- More entities are reporting non-financial matters, boosting emerging forms of external reporting (EER).
- EER has a range of drivers, including environmental and social sustainability concerns.
- EER is not always governed by accounting standards, which can present auditing challenges.
A variety of entities are increasingly producing reports that include non-financial information that extends beyond the traditional focus on financial position, financial performance and impact on an entity’s financial resources. This type of reporting is becoming known as "emerging forms of external reporting" (EER).
Common forms of EER include integrated reporting, sustainability reporting and other reports on environmental, social and governance matters. In New Zealand’s registered charity sector, for example, EER often encompasses service performance reporting.
A number of drivers are behind the growth of EER. Climate change is underpinning reporting on carbon emissions and environmental sustainability. Greater transparency about the purpose and activities of charities is a driver for service performance reporting, which will hopefully support greater awareness of worthwhile activities – and in turn, garner public support. Integrated reporting is being adopted by many corporates to help them demonstrate a holistic view of the organisation and its impacts across a range of capitals, thereby bolstering confidence in the entity’s business model and organisational sustainability.
In some cases, additional reporting is specified by legislation or regulation. Australia already requires some entities to report on environmental impacts, and the New Zealand Government is considering a similar approach. The NZX Corporate Governance Code promotes issuer disclosure of environmental, social and governance factors. Other reporting is being driven by the organisations themselves to provide more useful information to key stakeholders.
Interestingly, this non-financial information can have reasonably significant financial impacts. For example, one listed company – a leading proponent of integrated reporting in New Zealand - credits this type of reporting with a one percentage point reduction in its cost of capital over recent years.
While the accounting world follows global accounting standards, the wide variety of EER means equally there is a broad range of frameworks reports are prepared under. However, some reports are prepared without any recognised framework.
Non-financial information can, in some cases, have reasonably significant financial impacts.
So what about assurance?
Stakeholders are increasingly recognising the value of EER, which is driving what is reported. Nonetheless, as with financial reporting presented to a wide shareholder group, EER can also benefit from independent assurance.
In some cases, this assurance will be mandated by legislation and regulation. For example, service performance reporting for New Zealand charities is required to be audited if the charity is above the audit threshold. This independent assurance helps to ensure that charities do not try to use their service performance reporting as a hyperbolic marketing tool not grounded in reality. In other cases, independent assurance is proactively sought after by preparing entities to maximise stakeholder comfort.
While the audit of financial statements has benefitted from many years of experience, EER represents new forms of reporting, and as such, presents new challenges for assurance professionals. That said, the wealth of skills and experience of Chartered Accountants means they are often well-placed to apply auditing and assurance techniques and methodologies to these emerging forms of reporting.
Who is up for the challenge?