IFAC President Warren Allen presented “Driving Sustainable Organizational Success” at the Institute of Chartered Accountants of the Caribbean’s (ICAC) 31st Annual Caribbean Conference held June 28 in Barbados.

IFAC believes that high-quality reporting lies at the heart of strong and sustainable organizations, financial markets, and economies, as the disclosure of useful information is crucial for the various internal and external stakeholders who need to make informed decisions regarding an organization’s capacity to create and preserve value. As organizations depend on their stakeholders for their sustainable success, it is in their interest to provide high-quality reports.

The SMP Committee submitted this comment letter to the International Auditing and Assurance Standards Board (IAASB)'s Consultation Paper, A Framework for Audit Quality. 

The pace of change and increased complexity in audit and financial reporting standards over the past few years has been dramatic and may weigh disproportionately on smaller accounting practices who typically audit smaller entities. This burden is being exacerbated by the difficult economic environment, which is prompting clients to put pressure on their accountants to lower fees. As a result, it is getting harder for practices to maintain sufficient profitability from audit work.

The good news is that automation, made possible by recent developments in technology and by process improvements, can help practices simultaneously boost the quality and efficiency of their audit work—in turn, lowering costs and ensuring its profitability. 

Increasing Audit Quality          

Automating your micro-entity audit practice provides an opportunity to improve audit quality at both firm-wide and individual engagement levels. At the firm level, setting up standardized templates helps ensure that all phases have been completed in every audit. Customized checklists can be updated as needed and incorporated into individual engagement files at the beginning of every engagement.

File automation can significantly increase quality at the engagement level as well. If you import data from one application program to another, data conversion errors should be eliminated and grouping and arithmetical errors can be minimized.

A word of caution: as every audit is unique, make sure you customize each and every file. The generic firm template is a great place to start but it is only a start. Customization for things such as industry characteristics and internal controls are as essential as fully automating the underlying file structure.

Boosting Engagement Efficiency

Much of the tangible output of auditing is very similar from file to file: individual practitioners typically use common file structures and similar checklists and forms. In addition, commercial audit file, spreadsheet, word processing, and database platforms often allow for seamless and rapid data sharing between applications and client files. None of these features are new, but are you using them to maximum advantage? There are many easy-to-implement ways to increase the efficiency of every micro-entity audit. The trick is to be creative and use your imagination. Here are a few suggestions.

Pre-Engagement Phase

When using commercially available software for micro-entity audit engagements, you can:

• Roll forward last year’s electronic file almost instantly;
• Call the client, or send an email, to discuss timing, and ask if there were significant events/changes over the past year; and
• Assuming not, email an engagement letter, an audit strategy letter, and a list of the materials you will need when you visit the client to begin the audit. All of these documents should have been already prepared as part of the file update.

Engagement Processing and Assembly

Following the pre-engagement phase, ask your client to email you a trial balance in a format you can import into the audit file.

Fieldwork Phase

An efficient automated audit of a micro-entity might progress as follows:

Arrive at the client’s office with the rolled-forward audit file. After an initial discussion with the client, update your rolled-forward schedules, documenting your knowledge of the client’s business for any industry, environment, and entity control changes since last year.

Program the engagement and performance materiality calculations and sample size calculations, based on the imported trial balance.

Review the multi-year account analyses (e.g., key ratio analysis such as gross profit percentage), all of which can be pre-programmed.

Print confirmations required and have them signed at your client’s office.

Review for relevance and complete the rolled-forward engagement checklists. (Again, a word of caution: avoid falling into the trap of simply repeating last year’s procedures without having first used your professional judgment).

Draft key points for communication to management and those charged with governance as required by International Standard on Auditing (ISA) 260, Communication with Those Charged with Governance, and ISA 265, Communicating Deficiencies in Internal Control to Those Charged with Governance and Management, at the client’s office as they arise and review them with the client to ensure you have your facts right.

Forming an Opinion Phase

Review the post-fieldwork analytical review automatically updated for your audit adjustment.

Email the adjusted trial balance and proposed audit adjustments to your client.

Email the client the letter of representation and an updated ISA 260 audit summary document.

Email/mail a copy of the signed auditor’s report and an invoice once appropriate personnel have accepted responsibility for the statements.

