According to Robert K. Elliot, 1997, assurance is a positive declaration that produces quality information which enhances the degree of confidence for all intended users as well as improves the quality of decision that being made. It is also part of corporate governance which provide reliable and accurate information to the stakeholders such as investors, employees, government, voluntary sector and market regulators, regarding the efficiency and effectiveness of organization’s policies, strategies and operations and compliance with the statutory obligations will be provided by the management. Due to the risk of uncertainties in the environments, stakeholders demand more from financial information to non-financial information. Not only the numerical information tell the conditions of an organization to the stakeholders, but transactions, changes in information technology, markets and risks and changes in laws and regulations are crucial to them as well. ICAEW defined external assurance as the provision of an independent opinion by an expert (chartered accountants) on information prepared by one party for the benefit of another parties.
By providing assurance on non-financial information reporting is also known as external assurance reports. Basically there is no requirement or significant demand by public or association on this external assurance. Therefore, auditors are only required to meet their responsibilities in checking the consistency and reliability of information in the reports to enhance corporate governance. In future, if there are major errors from external assurance reports which affect the perceptions of investor, this would lead to an increase in demand for external assurance and indirectly will cause strictly rules or framework to be implemented on this practices. If stakeholders were lose confidence in the quality of information, the use and value of external assurance reports might change according to that. Other than external assurance, internal assurance also can provide support necessary or step for the efficiency of the internal control and prevent or reduce several of risks that might occur in an organization.
If an organization has a team of internal auditors to look over its practices, management or activities in the firm, this will indirectly support corporate governance and public accountability process. With doing so, an organization not only able to deliver their financial information to the stakeholders but as well as expose the condition or improvement of the firm which is consist of non-financial information to them. Internal auditors are also able to assist external auditors by providing them relevant and reliable information non-financial information reporting such as opportunities for pragmatic efficiency and effectiveness improvement in internal control and risk analysis. These lead those decision-makers to identify risks in business. Whereas, audit committees are responsible to evaluate and review the quality of audit reports conducted by the external and internal auditors. Establishment of audit committees is important in provides assurance which is relevant and reliable to the accounting and reporting practices of the organization.
The requirements to be audit committee member are stated in Listing Requirements of Bursa Malaysia Securities Berhad to ensure they act independently without conflict of interest with that particular of organization. Therefore, audit committees help to improve reliability and relevance of the non-financial information reporting as well as financial information reporting. They have unlimited access to all information if they have any doubt on the reporting to investigate any activities. Reliability and relevance are two of the four keys of qualitative financial reporting information. The other being understandability and comparability. It is important to define the meaning of reliability and relevance to ensure accuracy of reporting and the meaning intended are not compromised or are encompasses for the said characteristic. In other words, to maintain the objectivity of the meaning intended for the information in question rather than turning it into a subjective opinion.
Reliability and relevance are both important for the quality of the accounting information as both are closely related together and any of this characteristic may affect or compromise the other objectivity and vice versa. Both reliability and relevance are closely related and evolves one another, but, has different meaning when being presented. A very good example to relate to this matter is the effectiveness and efficiency of a company. Although, both relates towards the goals and objective of a company, but, both are differently applied as effectiveness measure how realizable the goals and objectives are and efficiency measure how a company utilize and optimize their resources to achieve the goals and objective. Both effectiveness and efficiency works hand in hand with each other and one may affect or compromise the objectivity of the other and vice versa. Reliability is used to measure the accuracy and truthfulness of the information. In other words, information which is reliable should be neutral, true, honest and accurate when presented to the users of the information to make decisions based on the objective of the opinion raised rather that subjective opinions being thought of.
Reliability is an important characteristic as reliable information represents that the information is free from any errors and bias to ensure the quality of the information in consideration if reliable or trustworthy for decision making. Relevance is described as the ability of information to change or influence the users for decision making, to confirm or correct an expectation or to assist in forming future expectations. In other words, it is the ability or capacity to change or influence in decision making or to create a difference in decision making by the users of the said information. This varies between decision makers and there are values that will affect the decision makers such as feedback values, predictive values and deadline values. Overall, both reliability and relevance have different characteristic and trade-off between each other as one can affect the other and vice versa and varies depending on the user’s behavior, market behavior and economic decision making.
Reliability relates to the quality of the information being presented whether it is true, fair and accurate while relevance relates to how the information is being interpreted to make a decision, to confirm to correct current expectations or the create predictions for future expectations. Accounting information becomes relevant when it is provided in time, but at early stages in obtaining the information may be uncertain and it will be proven to be less reliable in time. On the other hand, if the information is being obtained over time, the information proves to gains better reliability, but relevance may be lost. Non-financial reporting involves performance or condition of a company which is in terms of qualitative and quantitative information. Non-financial information is all information except financial information which does not have a direct relationship with financial system. Examples of non-financial information are quality of risk management, corporate governance, quality of management and social and environment performance.
