Category Archives: Accounting Practice

ESG Audit and Sustainability Assurance Services

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We present AP Professional Services perspective to ESG Audit and Sustainability Assurance practices.

In a constantly changing audit landscape, achieving efficiency, accuracy and consistency is necessary. One of the new and latest reporting needed to be integrated in an Audit Engagement is ESG Audit and Sustainability Assurance. ESG addresses organization’s responsibilities beyond taking care of their bottom line (Profits) and financial performance.

In the past, we have integrated Tax and Company Secretarial Audit into our audit process. Now it’s the time to integrate a fully ASSURANCE PROCESS into our Annual Audit plan.

ESG stands for Environmental, Social, and Governance. Another name for ESG is Corporate Social Responsibility (CSR). For illustration purposes, CSR is like what Management Accounts (Unaudited Financial Statements) or better still Trial Balance is to organizations while ESG is the AFS and Sustainability reporting is like the Audit Opinion.

Sustainability assurance refers to providing independent assurance or verification of an organization’s sustainability-related information, performance, or reporting. Sustainability Assurance is what Audit Opinion is in traditional audit.

Business leaders increasingly see sustainability as pivotal to risk management and value creation. In line with this trend, more and more companies are investing in third-party assurance for ESG and sustainability reporting to mitigate risk and bring valuable benefits.

It’s about assessing how your company’s operations impact the world and ensuring these actions are aligned with your values and the values of society at large.

There are some countries that are charged with Mandatory ESG Reporting. However, it can be adopted as voluntary obligations in countries where it is not mandatory. In those countries where ESG Reporting is mandatory, regulations are in place demanding certain companies to provide specific financial or non-financial data disclosures in their strategic report.

Some of Mandatory ESG Reporting areas are:

(1) Climate-related disclosures in financial reporting.  

(2) SEC demands from publicly traded companies to submit annual reports on human capital resources (HCR)

RELATED SERVICE PROVIDERS
ESG Assurance Providers
Sustainability Assurance Providers

NOTE: Experienced Chartered Accountants and Auditors are the best fit to perform ESG audit services as they have vast experience in determining whether a client is in compliance with multiple standards and frameworks.

What is ESG reporting?
ESG reporting is an organization’s public disclosure of its environmental, social, and corporate governance data in order to ensure transparency into the organization’s ESG activities and measure its sustainability performance so stakeholders, such as investors, consumers, and NGOs, can make better-informed decisions.

A comprehensive and continuous ESG auditing helps protect organizations from ESG-related risks. ESG audits is part of a Risk Management tools that helps organizations identify and assess their impact on the environment and society, and develop strategies for mitigating or otherwise addressing ESG risks. Also, ESG Audit is an essential source of information for investors, employees, and customers, who demand accurate information and transparency around how organizations approach ESG issues. ESG Audit allows companies and organizations to benefit from stakeholder confidence, regulatory compliance, and an enhanced reputation.

ESG Audit is needed where pressure on any of these ESG elements (Environmental, Societal and Governance) are identified:

(a) An organization is exposed to Environmental pressures. Example is the Climate Change impact, waste management challenges, hazardous materials handling, pollution impact and supply chain depletion (depletion in source of material supply).

(b) An organization is exposed to societal pressures as a result of relationships with Employees, Customers, Communities. Examples are procedures to adhere to Labor laws, procedures not to violate human rights, policies on child labor and work conditions, Data Protection and privacy risk and policy framework on DEI Issues (Diversity, equity, and inclusion)

(c) An organization is expected to abide and make disclosure regarding laid down code of conducts and sets of Corporate Governance rules and regulations

ESG REPORTING FORMAT (ESG FRAMEWORK) Four well-known ESG frameworks are:
(1) Sustainability Accounting Standards Board (SASB)✅

Presently, ISAE-3000 (revised) is an assurance standard by the International Auditing and Assurance Standards Board (IAASB) that deals with assurance engagements other than audits or reviews of historical financial information. ISAE3000 on provide guidance for ESG Audits.

ISAE stands for International Standards of Assurance Engagements. ISAE are issued by issued by the International Auditing and Assurance Standards Board (IAASB)

Newly, we are having ISSA5000 to replace ISAE3000 as one unified guidance for a standard Sustainability reporting and combined guidance for both ESG Audit and Sustainability Assurance.