The above assumes you have taken time to standardize data fields across all your client files. Client names and address fields, year-end and other dates, and other standard documentation can all be programmed into a master file containing individual templates for correspondence, planning lists, etc. Firm-wide standardization is essential if you want to maximize efficiency with automation.

Be Smart About the Automation Process

There are a number of cautions to heed before embarking on even a modest automation project.

1) Be realistic. The initial automation process will likely take longer than you think.

2) Spend time up-front to get it right. If you have an error in your template, you will have to fix it each time you use it. That significantly increases the cost of automation.

3) Aim for consistency across clients. Using standardized templates for analytical schedules, financial statements, statement coding, and file indexing avoids having to reinvent the wheel on every micro-entity audit engagement.

Summary

Automation of your practice is an exacting process requiring project management skills and a significant time commitment from senior members of the firm. If you have the discipline to make it happen, automation will pay off over the long term many times over.

IFAC Resources

IFAC hosts a range of resources and tools, including guides and articles, to help implement audit and quality control standards: See Resources and Tools at www.ifac.org/SMP. 

IFAC welcomes the opportunity to comment on the Basel Committee on Banking Supervision (BCBS) consultative document, External audit of banks. IFAC recognizes the importance of high-quality auditing and acts to promote and enhance audit quality around the globe. This includes supporting the development, adoption, and implementation of high quality, internationally accepted auditing and quality control standards; promoting the need for global regulatory convergence; and supporting the development of strong professional accountancy organizations and accountancy firms.

Welcome to a Special Edition of the Professional Accountants in Business Committee eNews—Accounting for Natural Capital.

1. Overview
2. Where Does the Accountancy Profession Fit it In?
3. A Macro View of Natural Capital Risk
4. Business Case for Natural Capital Management
5. The TEEB for Business Coalition
6. Tracking a Carbon Bubble
7. Innovative Organizations

8. Other Activities and Resources

1. Overview

Attention from the accountancy profession on natural capital accounting is rapidly increasing in response to concern about the potential for systemic risk of climate change and environmental externalities that affect organizational, market, and societal sustainability.

Sustainable economies depend on sustainable organizations. To be viable over time, the ecosystems and resources organizations depend on need to be maintained and enhanced. Yet when it comes to the natural environment, we are seeing a rapid depletion of capital and resources, as well as the risk of a financial “carbon bubble” due to the potential limitations on what percentage of global fossil fuel reserves can be burned (see Tracking a Carbon Bubble for additional information).

This loss of natural capital is posing a new array of threats and opportunities to business ranging from competition for access to resources, and tightening regulation. Therefore, the time has come for organizations in the public and private sectors to adapt to a world of increasingly scarce natural resources.

2. Where Does the Accountancy Profession Fit it In?

Factors that are economically invisible contribute to natural capital depletion. Many environmental impacts are externalities because they are not accounted for in market economics. Government and business alike are starting to recognize the importance of measuring and valuing natural capital. Widely accepted standards for measurement and valuation would help organizations implement natural capital management and facilitate consistency and comparability across organizations.

Natural capital assets broadly fall into two categories: those that are non-renewable and traded, such as fossil fuel and mineral commodities, and those that provide finite renewable goods and services for which no price typically exists, such as clean air, groundwater, and biodiversity. Natural capital is the stock of capital derived from biological diversity and ecosystems as well as natural resources such as fossil fuels.

Is Natural Capital a Material Issue? by the Association of Chartered Certified Accountants, KPMG, and Fauna and Flora International demonstrates the lack of a standardized business case for considering biodiversity and ecosystem issues as a barrier impeding companies from effectively determining risk and opportunity exposures. So too is a lack of awareness among accounting and business communities of natural capital issues.

Given the importance of biodiversity and ecosystems to business and society, the accountancy profession has an important role to play in raising awareness of the business case, and developing new valuation, accounting, and reporting approaches.

Organizations can position themselves for sustainable success by ensuring that risk and materiality assessments consider natural capital, and by going through a process of placing monetary values or measurements on what nature does for their business models. This leads to better business decision making by exposing significant costs and benefits that could materially impact the bottom line but that traditional financial analyses usually miss.

This eNews highlights what is being done and by whom to develop natural capital accounting as an integrated part of business decision making and reporting.