Non-financial reporting is also referred to social accounting, corporate social responsibility reporting, environmental reporting, sustainability reporting, service performance reporting, and integrated reporting, cited by Francesco Perrini, 2006. Generally, it refers to outside area of financial statements. These information could be useful for a better understanding with company’s overall performance, business strategy and growth perspective. One of the non-financial information reporting is sustainability reporting. Here we will briefly explain on this type of reporting. Sustainability assurance is one of the assurance method that involves complying and evaluating financial and non-financial performance in environmental decision making and an entity’s principles and standards in applying sustainability assurance. It also measures the competencies and processes that underpin its performance.
In the journal study of determinants of the adoption of sustainability assurance statements : An international investigation by academian, Ans Kolk from the University of Amsterdam Business School and Paolo Perego from the Rotterdam School Of Management in the Erasmus University Rotterdam both from The Netherlands, there are a few aspects that is researched thoroughly. Firstly, the growth in voluntarily adoption of sustainability reporting in response to both stakeholders concerned with the social and environment performance and investors that rely on this type of non-financial data. This aspect is the studies the growth number of voluntary adoption by an entity to adopt sustainability assurance reporting in non-financial reporting and performance measurement in reporting sustainability assurance in the non-financial reporting.
In this research, it is figured that most of the increase in adoption is due to the demand and credibility that comes with reporting sustainability assurance in the non-financial data reporting to be included in the year end financial report. Secondly is the type and format for reporting sustainability assurance in the non-financial reporting. This aspect studies the consistency and availability of information in the year-end financial reporting and the relevant and reliability of the information available to external or 3rd party users that uses the information of sustainability reporting for decision making. The conclusion of both this study shows the determinants of the adoption of sustainability assurance statement and certain aspects which are tested are relevant to be used by entities in non-financial reporting internationally.
As from the topic, we can see a relationship between assurance, reliability, relevance and non-financial information. These four elements are closely related together as all the non-financial information being presented or being interpreted must give a reasonable assurance so that it can provides true and fair information for the users. The non-financial information must also be reliable to ensure that quality information being interpreted or presented give fair, correct and accurate information for the users of the non-financial information. Other than that, the non-financial data being presented or interpreted must be relevant to ensure any decision made, or expectations formed does not influence the users of the non-financial information into the wrong direction. A reliable and relevant non-financial reporting will assure the decision making by the stakeholders. Therefore, there is a closely relationship whereby lack of any elements will cause unfavorable results from the decision made. 2. Demand of non-financial reporting
The demands of corporate social responsibility (CSR) assurance are increasing for investor’s confidence towards the company. CSR known as business decision making related to ethical values, compliance with legal requirement, respect to people, communities and the environment (Lindgreen, 2009). For accounting and auditing firms, they are providing CSR assurance as an aim to standardize sustainability assurance services. Without CSR assurance, investors might suspect disclosing companies are involving in impression management and provide information that presents the company in positive way strategically. Through CSR assurance, investors will able to incur less cost in searching credibility information, which will reduces the firms cost of capital and in other words, increases the firms’ value.
Companies involves in impression management in order to convince potential investors that their company is a caring company and serve public interest as well. Besides, there are demand on Corporate Sustainability Reporting includes both reporting financial and non-financial information to both external and internal stakeholders and organizations. The corporate sustainability reporting includes the following information such as company operational, social and environmental activities and its ability to deal with the related risks. The reports consist of reporting information on managing risk to stakeholders, because interest and information varies regardless of company’s economic, operational, social, philanthropic and environmental objectives. Stakeholders able to assess the information which provided are accurate, transparent, reliable and fair picture of overall performance of the companies.
3. Current issues of non-financial reporting
Journal Review 3 – Assurance on non-financial information: existing practices and issues (ICAEW publication)
This paper addresses a number of important issues relating to the performance of assurance engagements in relevance to external assurance on nonfinancial information. Although several standards such as the ISAE 3000 and guidance has been developed for specific types of assurance engagement, there are still no internationally recognised standards for the external assurance for nonfinancial information such as the corporate responsibility reports. Because a suitable criteria and a frame of reference for non-financial information are not available and as information demands change, practitioners might be asked to carry out different types of assurance engagement that might be outside of their normal skill sets.
Moreover, practitioners might face a different set of challenges in providing external assurance reports on nonfinancial information regardless of their experience in auditing quantitative information. For instance, there is no system of double entry as to financial information; analysis and measurement tools can be immature to accounting software. The use and value of external assurance reports might change if stakeholders were to lose confidence in the quality of information being presented by entities. Future major errors involving publicly available non-financial information, which affect investor perceptions, could lead to an increase in demand for external assurance.
