get Auditing the financials right first shall we!

If companies are to have their environmental impact audited then this should be done by environmental auditors, not financial auditors!

it's like asking a mechanic to do a kidney transplant!

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