3. A Macro View of Natural Capital Risk

Trucost’s study, Natural Capital at Risk: The Top 100 Externalities of Business, provides a high-level indication of the priority sectors and regions where natural capital risk lies and, therefore, the largest natural capital risks and opportunities for business and investors. Highest impact externalities are the primary production (agriculture, forestry, fisheries, mining, oil and gas exploration, utilities) and primary processing (cement, steel, pulp and paper, petrochemicals) sectors analyzed and are estimated to have externality costs totaling US$7.3 trillion, which equates to 13% of global economic output in 2009. The value of the Top 100 externalities is estimated at US$4.7 trillion or 65% of the total primary sector impacts identified.

The majority of environmental externality costs are from greenhouse gas emissions (38%) followed by water use (25%), land use (24%), air pollution (7%), land and water pollution (5%), and waste (1%). The report assessed more than 100 environmental impacts using the Trucost environmental model, which condenses them into six Environmental Key Performance Indicators (eKPIs) to cover water use, greenhouse gas (GHG) emissions, waste, air pollution, water and land pollution, and land use.

4. Business Case for Natural Capital Management

Organisational Change for Natural Capital Management, released by The Economics of Ecosystems and Biodiversity (TEEB) for Business Coalition, describes how business leaders can strategize and implement changes in organizational behavior related to valuing natural capital in their companies. The findings are threefold.

• A small group of pioneering companies who recognize the growing business case are moving natural capital management forward and expect to embed it into their business within the next three years. The rationale is they will be much better positioned than other companies to manage and thrive in the resource-constrained world. In particular, availability of freshwater, renewable energy, climate regulation, fiber, and food were identified as the most important natural capital risks over the next 3-5 years.
• Delaying the measurement and management of natural capital carries a significant business risk for companies in terms of the availability of key raw materials and maintaining sustainable competitive advantage.
• Current barriers to change at the organizational level include a lack of harmonized methods to measure, prioritize, and integrate natural capital into the business and organizations analyzing their impacts beyond their organizational boundary into their supply chains.

The 24 companies featured in the Corporate EcoForum report, The New Business Imperative: Valuing Natural Capital, are taking a lead by uniting in the view that immediate leadership to safeguard well-functioning ecosystems is a business imperative, not a matter of philanthropy. Companies cited in the report include Puma, Nike, Lockheed Martin, GM, Disney, Enterprise, TD, Coca Cola, Patagonia, Xerox, Unilever, Kimberly-Clark, and Marriott.

5. The TEEB for Business Coalition

The TEEB for Business Coalition is developing tools and guidance to successfully incorporate natural capital into strategy and decision-making processes. This involves companies reflecting the true social and environmental costs of depleting natural capital and creating benefits, such as restoring natural environments and developing social and human capital. The coalition is a global platform for supporting the development of widely agreed-on methods for natural and social capital valuation in business. This work involves considering a valuation framework that can define what to measure and why.

A number of organizations are supporting the coalition, including the Institute of Chartered Accountants in England and Wales (a founding member), IFAC, the Chartered Institute of Management Accountants, the World Business Council for Sustainable Development, the International Union for Conservation of Nature, the World Wildlife Fund UK, and the Global Reporting Initiative, all of which are engaged in developing and furthering the coalition. IFAC is represented by PAIB Committee member Ian Rushby, who is also a trustee of the International Institute for Environment and Development.

TEEB for Business Coalition is holding its annual conference in Singapore November 18-19, 2013, in conjunction with the Responsible Business Forum. Additional details will be shared in later issues of the PAIB Committee’s eNews and on the TEEB for Business Coalition website.

6. Tracking a Carbon Bubble

The Carbon Tracker Initiative report, Unburnable Carbon, calculates that only 31% of the world's currently indicated fossil fuel reserves, which equate to 2,860bn tonnes of carbon dioxide, could be burned for an 80% chance of keeping below a 2°C global temperature rise, which is commonly regarded as the threshold within which to avoid dangerous climate change. For a 50% chance of 2°C or less, only 38% could be burned.

This information has potentially significant implication for loss of value to investors given how far reaching carbon is for financial markets—the top 100 coal and top 100 oil and gas companies have a combined value of US$7.42 trillion as of February 2011. Additionally, the countries with the largest greenhouse gas potential in reserves on their stock exchanges are Russia, the United States, and the United Kingdom and the stock exchanges of London, Sao Paulo, Moscow, Australia, and Toronto all have an estimated 20-30% of their market capitalization connected to fossil fuels. Carbon and fossil fuels, and decisions regarding their use and value, can have significant impacts on financial markets and futures around the world.