This study provides an account of reports preparers’ and assurance providers’ perceptions of the current status and future directions of assurance on non-financial information. Presently, most sustainability reporting is a voluntary activity with no statutory or mandatory guidelines. Similarly, the assurance of these reports is also voluntary. With an increased emphasis on financial implications and as reporting evolves to a more formal standardized process, the scope of traditional financial audit naturally now includes issues of sustainability and corporate social responsibility. Reporting on nonfinancial information is still comparatively new as generally accepted principles are yet to be properly established. Furthermore, the data are very diverse as it is more difficult to measure and assess qualitative data. As stated in the International Journal of Government Auditing by INTOSAI; non-financial information comprises all quantitative and qualitative data on the policy pursued, the business operations, and the results of this policy in terms of output or outcome, without a direct link with a financial registration system.
A critical issue in the contemporary practice of assurance of nonfinancial information is the development of, and adherence to, standards to guide the process. There are no universal frameworks or standards that are used for the preparation of the nonfinancial information like the sustainability reports, there is presently no single authoritative framework or set of standards to apply in providing assurance on these reports. Qualitative information may be subjective in comparison with financial information as the subject matter can be evaluated from different viewpoints and it might not be possible to establish consistent measurement criteria and the subject matter is fundamentally of a subjective matter.
As reliability and relevance works hand in hand with each other, and may affect one another, it is difficult to measure the fairness or truthfulness and the quality of the information for decision making purposes or financial and non-financial reporting. This creates a differentiation between reliability and relevance of non-financial reporting and may cause a negative or other influence the users in decision making, confirming or correcting current expectations or future expectations. Another important issue concerns the level of assurance provided. While traditional audits of financial statements provide high or reasonable level of assurance, there is arguably less ability to provide such level of assurance on non-financial information. This lack of consensus and common terminology is compounded by the fact that non-financial information often contains qualitative information, on which it is more complex to deliver high level of assurance.
4. Role of assurance in improving relevance and reliability of non-financial reporting from the perspective of pedagogy, policy and practice. From the perspective of pedagogy, research on this issue could promote better understanding on the role of assurance. In addition to that, it helps in appreciating the evolution of the role of assurance from financial reporting to non-financial reporting, as stakeholders seek to be well-informed on both the quantitative and qualitative information. By conducting research and judging based arguments between scholars, there would be better understanding on the characteristics of information which is relevant and reliable. Hence, it improves the understanding on how could the role of assurance improve the relevance and reliability of the non-financial information disclosed. The understanding on the role of assurance would also bring impact to the various stakeholders of the firms. Besides promoting better understanding, there would also be appreciation on the development of the role of assurance from financial reporting to non-financial reporting.
Consequently, there would not be misconception among the public and the practitioners that the scope of assurance is constraint to financial reporting only. Different perspective and arguments from academicians on ‘the role of assurance to improve relevance and reliability of non-financial information reporting’ would stimulate the critical thinking and understanding among academicians and students on this issue based on the different point of views. From the perspective of policy, the understanding on the role of assurance in non-financial reporting could promote better understanding on the challenges faced by practitioners upon the conduct of their practice. By identifying the challenges faced, it aids in the formulation of policy.
Upon the formulation of policy, various parties should be involved to promote fairness for the need of the majority stakeholders. Examples of these parties are the regulators, practitioners, academicians, subject-matter experts and key stakeholders. From the perspective of practice, the practitioners could assess whether the existing audit procedure used in financial reporting is applicable in improving the relevance and reliability of non-financial information. Based on the practitioners’ understanding on this issue, they could implement a different audit approach to provide assurance for non-financial information reporting.
5. Objectives of the discussion
This Accounting Theory assignment was given to students for several objectives. This is to ensure that we gain more knowledge with regard to the subject. This assignment is aimed to improve and enhance our knowledge about Accounting Theory specifically with regard to the roles of assurance in improving reliability and relevance of non financial information reporting. Students will be able to gain more knowledge about the roles of assurance in non financial information reporting. Students will be able to know and understand the roles of assurance to improve reliability and relevance of non financial information reporting. On the other hand, students will also be able to study and learn the types of non financial information that should be disclosed and also the importance of disclosing that non financial information in an organization.
Besides, this assignment will also be able to improve the critical thinking of students in analyzing problems related to assurance. The need of analyzing and summarizing journals enhances the critical thinking of students. Students will also be able to enhance their critical thinking as they compare and contrast between the necessities of disclosing non financial information in an organization. Therefore, this assignment will be able to enhance students’ understanding with regard to the roles of assurance in improving reliability and relevance of non financial information reporting in an organization.