ISSA stands for International Standards Sustainability Assurance. ISSA issued by the International Auditing and Assurance Standards Board (IAASB)

(2) Task Force on Climate-Related Financial Disclosures (TCFD)

(3) ISO Standards. International Organization for Standardization.

Some useful ISO standards that provide ESG audit frameworks include ISO 26000 (Social Responsibility), ISO 14001 (Environmental Management Systems), and ISO 45001 (Occupational Health and Safety)

(4) GRI: The most popular or well-known of these frameworks comes from the Global Reporting Initiative (GRI). This framework is focused on sustainability and impact reporting. 

NOTE: SASB offers sector-specific guidance while TCFD is more specifically geared towards climate issues. As some frameworks address a specific aspect of ESG, you may want to consider whether using or combining parts of multiple frameworks makes sense.

Any ESG reporting frameworks adopted will provide guidance to:
(a) Identify ESG topics or better still risk areas

(b) Provide criteria on how to structure and prepare information to disclose for each topic.

STEPS ON HOW TO CARRY OUT ESG AUDIT (HOW TO PERFORM ESG AUDIT)

(a) Data collection (Data Mining) from stakeholders in order to understand and identify specific ESG Risk Exposure. Automate this process for continuous auditing and evidence collection

ESG data refers to information related to a company’s environmental impact, social responsibility, and governance practices.

Types of ESG Data
The different types of ESG data can be broadly categorized into the following areas:

  • Environmental data: This includes data on a company’s energy usage, carbon emissions, water usage, and waste management practices
  • Social data: This includes data on a company’s labor practices, human rights policies, community engagement, and diversity and inclusion initiatives
  • Governance data: This includes data on a company’s board composition, executive pay, anti-corruption policies, and other metrics
  • Financial data: This includes the financial performance and stability of the company, which may be used alongside other ESG data to calculate intensity ratios and other ESG KPI

(b) Select an ESG framework that aligns with your organization’s goals.

(c) Set up ESG Goals and KPI per each ESG potential risk identified. This will be used to determine if Risk is POTENTIAL or not.

(d) Map out strategy to manage and mitigate against potential risks identified under c above

ESG AUDIT RISK
Companies that fail to manage or mitigate ESG risks face financial, reputational, and legal cos

Court stops FRCN from regulating Private Companies

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The Federal High Court (“FHC”)  in Lagos on Friday, 21 March 2014 ruled in a case between Eko Hotels Limited and the Financial Reporting Council of Nigeria (“FRCN”) and held that the Financial Reporting Council of Nigeria (FRCN) lacked the statutory powers to regulate the activities of private firms in Nigeria. The FHC decided that under the FRCN Act, the FRCN cannot enlarge its regulatory powers to regulate private companies.

The main issues raised by Eko Hotels for determination by the FHC were:

  • Whether Eko Hotels is required to register with the FRCN under the FRCN Act 2011
  • Whether Eko Hotels is liable to pay the statutory and renewable annual dues to the FRCN for 2011 and 2012.
  • Whether Eko Hotels is required to furnish the FRCN with evidence of its statutory filing with the Corporate Affairs Commission and the Federal Inland Revenue Service.
  • Whether the FRCN could penalise it for failure to submit the annual returns and statements.

Eko Hotels sought a declaration from the court that the FRCN’s demand for registration was unlawful on the basis that Eko Hotels is not a public company or a public interest entity. It further sought the FHC to declare that the FRCN lacked the statutory power to demand for annual returns and financial statements of a private limited liability company among others.

Position of the FRCN: 

FRCN’s position was that Eko Hotels was expected to routinely file returns not only with the CAC or the FIRS but also with the Tourism Development Corporation (being the regulatory body responsible for the registration, classification and grading of all hospitality and tourism enterprises in Nigeria). The FRCN Act defines a public interest entity to include ‘unquoted’ entities which file returns with regulators other than the FIRS and the CAC. The FRCN also stated that one of the requirements for Eko Hotels to file its routine returns with the CAC was evidence of payment of its annual dues to FRCN.

Justice Okon Abang, who handed down the verdict, equally ruled that the FRCN lacked the legal backing to impose statutory renewal dues on private companies in Nigeria.

Justice Abang arrived at the conclusions while delivering judgment in a suit filed by Eko Hotels Limited, challenging the legality of an attempt by the FRCN to regulate its financial activities.

