In May, the Institute’s Standard Setting Department responded to the International Ethics Standards Board for Accountants (IESBA) Exposure Draft on Proposed International Ethics Standards for Sustainability Assurance (IESSA) (ED-IESSA). Overall, the Institute supports the development of the ED-IESSA aimed at maintaining public trust in providing sustainability assurance. However, challenges in implementation are expected. The IESBA expects to approve the final pronouncement by December 2024.
Profession-agnostic
We highlighted to the IESBA that the ED-IESSA is especially relevant where sustainability information is increasingly becoming important for multiple stakeholders when service providers outside of the accounting profession play a role in sustainability assurance. For the ED-IESSA to be effective, it is crucial to have a well-established framework in place for sustainability reporting and assurance similar to the reporting and audit of financial statements. Besides, the ED-IESSA can only truly be profession-agnostic in practice if there is a robust and effective monitoring and enforcement system that is implemented consistently across both professional accountant practitioners and non-professional accountant practitioners (non-PAs). We suggested that the IESBA coordinate with regulators and global accreditation bodies to promote the consistent use of a global framework of high-quality ethics standards for sustainability assurance.
NOCLAR
The ED-IESSA requires practitioners to discuss non-compliance with laws and regulations (NOCLAR) matters with the appropriate level of management and, where appropriate, those responsible for governance if they identify suspected instances of NOCLAR. Given that practitioners may be engaged to provide limited assurance for only a limited portion of the clients’ sustainability information and sustainability assurance may be obtained on a voluntary basis, the compliance efforts required to adhere to the NOCLAR provisions could potentially place an undue cost on the practitioners. Therefore, we recommended that the IESBA provide more non-authoritative materials such as case studies to illustrate the expected work effort involving a limited assurance engagement versus that of a reasonable assurance engagement.
Value chain entity
The ED-IESSA requires the practitioner who performs assurance work at the value chain entity of the sustainability client to be independent of the value chain entity which we consider to be excessive and disproportionate in the context of a sustainability assurance engagement. This is particularly the case when (i) value chain entity is not the reporting entity of the sustainability information, (ii) the number of value chain entities involved may be significant, and (iii) the extent of work performed at each value chain entity may be limited where limited assurance is provided on a limited scope of sustainability information. While we acknowledge that the decision on whether to provide assurance on the value chain entity is a matter that falls under the purview of the International Auditing and Assurance Standards Board’s (IAASB) proposed International Standard on Sustainability Assurance (ISSA) 5000 General Requirements for Sustainability Assurance Engagements, we recommended the IAASB and the IESBA to cooperate to address this area considering current practice and the evolving scope of sustainability assurance. In addition, we highlighted that the threats arising from the relationships between the firm, a network firm, or a member of the sustainability assurance team and a value chain entity are low due to their remote relationships. Hence, we do not perceive any necessity to include the “knows or has reason to believe” principle as proposed in the ED-IESSA.
NAS
We expressed our concern that implementing the non-assurance services (NAS) provisions at the same time as the other fundamental principles within the ED-IESSA may result in unintended consequences in reducing the pool of practitioners that will be available to clients, as a practitioner who intends to provide sustainability assurance in future years cannot provide certain NAS to the same client as currently proposed by the ED-IESSA. This is particularly relevant in the current market where there are already limited quality sustainability assurance providers and where the majority of clients seeking sustainability assurance are public interest entities (PIEs). Accordingly, we recommended that the IESBA incorporate transitional arrangement in implementing the relevant provisions of the ED-IESSA.
Fee-disclosures
The ED-IESSA requires that where a sustainability assurance client that is a PIE does not disclose the sustainability assurance fee-related information (fee-disclosures), practitioners should publicly make such disclosures. Due to the absence of jurisdictional mandatory regulations for such fee-disclosures, practitioners may face challenges when making the requests to their clients as clients may perceive the primary responsibility for complying with the ED-IESSA lie with the practitioners rather than with the entities. Therefore, we suggested that the IESBA consider providing some relief such as starting off with encouraging the fee-disclosures as best practice before transitioning them into requirements over time.
Effective date
Though we are supportive of aligning the effective date of ED-IESSA with ISSA 5000, there is a concern as to whether the regulatory framework and enforcement regime for non-PAs will be ready in time. Consistent regulatory oversight is necessary to establish a level playing field, allowing investors and other users to confidently rely on sustainability assurance reports. The full response is available on our website.
This article was contributed by Cherry Yau, Associate Director of the Institute’s Standard Setting Department.