The Role of Assurance in Improving Reliability and Relevance of Non-Financial Information Reporting Role of external auditors in improving relevance and reliability on non-financial information Role of an external auditor is to express audit opinions on the company’s financial statement with truth and fairness. Audit procedures are applied to obtain reasonable assurance on the management’s presentation in financial statements. Today, the role of external auditors had extended to the scope of providing assurance for non-financial information for various stakeholders. The corporate sustainability report is one of an example of a non-financial information report issued by firms voluntarily. The audit procedure which is carried out by the external auditor towards the non-financial information is comparable with the audit procedures used for financial statements. Unlike financial information, non-financial information is qualitative. Thus, it requires the external auditors to seek reliance through the use of experts and internal auditors of the firm.
Pre-audit| Audit the reporting processes| Audit the quantitative data| Reporting| Source: Axel Springer
The above illustrated PricewaterhouseCoopers audit approach for sustainability report. The assurance procedure starts from preliminary audit work, followed by auditing the reporting processes, auditing the quantitative data and information, and finally, reporting and issuance of audit certificate. Stage 1: Preliminary audit
At the stage of preliminary audit, management would need to decide on the type of assurance engagement to assure the relevance and reliability of the non-financial information reporting. This decision is essential as it would affect the degree of relevance and reliability of the non-financial information.
This journal had discussed about the importance of non-financial reports, role of auditor in non-financial reporting, as well as some recommendations on reporting and assurance. This journal particularly recommended that “the scope for flexibility is also necessary for the assurance of non-financial information; assurance is no end in itself”. An auditor should only limit his job scope in the audit process, and allow the users to draw their own conclusion. Firms should make a choice on the type of audit engagement upon assuring non-financial reports as the types of audit engagement would have different impact on the users. In order to reduce the expectation gap among the users, a clear choice of audit engagement should be made.
According to the authors, “a sustainability report is a complex subject of investigation that combines the quantitative type information with entirely qualitative elements”. The complexity of non-financial information reporting would cause problems in obtaining highly reliable verifications and audit evidence.
Thus, the authors suggested that non-financial reports should be audited by using the limited assurance engagement, but not reasonable assurance engagement. The combination of quantitative and qualitative information as well as the complexity of non-financial reporting caused reasonable assurance engagement to be unsuitable. Based on the journal reviews, journal review 1 recommended that there should be flexibility over the types of audit engagement for non-financial reporting. On the other hand, journal review 2 prefers limited assurance over reasonable assurance. The selection between reasonable assurance and limited assurance plays a crucial role in determining the scope of audit work done and its audit procedures. It is indeed true that the complexity and the vague criteria of measurement would lead to subjectivity in determining the relevance and reliability of the audit evidence. In addition, auditors are not technically equipped to have competency in seeking verification and the objectivity of audit evidence obtained.
However, the sustainability report consists of non-financial information from several aspects, both quantitative and qualitative. This includes financial highlights, carbon emission and employee trainings. Each aspect differs in nature, resulting in different methods in seeking for verification and obtaining audit evidence. Thus, it can be said that not every aspect in sustainability reporting is subjective and ambiguous. For instance, audit evidence could be verifiable and objective in the financial aspect and emission of greenhouse gas. Whenever there are any aspects which audit evidence are as such, reasonable assurance should be carried out to enhance the reliability of the non-financial information. Since both reasonable and limited assurance engagements are applicable in different aspects of the non-financial information reporting, it would be possible that auditors provide both limited and reasonable assurance engagements for a non-financial report.
For instance, reasonable assurance could be conducted for financial highlights and greenhouse gas emission. On the other hand, limited assurance could be conducted towards aspects which are more ambiguous and subjective, such as member loyalty score and service experience. Conducting meetings and interviews with management’s key personnel By choosing a suitable type of assurance engagement, the amount of audit work done and audit procedures would be adjusted according to the nature of the respective non-financial information. The variation in the desired level of evidence and audit work done would therefore, enhance the relevance and reliability of the non-financial information. Once the type of assurance engagement had been selected, the external auditors would then conduct meetings and interviews to identify the relevant systems implemented by the management.
Interviews are conducted with employees who are involve and responsible in the process of preparing CR-reporting and employees who are specialist of the related departments such as sustainability, corporate development, and environmental management. For companies involved in specialized industries, relevant experts are hired for their expertise which adds value to the management. For instance, geologists are hired by firms in the oil and gas industry to identify potential oil wells. The external auditors would carry out a walkthrough process with the internal experts to understand the process flow relating to the non-financial information. A walkthrough would help to improve the reliability as the internal experts are required to provide verifiable documents as audit evidence. Even though the audit evidence provided by the internal experts is generated from the management’s internal source, its reliability could be enhanced if the internal controls are strong and the supporting documents are generated from an independent third party. In short, interviews and walkthroughs conducted by external auditors could enhance the reliability of the non-financial information.