FRCN had written a letter to Eko Hotels Limited requesting registration and payment of statutory renewal dues. The FRCN had also requested the plaintiff (Eko Hotels Limited) to furnish it with evidence of statutory filings of annual report, financial report and statements at the Corporate Affairs Commission (CAC) and the Federal Inland Revenue Service (FIRS).

But in his judgment, Justice Abang held that from the careful interpretation of the Financial Reporting Council of Nigeria Act, there was no provision that empowers the agency to exercise disciplinary control over a private company.

“The section relied upon by the defendant (FRCN) relates only to an employee of the plaintiff and not the plaintiff as a corporate entity.
“The plaintiff is a private company and the shares are not quoted on the floor of the Nigerian Stock Exchange. By the clear provision of the FRCN Act, the plaintiff is exempted.

“The defendant (FRCN) can only regulate publicly-quoted companies and public interest entity. “Where a statute does not empower a statutory body to do certain things, such body cannot so act,” Justice Abang ruled.

The court thereafter nullified the letter written by FRCN to the plaintiff, and also awarded N40,000 as cost in favour of the plaintiff (EKO Hotel) against the defendant.

CONCLUSION THAT COULD BE DRAWN FROM THIS COURT JUDGEMENT

This decision reiterates the scope of the FRCN’s authority in regulating companies in general in line with the provision of the enabling statute being the FRCN Act 2011. Based on the judgment, the FRCN does not have oversight functions over private companies. Attempts by the FRCN to bring a wider range of companies under its scrutiny and guidance are therefore open to challenge by any affected company on the basis of this decision.

The judgment suggests that the rules imposed in some industries requiring players in the industry to submit certain documentation or to pay certain registration fees does not translate to “filing of returns” as contemplated by the Act. Furthermore the mere fact that a company is popularly known to the public due to the nature of its services does not automatically make it a public interest entity.

On the basis of this judgment, private companies who only file returns routinely with the CAC and FIRS can carry on their business activities without the additional administrative burden of registration or payment of fees to the FRCN.

However, the Financial Reporting Council of Nigeria (FRC) has appealed  the verdict of the Lagos Federal High Court which restrained its powers to register and regulate companies in the country. The FRC also contended that the judgment did not take cognisance of the provisions of Section 77 of the FRC Act which defines a public interest entity as Governments, government organisations, quoted and unquoted companies and all other organisations which are required by law to file returns with regulatory authorities and this excludes private companies that routinely file returns only with the Corporate Affairs Commission and the Federal Inland Revenue Service.”

I shall keep you posted on the APPEAL DECISION.

IFRS First time adoption – Phase 3: SME

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IFRS 1 First-time Adoption of International Financial Reporting Standards sets out the procedures that an entity must follow when it adopts IFRSs for the first time as the basis for preparing its general purpose financial statements.

In order to achieve complete conversion, the Federal Reporting Council categorised reporting entities into three(3) phases and assigned deadline to them. As at the date of publishing this pose, Phase 1 and Phase 2 have been concluded. Phase three is expected to be concluded by December 31, 2014.

Phase 1: Publicly listed Entities and Significant Public Interest Entities (deadline is January 1, 2012 and the first IFRS based audited account shall be for the year ended 31 December, 2012)

Phase 2: Other Public Interest Entities (deadline is January 1, 2013 and the first IFRS based audited account shall be for the year ended 31 December, 2013)

Phase 3: Small and Medium-Sized Entities (SMEs)

IFRS for SMEs shall mandatorily be adopted as at January 1, 2014. This means that all Small and Medium-sized Entities in Nigeria will statutorily be required to issue IFRS based financial statements for the year ended December 31, 2014.

Entities that do not meet the IFRS for SME’s criteria shall report using Small and Medium-sized Entities Guidelines on Accounting (SMEGA) Level 3 issued by the United Nations Conference on Trade and Development (UNCTAD) .

It helps to work with a team that’s been there before. We understand the practical issues around IFRS from both a Nigerian and global perspective. Our experienced team works with organizations to help them implement IFRS in a comprehensive way.

Please note that Phase 3 is further defined to mean companies whose audited accounts are mainly filed with the Corporate Affairs Commission and the Federal Inland Revenue Service only.

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