www.monash.ac.za 1 competencies and thinking skills required in modern auditing for dealing with...

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Competencies and thinking skills required in modern auditing for dealing with

sustainability assurance

Public Sector Auditing Symposium30 January 2008

Midrand Conference Centre

Anton Du ToitAcademic Director: AccountingMonash South AfricaTel: 083 252 0910E-mail: anton.dutoit@buseco.monash.edu

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1. Introduction

2. Corporate Governance introduction

3. Literature survey:1. Sustainability reporting

2. Sustainability assurance

3. Competencies of assurance providers

4. Thinking skills

4. Conclusion and recommendations

Competencies and thinking skills required in modern auditing for dealing with

sustainability assurance

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Current trend: 2 glossies

Nedbank 2006 Sustainability Report(Economic, Social and Environmental

bottom line – 123 pages)

Nedbank 2006 Annual Report(Chairman, Operations, AFS)(Fin. Bottom line) – 298 pages

Independent Audit Report by KPMG & Deloitte:

Reasonable Assurance

Verification Statement by Ernst & Young:

Limited Assurance

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Corporate governance can be defined as the manner in which an organisation is directed and controlled with a view to ensuring the achievement of its objectives in a sustainable manner within an environment of accountability to its stakeholders. It is about leadership with integrity.

(Payne, 2002)

2. Corporate Governance introduction

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Corporate Governance

• King III on its way: changes in Companies Act, Auditing Profession Act, Prevention and Combating of Corrupt Activities Act

• Public sector: PFMA, MFMA, Public Audit Act, Protocol on CG in the Public Sector

• No reference to sustainability or CG in the last group, only in King II

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Corporate Governance

Ethics

Business ethics

CorporateGovernance

• By its very nature, corporate governance has an ethical dimension that can be viewed as the moral obligation for directors to take care of investors and other stakeholders

(King II, 2002)

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Corporate Governance

• Business ethics is the ethics applied in business when making decisions, so that the decisions are good and right for the business and/or also for other people (persons, communities or structures) influenced by those decisions.  

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Corporate Governance:ethical principles

• Honesty• Integrity• Keeping promises• Loyalty (to all and to

company)• Fairness

• Caring for others• Respect for others• Responsible

citizenship• Pursuit of excellence• Accountability

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• Corporate failures and global competitiveness:– Cadbury in UK in 1992 and King in SA in 1994

• Steady increase in reporting on TBL: social, environmental and economic performance

• Some in AFS, or annual report• Now in stand-alone sustainability report (or CSR or social

or environmental or corporate accountability reports)• TBL implies sustainability• Financial bottom line part of Economic bottom line• All the stakeholders were shown in the previous slide

3.1 Sustainability reporting

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Sustainability reports: the GRI

• Sustainability reporting is the “practice of measuring, disclosing, and being accountable to internal and external stakeholders for organizational performance towards the goal of sustainable development” (GRI, 2000-2006:5)

• Latest framework of GRI is G3 – Aug 2006• Voluntary, currently 2 302 companies• Mandatory for France, South Africa and Denmark (stock

exchanges)• Independent assurance of the sustainability reports is growing,

most still done by accounting firms

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Sustainability reports: King II

• Annual report on nature and extent of its social, transformation, ethical and SHE management policies and practices

• Specifically:– SHE– Society and transformation, incl. BEE, gender,

equity– Human capital

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3.2 Providing Assurance

• Credibility, therefore not prepare and verify• GRI only recommends external assurance• Then rated as A+, B+ or C+• Two assurance standards:

– ISAE 3000 of IFAC – mainly auditors– AA1000AS of AccountAbility – mainly others

• Standards are still criticised, e.g. by FEE

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3.3 Competencies of Assurance Providers

• Language and semantics? Translations?• Historical data – now prospective data?• The technical areas of SHE?• Multidisciplinary teams – understand business,

environment and society• Competencies very rare in literature and in

reports• ISAE 3000 requires competencies and to evaluate

expert’s prof. competence

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Competencies in literature survey

• FEE wants disclosure• AA1000AS:

Individual – Prof. qualifications, assurance experience in fin. and TBLOrganisation – adequate assurance oversight, understand legal aspects, adequate insurance, structure to save material, independent from preparers

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IRCA – International Register of Certificated Auditors