Besides reliability, relevance could be improved through interviews as well. During the interview process, external auditors could gain a better understanding on the significant matters as well as the impact of the non-financial information disclosure towards the stakeholders. Identification of significant matters is crucial as they have the characteristic of significant forecast value and feedback value for the stakeholders. By identifying the significant matters, relevance could be improved as auditors would ensure that non-financial information with significant forecast value and feedback value would be disclosed in the sustainability report. After determining relevance of the system, adequacy of disclosure and the process of sustainability reporting system are assessed by referring to the sustainability framework introduced by Global Reporting Initiative (GRI). Global Reporting Initiative
Global Reporting Initiative (GRI) is a non-profit organization that works toward a sustainable global economics by developing a comprehensive Sustainability Reporting Frameworks that enables all organizations across different industries to measure and report their the four key areas of sustainability, namely their economic, environmental , social and governance performance. Nowadays, GRI plays an important role in the society as the society demands for more reliable and relevant non-financial information from corporations. In order to fulfill the needs of the society, GRI aims to provide a trusted, credible and generally accepted framework for sustainability reporting that can be used by any company around the world. (Global Reporting Initiative, 2010-2011).In pursuit of its mission, open dialogue and collaboration from different entities methodshave been adopted by GRI to design and implement sustainability reporting guidelines that can be widely accepted by everyone. (Maef Woods, 2003).
The Sustainability Reporting Framework could assist the assurance provider to improve the relevance and reliability of the non-financial information. The framework acts as a guideline in determining the significant and relevant non-financial information to be disclosed in the sustainability report. Each stakeholder would have different information needs to satisfy their respective interest for better decision making. Therefore, it is crucial to practice the “stakeholder inclusiveness” in order to improve the relevance of the non-financial reporting. Besides that, the nature of business and the type of industry also determines the relevance of the non-financial information. For instance, non-financial information to be disclosed in telecommunication industry differs with healthcare industry. The assurance provider can help to identify the scope of the non-financial information to be reported by examining the organization’s nature of business, and identifying the reasonable expectations and interests of the organization’s stakeholders.
This can be achieved by conducting meetings and discussions with the stakeholders on the scope of non-financial information that is expected to be disclosed by the management. Stakeholders’ expectations toward the role of the assurance provider in verifying such non-financial information is communicated in the meetings as well. After the assurance provider has identified the issues, they will assess the significance and the relevance of the issues to be disclosed from the perspective of the management and the stakeholders of the company. From here, auditors could rank the issues accordingly to determine whether the company had provided sufficient evidence and supporting documents for the prioritized issues. For instance, the most concerning issue for a manufacturing company would be issues relating to the waste management as it is related to the compliance with the environmental regulation.
This information is essential to the government regulators as well as the environmentalists whom are concerned with the well-being of the environment and the neighbourhood society. In order to improve the relevance of the non-financial information disclosed, assurance provider should communicate with the key stakeholders. Two-ways communication between assurance provider and stakeholders is essential as it would increase the credibility of the audited non-financial information. By engaging with stakeholders via meetings and interviews, it also helps to reduce the expectation gap that exists between the assurance provider and stakeholders of the company which would further increase the stakeholders’ acceptance towards the audited non-financial information. The Sustainability Report Framework could also serve as a guideline for the assurance provider to verify the compliance of the presentation and disclosure in the non-financial information reporting.
Besides that, the framework helps both the management and the assurance provider on the relevant information to be disclosed. For instance, the framework requires each of the organization to disclose the company profile and their compliance to the environmental regulation. By disclosing the non-financial information according to the framework, it will help to increase the feedback value and the forecast value of the non-financial information in the report. Other than that, this framework had developed several performance indicators such as core environmental indicators, core social indicators and core economic indicators. These performance indicators provide guidance to the assurance provider to decide the audit approach to be used to assess the non-financial information of the company. The indicators could also improve the objectivity in assessing the non-financial information. For instance, direct energy should be measure in Joules and should be segmented by primary sources.
By specifying the method to be used in audit verification, it improves the objectivity and verifiability of the audit findings. Thus, reliability of the non-financial information could be improved. Assurance provider can further increase the reliability and relevance of the non-financial information by assessing the completeness of the sustainability report that is presented by the management. Completeness can be expressed in terms of the timeliness and scope of the information disclosed. This helps to ensure that all significant events or trends reported in the sustainability report are relevant for the stakeholders for better decision making. Other than that, assurance provider will also help to ensure any event or the trend arises that will affect the organization in the long term and short term period be disclosed in the sustainability report.