This carbon bubble leads to a reporting challenge, particularly for fossil fuel companies. For these companies, it is not necessarily the scale of operational emissions that is the strategic challenge but the emissions associated with their products, which are currently locked into their reserves. The potential carbon footprints of reserves may not be adequately transparent with obsolete data masking the full risks facing fossil fuel reserves. Consequently, companies need to consider moving beyond simply annually reporting last year’s emissions flows to a more forward-looking analysis of carbon stocks.

7. Innovative Organizations

Becoming Net Positive

An increasing number of companies, including Coca Cola and retail organizations Kingfisher and Ikea, are striving to become net positive, which means that they will give back more than they take in relation to critical environmental and social factors upon which their business models depend.

For example, for a do-it-yourself (DIY) business such as Kingfisher, timber is an essential raw material. It depends on a forest area approximately the size of Switzerland. It aspires to create more forest than it needs to develop products. Beyond timber, Ikea strives for resource independence, by encouraging all waste be turned into resources; energy independence, by being a leader in renewable energy, and becoming more energy efficient throughout its operations and supply chain. Coca Cola aims to return as much water to nature as it uses in its products and their production.

Indian conglomerate ITC reports that it is carbon positive (by sequestering or storing twice the amount of carbon dioxide emissions that it emits through, for example, farm forestry initiatives, which add to plantation sizes); water positive (by creating three times more rainwater harvesting potential than the net water consumed by its operations); and waste positive (by recycling its own paper and fly ash, a byproduct of coal combustion, as well as buying other company’s waste paper to use in its paperboard operations).

The key success factors behind such initiatives include:

• providing vision, leadership, and commitment from the top of the organization to be sustainably successful;
• applying a financial mindset by establishing a business case and understanding how sustainability actions contribute directly to business value, either through revenue generation, cost control, risk management, or innovation;
• setting aspirational and challenging goals and targets;
• connecting sustainability goals to strategy by identifying significant drivers and subjecting these aspects to a systematic management process that involves setting and cascading targets and performance measures to facilitate the delivery of vision and strategy;
• collaborating closely with customers and suppliers;
• measuring the drivers of business externalities, such as greenhouse gas emissions and resulting impacts, such as climate change (this involves data collection, analysis, and interpretation, and integrating data requirements into management and/or accounting systems); and
• communicating with stakeholders through high-quality reports and disclosures.

An Innovative Approach to Disclosure: PUMA Environmental P&L Methodology

In 2011, PUMA became the first major company to release an environmental profit and loss (P&L) statement and put an economic value on greenhouse gas emissions and water consumption (see PAIB Committee eNews July 2011 for more information). PUMA started on its journey to establish how much it would need to pay for the services nature provides so that PUMA can produce, market, and distribute footwear, apparel, and accessories made of leather, cotton, rubber, or plastic for the long term. A P&L methodology utilizes the essence of an accounting framework when monetizing environmental impacts. The economic valuation of PUMA’s environmental impact provides a wake-up call and reveals where it has to direct its sustainability initiatives to make real improvements in reducing its footprint. These include identifying more sustainable materials, investigating the development of broadly-accepted definitions of sustainable cotton and rubber, and looking for additional opportunities to reduce greenhouse gas emissions and other environmental impacts.