Criteria for Certification as a SustainabilityAssurance Practitioner:1. Understand sustainability assurance (incl.

auditing)2. Understand stakeholder engagement processes

and assess and assure3. Understand sustainable development: TBL4. The ability to make informed professional

judgements on an organisation’s sustainability performance

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ACCA report – the future of sustainability assurance (2004)

1. Technical competencies: assurance – Big 4 are strong

2. Process competencies: stakeholders, materiality, responsiveness and completeness – market researchers and assurance consultancies are strong

3. Substantive/ content competencies: Understand all in TBL, good judgement for reasonable or limited assurance is crucial

4. No individual or organisation has it all – use teams or advisory panels of experts

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Competencies Literature survey (cont.)

• IRCA: definition of competencies very difficult and will evolve from year to year

• Boele & Kemp (2005): social auditors could learn from financial auditors, and vice versa

• Language and translation skills never mentioned

• Competency to predict the future also not. Applied mathematics is a core competency of economists, for example.

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3.4 Thinking skills

• Logic: analytical and critical thinking processes• Nothing in syllabi, except Mathematics• Professional judgment is logical experience• The auditor is per se a rational person• Collect audit evidence to express an opinion• If evidence is accepted or rejected in error, a

thinking mistake was made

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Thinking Skills: Virtues

1. Patience and intellectual tolerance;2. Fairness – listen to all the facts before making a

conclusion/expressing an opinion;3. Be honest about one’s own prejudices;4. The willingness to analyse: distinguish things and

separate them;5. Compare things – get the logic context and systemise;6. Try to do it in other ways – do experiments; and7. Thoroughness and persistence.

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Use thinking skills to:

• Solve problems• Evaluate evidence• Provide evidence• Argue• Analyse a problem in its components• Detect errors in reasoning or in an argument• Understand issues and modern day problems

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Technique for basic elements:

1. What is the question or problem?2. What is the objective or solution?3. What do the important concepts mean?4. What are the important facts?5. What are the implications or

consequences?6. Can it be done in another way?

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What arguments are

Each reason:

True, relevant, reliable and valid

Give many reasons ANDMake sure that there is proof for thereasons

Reasons Decision

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Reasons Decision(Conclusion)

Items of auditevidence

Audit opinion(consideringaudit risk)

From logic to auditing

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Use logic: Can it be true?

BDO Trevison (in Banco ABN Amro Real SA, 2007) concludes that the information in the report is adequately presented in all its relevant aspects. This includes statements such as:

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Sourcedocuments

1 Jan. 31 Dec.

Valid??

Complete??

Acc.Records

Maintained??Accurate??

?? Audit risks = Control risks

Need Internal Controls

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Complete??

Maintained??Accurate??

1 Jan. 31 Dec.

Acc.RecordsSource

documents

Valid??

Interna l Control system

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Acc.Records

G/L T/B

IncomeStatement

AFS:

BalanceSheet

ValidCompleteAccurateMaintained

Assertions:ValueExistenceOwnershipCut-offDisclosureCompleteness

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4. Conclusion and recommendations

Conclusions from literature survey:• Currently no minimum standards for

competencies in sustainability assurance• Very little research on competencies.

Lack of language and semantics, logical skills, predict the future, 3 areas of TBL

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4. Conclusion and recommendations (cont.)

Recommendations:

1. Auditing firms to ensure competencies in teams

2. Careful with predictions and the future. Beware of full audits

3. Staff registered with IRCA until IFAC starts defining the competencies

4. Training and education providers to bring in the competencies and thinking skills into the syllabi

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4. Conclusion and recommendations (cont.)

Outcomes of thinking skills development• Be familiar with use of good thinking habits• Be able to master a good thinking process• Be able to analyse arguments (reasoning) properly and

make sensible conclusions• Be able to identify the audit principles logically, to

analyse them and to criticise them• Using the above, to perform more logical, effective and

sensible audits on BOTH FINANCIAL AND NON-FINANCIAL INFORMATION

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Final conclusion

7 research opportunities identified

The auditing profession should reconsider its role in society, whether to remain financial-only experts or to widen its scope to provide assurance on sustainability and on corporate governance. If the second one is chosen, the training and education requirements for auditors should be revisited and redesigned

Let us all prevent the following of say nothing, hear nothing, see nothing:

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