An increasing number of earnings restatements along with many allegations of financial statement fraud committed by high profile companies have eroded the public confidence in corporate governance, the financial reporting process and audit functions. The Sarbanes-Oxley Act of 2002 was an attempt to regain confidence and trust in the accounting profession. Some of its provisions relate to the audit committee oversight function over corporate governance, financial reporting, internal control structure, internal audit functions, and external audit services. This study examines the importance in the effectiveness of audit committee and internal audit in improving corporate governance and accountability resulting in a further improvement in the public confidence on the financial and non-financial reports through larger accountability.
Research participants of the Ernst & Young report on “Internal audit’s evolving role: a proactive catalyst of business improvement”, as one internal audit advisor said, “internal audit is now seen as an enabler of business performance. Internal audit can help make the business better and help the business go faster rather than slow it down.” In this context, it highlights the needs of internal audit to focus on the most value-added activities, the needs of enhancing its effectiveness and the needs of audit committees to guide and support audit more actively. Research participants agreed that internal audit’s role now extends beyond financial controls matters as it plays a more prominent and proactive role in non-financial reporting, for example, in sustainability reporting, and it has focused its energies on catalyzing the company’s risk discussions and auditing those processes.
Most of the research participants agreed that the audit committee can offer valuable support to internal audit and enhance internal audit’s position in the company as this support is increasingly necessary as internal audit takes on new roles in a variety of different business areas. Internal audit has, from the perspective of their assurance role, an opportunity to help the business enhance its maturity in terms of its sustainability programme and initiatives. Internal audit can assist through making recommendations in terms of enhancing the robustness of the sustainability and integrated reporting process and controls and through providing recommendations in terms of enhancing relevance and reliability of the non-financial reports. Internal audit’s role is extending beyond financial reporting controls to include audits of non-financial information and controls surrounding the areas of sustainability reporting and non-financial communications.
As sustainability moves up the audit committee agenda, internal audit is taking a leading role in validating the information submitted for sustainability reports. This is in compliment to the stages where companies are facing pressures in complex sustainability reporting standards where there are increasing concerns about the accuracy of the information in sustainability reports. In recent trends, key stakeholders especially major investors and analysts are paying more attention to non-financial communications to the marketplace. Internal audit is playing a rising role by providing audit committee with an assessment of the quality of the processes and controls used to generate this information. Tasks being undertaken by the internal auditors could come into play in assuring the reliability of the non-financial information.
This is said because internal audit common areas would include the reviewing of internal control system, reviewing compliance with government regulations, checking compliance with policies and procedures, safeguarding asset of the organization, making recommendations on improvement in the operation of the organization, acting as in-house consultant on control matters. Relevance and reliability could be enhanced by relying on the role of internal audit function as internal audit has a better overview and understanding towards the internal control system of the company. With reference to external assurance towards the non-financial reporting, an independent perspective towards the internal control of the company is essential as the internal audit has already conducted a preliminary audit towards the controls of the company.
This eventually increases the independence and reliability of the report. Internal audit placed a more focused role in the risk process such as managing the risk identification process, ensuring risk analysis is dynamic and auditing the ERM process. Internal audit also places a sharper focus on emerging risks in terms of operational and strategic areas such as Mergers & Acquisition risks, new product risks, business continuity and crisis management. Nevertheless, their importance is greatly emphasized in their role as an advisor in governance matter through involvement in corporate governance processes, examination of management decision processes, and advising on audit committee effectiveness. With their diverse role within the organization, internal audit would be in a greater position to understand the risks faced by the companies whilst the external auditor can refer upon.
Thus enhances the public confidence or accountability of the non-financial report such risks are well identified and managed by the company in the effort of improving the reliability of the report. Internal audit needs to assure management as to the integrity, consistency and timeliness of externally reported information. Executives and boards are acutely aware of the growing demand for more transparent reporting of non-financial information. Internal audit can assist in evaluating the accuracy and credibility of the non-financial information reporting in advance of the increasing scrutiny this information is getting from external stakeholders. The publication of an assurance statement with the non-financial report is an increasingly common approach to enhance a company’s credibility and to meet growing stakeholder demand for transparency. As internal audit gets more involved in key emerging area risks, it is arguable that companies should be careful not to let internal auditor advise on the processes they audit, or vice versa.
Audit committee can offer valuable support to internal auditor and enhance internal auditor’s position in the company. The audit committee’s role in overseeing internal audit is changing as they must guide, support, counsel and evaluate internal audit more actively and simultaneously make possible internal audit’s involvement with the business lines while also ensuring internal audit’s independence. It could promote the integrity and quality of internal and external reports by providing a high level of assurance and checks. Reliability on the report could also be achieved by having audit committee through the fostering and promoting of a more effective and efficient audit process by providing an independent review of the internal audit annual audit plan and reports.