8. Other Activities and Resources

• Corporation 2020 is a movement that calls for new ways for corporations to operate given that the legal status and business persona of today’s corporation are almost a hundred years old.
• Forum for the Future is an independent non-profit that works globally with business and government to inspire new thinking, build creative partnerships, and develop practical solutions.
• Global Reporting Initiative (GRI)’s Approach for Reporting on Ecosystem Services: Incorporating Ecosystem Services into an Organization’s Performance Disclosure suggests indicators organizations could use to assess and report their impacts on ecosystem services. In cooperation with the United Nations Environment Programme’s World Conservation Monitoring Centre and the Dutch consultancy firm CREM, GRI highlights approaches for developing sustainability reporting indicators to help companies report their impacts and reliance on ecosystem services. Additionally, the fourth generation of the GRI’s Sustainability Reporting Guidelines (G4) is available on the GRI website.
• Natural Capital Declaration is a declaration by finance-sector CEOs representing commitments made at the Rio+20 Earth Summit to work toward integrating natural capital considerations into financial products and services. The Declaration is convened and facilitated by the United Nations Environment Programme Finance Initiative, the Global Canopy Programme, and the Center for Sustainability Studies of the Business Administration School of the Getulio Vargas Foundation.
• The Prince of Wales’ Accounting for Sustainability Project includes an initiative on valuing natural capital and is a co-founding member of the TEEB Business Coalition.
• The B Team is a not-for-profit initiative that has been formed by a group of global business leaders to create a future where the purpose of business is to be a driving force for social, environmental, and economic benefit.
  • UK Department for Environment, Food, and Rural Assets (DEFRA)’s Ecosystem Markets Task Force was established to respond to the continuing degradation of ecosystems and loss of biodiversity and highlights efforts by the UK government to become a global leader in measuring natural capital.
  • World Bank Wealth Accounting and the Valuation of Ecosystem Services (WAVES) is a global partnership to promote sustainable development by ensuring that the national accounts used to measure and plan for economic growth include the value of natural resources.
  • The World Business Council for Sustainable Development (WBCSD)’s Framework for Corporate Ecosystem Evaluation provides a framework for improving corporate decision making through valuing ecosystem services. The guide puts into operation TEEB’s Mainstreaming the Economic of Nature, released in October 2010, which also includes reference to the international mining company Rio Tinto, which adopted a net positive impact on biodiversity as a long-term goal.
  • WBCSD also recently published Eco4Biz: Ecosystem Services and Biodiversity Tools to Support Business Decision Making. The report provides a guide to help companies sift through an emerging family of tools to help them assess and manage their impacts and dependencies on natural capital. Eco4Biz also features a decision tree with two questions corporate managers might ask: a) At what scale would you like to carry out an assessment—global, landscape (including individual site and portfolio of sites), or product level? and b) What outputs would best support your decision-making—a map (including supporting reports), a quantitative value, or a score showing priority areas?

More than 150 attendees from 14 countries, including ASEAN, gathered on May 7, 2013 at a symposium to discuss strategies for building investor confidence through a strong financial reporting infrastructure that supports the integration of the ASEAN capital markets.

The International Federation of Accountants (IFAC), the global organization for the accountancy profession with 172 members and associates in 129 countries, and the Chartered Institute of Public Finance and Accountancy (CIPFA) today issued for public comment a Consultation Draft for an International Framework on governance in the public sector.

The draft Good Governance in the Public Sector encourages better service delivery and improved accountability by establishing a benchmark for good governance in the public sector.

“The function of good governance in public sector entities is to ensure that they act in the public interest at all times,” said IFAC CEO Fayez Choudhury. “This obligation forms the basis for this principles-based Framework and requires a strong commitment to integrity, ethical values, and the rule of law as well as openness and comprehensive stakeholder engagement.”

“The sovereign debt crisis underlined the fact that the public sector plays a major role in society. Public expenditure forms a significant part of gross domestic product and public sector entities are substantial employers and major capital market participants,” added CIPFA Chief Executive Steve Freer. “The impact and the nature of their outputs, as well as their financing through taxation, puts a premium on strong, effective governance.”

The Framework is not intended to replace national and sectoral public sector governance codes. Instead, it is designed as a reference document for those who develop and set national governance codes for the public sector when updating and reviewing their own codes. Where codes and guidance do not exist, the Framework provides a shared understanding of what constitutes good governance in the public sector and a powerful stimulus for positive action.

This Consultation Draft was developed after an initial review of relevant governance literature and with input from a group of representatives from relevant international organizations (the International Reference Group, which is listed in the Framework). Public sector representatives and other stakeholders are encouraged to respond to the proposed Framework to help improve its applicability to entities at all levels internationally.

How to Comment
CIPFA and IFAC invite all stakeholders to comment. To access the Consultation Draft and submit a comment, visit the Publications and Resources section of the IFAC website at www.ifac.org. Comments on the Consultation Draft are requested by September 16,2013.

IFAC President Warren Allen speaks in support of 2013, the year of the accountants, an initiative by the accountancy profession in Brazil and Conselho Federal de Contabilidade and the Instituto dos Auditores Independentes do Brasil