Why using the same auditor for financial and sustainability reports makes sense
Why using the same auditor for financial and sustainability reports makes sense
The Australian Securities and Investments Commission (ASIC) has recently published frequently asked questions (FAQs) offering guidance for preparers and auditors on reviewing and auditing sustainability reports under the Corporations Act 2001. While the FAQs cover a broad range of questions, this article focuses on a key question: who can conduct the review or audit of a mandatory sustainability report.
It highlights the benefits of why engaging the same auditor for both your financial and sustainability reports is a smart and efficient choice.
Who can conduct the review or audit of the sustainability report?
The auditor of a sustainability report must either be an individual auditor, an audit company or an audit firm (section 324AA of the Corporations Act 2001).
A company or registered scheme (section 324AA(1)) and a retail corporate collective investment vehicle (section 1232(1)) can have more than one auditor. However, a registrable superannuation entity (RSE) can only have one auditor (section 324AA(2)).
The Government’s initial Policy Statement and Explanatory Memorandum accompanying the draft climate reporting legislation reflected its initial intention that the auditor of the financial report and the sustainability report would be the same for all types of entities. However, the final climate reporting legislation contained in the Treasury Laws Amendment (Financial Market Infrastructure and Other Measures) Bill 2024 contains no such restriction. In fact, it could be possible for the sustainability report of a company or registered scheme to be audited by a different individual and even a different audit firm or company.
Considerations for appointing your sustainability report auditor
An RSE has no choice - its financial statement auditor must provide assurance on both its financial report and its sustainability report because section 324AA(2) only permits it to have one auditor.
However, companies, registered schemes and retail corporate collective investment vehicles (CCIVs) can choose to appoint different auditors for the financial and sustainability reports. Nevertheless, there are consequences for entities adopting this approach, and we do not recommend it as a practical and viable alternative. Mainly, it will result in entities incurring significant additional costs because of the additional time investment and duplication of work effort.
Before appointing two separate auditors, entities should consider:
- Communication: Directors and management will have to engage in and coordinate two separate audit engagements, which could reduce communication and cooperation between the auditors.
- Synergies: We expect reduced synergies in areas such as gaining an understanding of the business and control environment, risk identification, and execution of procedures.
- Methodologies: The two auditors could use different methodologies, which could result in reduced connectivity.
- Connectivity: There may be connections between information presented in the sustainability report and the annual financial report. Having two separate auditors means both parties will have to be across connected disclosures rather than one.
- Material inconsistencies: Both the auditor of the financial report and the auditor of the sustainability report are required to consider whether there are any material inconsistencies between the information they have assured, and other information contained elsewhere in the annual report. This results in information being looked at twice rather than once.
- Adequacy of evidence: If the sustainability report auditor obtains inadequate evidence from the financial statement auditor and is unable to obtain sufficient appropriate evidence from alternative procedures, their opinion on the sustainability report may be subject to a qualification or limitation in scope.
- Additional costs: Additional costs will be associated with the approval, removal and resignation of auditors, the independence requirements and section 311 reporting obligations, which are likely to translate into higher client fees overall.
- Deadlines: Divided responsibilities increase the risk of not meeting deadlines.
Can different lead and review auditors be used?
Yes. If the entity appoints an audit firm or company as its auditor, two different people can audit the financial report and the sustainability report. That is, the lead auditor for the sustainability report does not also have to be the lead auditor for the annual financial report, and the review auditor for the financial and sustainability reports can also be different.
Given the synergies and interconnectedness of information across financial and sustainability reports, we recommend that audit firms or companies consider appointing the same lead and review auditor for both.
Auditor qualifications
While multiple auditors are possible (although not recommended), the sustainability report auditor must be a registered company auditor. This means that climate consultants cannot be appointed as the sustainability report auditor unless they are a registered company auditor.
Approval, removal and resignation requirements
These apply to each auditor, so if a company uses a different auditor for the sustainability report than for the annual financial report, the approval, removal and resignation requirements apply independently to each of these auditors.
Auditor independence requirements
The auditor independence requirements apply (as appropriate) to each individual who plays a significant role in an audit under Chapter 2M of the Corporations Act 2001. This includes an individual auditor, lead auditor or review auditor.
If the lead auditor for the financial and sustainability report of a company, registered scheme or retail CCIV is different, each of these people must:
- Be aware of, and implement appropriate responses in relation to conflict of interest situations
- Comply with the auditor rotation requirements
- Give a written independence declaration to the directors under section 307C.
Section 311 reporting obligations
Section 311 requires reporting to the Australian Securities and Investments Commission under certain circumstances, including where the auditor has reasonable grounds to suspect that there has been a breach of any requirements of the Corporations Act 2001.
If the lead auditor for the financial report and sustainability report is not the same, the reporting obligations under s311 apply to each lead auditor. That is, each auditor would have to report under section 311 regarding the same matter - again, a double-up of costs.
More information
You can find more information about the assurance requirements for sustainability reports on ASIC’s website.
Need help
If you’re unsure about how best to approach auditor appointments under the new sustainability reporting requirements, BDO’s sustainability and assurance specialists are here to help. Contact us to discuss your specific circumstances and ensure your audit arrangements are both compliant and efficient.