The core responsibilities of audit committee is to improve the credibility and objectivity of the accountability process, overseeing the effectiveness of the internal and external audit functions and being a forum for communication between the board of directors and the internal and external auditors, ensuring the independence of the external auditors, monitoring the objectivity and independence of the internal auditor, assuring the quality of internal and external reporting of the financial and non-financial information. Audit committee plays a key role with respect to the integrity of the agency’s financial information, its system of internal controls, the legal and ethical conduct of management and employees.
As such, external audit and audit committee should have a strong relationship as open, regular, frank and confidential dialogue should be the norm, where appropriate level of assistance and cooperation has been provided to the external audit team, quality of information provided to the external auditors, and where appropriate relationships exists with internal audit. Therefore, it is important to address how audit committee could ensure that the management and internal audit are all clear on internal audit keeps the right balance between assurance responsibilities and operational improvement. It is also important that the audit committee understand the best mechanisms for assessing the value that internal audit brings to the company. Stage 2: Assuring the reporting process
After preliminary audit, the next stage is to audit the reporting processes which include processes of gathering, quality assurance and aggregation of data for sustainability reporting. At this stage, site visits could be carried out as part of the assessment of the relevant systems and processes related to CR-reporting and CR-management. Site visit is crucial in validating the non-financial information. By carrying out site visit, reliability of the non-financial information could be improved as the existence of the audit evidence is verified. In accordance with ISAE3000, auditors are required to seek assistance from independent subject-matter experts if auditors do not have the technical knowledge and competency to carry out their practice in assurance. Use of subject-matter experts
According to Gray (2000), auditors are not competent in all areas disclosed in the sustainability report. The auditors would be incompetent to verify and evaluate the non-financial information which is not of their expertise. In compliment with Gray’s statement, the journal highlighted that the lack of technical competency in auditors requires the use of subject matter experts in assurance engagement for non-financial information reports. Still, the auditors would play a role in assigning tasks to experts as well as communicating with experts to evaluate the audit findings and conclusions arrived. Even though external auditors do not have professional competency in providing assurance for certain areas in non-financial reporting, they are still crucial in playing a part as the leader in the audit team which consists of independent subject matter experts from various areas.
These experts include economists, geologists, environmentalists and socialists. Before engaging with the subject matter experts, the external auditors would communicate with the management’s key personnel, and the stakeholders to understand the relevant information to be disclosed in non-financial reports. After identifying the scope of audit work done and the desired level of evidence required, external auditors would then gather the experts to assist in the assurance engagement. The use of independent subject matter experts could improve the relevance of audit evidence and the non-financial information disclosed. Equipped with technical competency and past experiences, the independent experts could provide objective professional judgment in determining the materiality and significant impact of the non-financial information.
The professional judgment from experts play an essential role in assisting the audit team to identify significant matters and material non-financial information which carries forecast value and feedback value to the stakeholders. Hence, the relevance of non-financial information could be improved with the use of experts. Besides relevance, the use of subject matter experts in the assurance team could also improve the reliability of the non-financial information. The experts’ technical knowledge allows them to verify non-financial information. This improves the verifiability of the non-financial information. In addition, the methods of measuring various scope of non-financial information are clearly indicated in the Sustainability Framework introduced by Global Reporting Initiative (GRI).
For instance, waste materials are measured by the percentage of waste materials used from external sources. By complying with the GRI Indicators, the method of measurement used by the experts for audit testing would be objective. Thirdly, the subject matter experts working jointly with the auditors are independent and do not have any personal interest relating to the management. In relation to that, the independence and competency of the experts would promote their trustworthiness. In short, the use of experts enhances the verifiability, objectivity and the trustworthiness upon their duty in assisting the assurance team. Consequently, this would improve the reliability of the non-financial information.
Stage 3: Assuring quantitative information
The relevance and reliability of quantitative data disclosed in the sustainability report can be improved through analytical inspections, such as the generation and review of expected values. The quantitative expected values are derived by re-performance and recalculation by external auditors, based on the method applied by the management. Besides that, trend and deviation analysis would be another method to derive expected value by auditors. By setting an auditor’s expectation, the external auditor would be able to evaluate and investigate the quantitative information objectively. The independent expected values derived by external auditors could also enhance the trustworthiness of the audit findings. Besides that, quantitative information is verifiable as compared to the qualitative information.
By deriving an objective, trustworthy and verifiable expected values, reliability of the quantitative aspect of the non-financial information could be improved. Relevance of quantitative information could be improved when external auditors determine the level of materiality. The level of materiality of quantitative information depends on the nature and the size of the population. It is a requirement for material and significant matters are to be disclosed in non-financial information report as they are relevant to the stakeholders for decision making. Stage 4: Issuance of audit certificate
After all audit work done have been completed, supported with relevant and reliable audit evidence and arriving in conclusions with the assistance from the independent subject-matter expert. An audit certificate would finally be issued to the management. Upon the issuance of audit certificate, the auditor would express his opinion either in a positive or negative way, depending on the type of assurance engagement.
