Auditors push for sustainability yardsticks to verify firms’ claims

By Peter Chapman

Date: 29/04/04

GLOSSY brochures purporting to show that "sustainability-conscious" firms are kind to the environment or don't employ child labour are "little more than advertising" unless the claims can be independently verified.

That is the warning from experts at the Brussels-based European Accounting Federation (FEE), who will press the need for a greater role from the auditing profession to give assurance to the claims - to make sure ethical investors get a truer picture of companies' records.

A growing number of firms produce reports showing how their business practices are affecting the wider world.

For instance, companies often give examples of how their policies - such as leaner production methods - have cut down on pollution, and, in turn, saved on energy costs.

Companies also cite the manifold benefits stemming from improving the conditions of workers, for example in developing countries.

But Lars-Olle Larsson, the Swedish auditor heading a FEE group focusing on the issue, told European Voice these claims mean little unless they are checked out by experts.

"For me, sustainability reports without assurance are like advertising. They [companies] can pick and choose the best things - you cannot regard them as reports as you would the [regular financial] reports."

The Stockholm-based KPMG partner said global standards are needed to ensure that auditors can carry out their checks according to a common benchmark. Setting these norms is the responsibility of the New York-based International Auditing and Assurance Standards Board.

However, Larsson said the European Commission - which recently announced plans to overhaul EU audit policy, can help to promote the auditing efforts.

But he said it is "too early" to set binding European rules.

Some countries, such as Sweden and France, have already started to insist on limited levels of assurance.

Although he hails this as a welcome development, Larsson said the Commission should monitor potentially conflicting policies - and may one day be forced to step in to ensure a level playing field.

FEE's report is currently being finalized by the group's Europe-wide members, in response to a broader Commission consultation on the issues surrounding "sustainability" or "corporate social responsibility" (CSR) - jargon for industry policies that have no long- term harmful effects on the planet's environment or society.

But Larsson confirmed it will call for corporations to seek independent assurance on their CSR reports.

This could be an audit firm - such as one of the "big four" of PricewaterhouseCoopers, Deloitte and Touche, Ernst&Young or KPMG - or another specialist organization with the know-how.

In turn, he said the companies would be urged to disclose sufficient information to stakeholders and investors so that they can be sure of the independence of the assurance provider.

An international project, known as the Global Reporting Initiative, must also take on board the need for a greater role for outside assurance.

Crucially, Larsson said that the increasingly popular sustainability indices - such as FTSE4GOOD and the Dow Jones Sustainability Index, which help to compare the performance of big companies according to their records, should be backed up by independent assurance.

Companies not providing assurance - such as an auditors' report - should not be allowed to appear on these indices, he said.

Finally, non-governmental organizations and other stakeholder groups should increase their members' awareness of the issue of assurance and take part in discussions with standard-setters.

The European Accounting Federation (FEE) has warned that the auditing profession will have to make sure companies' claims to ethical investors can be verified.

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