The complexity of non-financial information and the lack of common terminology used would result reasonable assurance not being able to provide a high level of assurance for non-financial information reporting. Due to the subjectivity in non-financial reporting, a low level of assurance would be suitable for non-financial reports. However, we would recommend that it is not necessary for all the areas in the non-financial information to be audited. In certain areas, the management itself can ensure the relevance and reliability of non-financial information. For instance, the non-financial information relating to Corporate Social Responsibility (CSR) derived from the management is sufficiently reliable and relevant. The charity and social activities are events which are transparent to the public need not be assured by independent parties. If the process of assurance is carried out in every aspect of the non-financial information, it could be viewed as costs exceed benefits.
This will not be considered as a good element for success and profitability of the organization’s benefit. Even though there is an increase in the number of firms issuing non-financial reports voluntarily, there are no standardized framework and standards implemented. Therefore, there should be measures taken by the government regulators and professional institutions to improve the current standards with regard to non-financial information reporting. For instance, currently Malaysian Accounting Standards Board (MASB) does not have standards and frameworks for non-financial information reporting. Standards should be set accordingly so that they will be fair presentation and reporting of the non-financial reporting. In order to promote fairness of the standards setting, various parties should be involved in the process of formulating and introducing new standards.
This includes the involvement of the government regulators, representatives from accounting professional bodies, auditors, accountants, academicians, and other key stakeholders. By promoting fairness, the framework and standards implemented would be able to satisfy the interest of majority from different industry with regard to non-financial information reporting. All organization from different industry will be able to improve the relevance and reliability of non-financial information reporting within the standards. In foreign countries, the Sustainability Reporting Framework by GRI is the most widely used framework by companies. Therefore, the relevant standard could be set by benchmarking with international standard and practices.
However, the standards to be implemented in Malaysia should be adjusted according to the general environment of the nation. GRI’s Sustainability Reporting Framework should only act as a reference for standards and framework settings. By having standards implemented, the presentation of the non-financial reports is standardized, thus improving the comparability of the reports. Besides that, it standardizes the methods used to derive non-financial information, which consequently improves the objectivity and the verifiability of the non-financial information. Also, there should be auditing standards implemented to assist auditors in providing assurance services for non-financial reports. Future directions
In the current trend, stakeholders does not only concerned with the firm’s financial performance. Today, non-financial information is highly demanded by the stakeholders whom are interested with the ethical values and corporate responsibilities to the society. Even though it is optional to issue non-financial information reports, the number of firms issuing them has increased over the years. In the future, the issuance of non-financial information reports should be made compulsory to all public listed companies, the same way applies to the issuance of annual reports. In order to ensure timeliness, firms should issue a detailed and comprehensive audited non-financial information report by the end of every financial year end. In order to promote communication between the management and the stakeholders, the non-financial information reports should be brought up to the Annual General Meeting (AGM).
In the AGM, the board of directors could present the highlights on the significant non-financial information to the stakeholders. After presenting, the stakeholders would then be given a chance to query the board of directors during the Question and Answer (Q&A) session. Providing assurance service on non-financial report would be a new and growing opportunity in the future. However, professional competency of auditors in financial reporting would be incompetent in providing assurance for non-financial information. Therefore, practicing auditing firms should consider developing partnerships with professional firms of other specialized industry such as a legal firm, environmental consulting firm and a quantity surveyor firm. By establishing partnerships with the subject-matter experts, it would increase the competency of the assurance team which consists of a pool of independent subject-matter experts. In a nutshell
Even though there are some arguments that auditors are professionally incompetent in providing assurance service for non-financial information reporting, the use of independent experts had compensated the incompetency of the auditors. Besides the use of independent experts, internal auditors would also have competency in performing internal assurance service as their scope of assurance covers more than just financial reporting, but also compliance audit and evaluating the internal controls and other non-financial information. By relying on the findings by the independent experts and the internal auditors, the role of external auditors in providing assurance could still help to improve the reliability and relevance of the non-financial information.
Another argument is that the complexity and the subjectivity of non-financial information helps would reduce the quality of reasonable assurance engagement. However, with the wise choice in the selection on the type of assurance engagement, the level of assurance could vary according to the nature of each aspect in the non-financial information. Perhaps both reasonable and limited assurance could be applied for different aspects of non-financial information in the report. By providing the suitable level of assurance, the reliability and relevance of the non-financial information reporting could still be improved. As a conclusion, the role of assurance had indeed contributed in improving the reliability and relevance of the non-financial information reporting.
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