Assuring Sustainability Shaping the assurance concept in Sweden.doc

department of business lawassuring sustainability:shaping the assurance concept in swedenresund auditing research networkconference 17-18th january 2008amanda sonnerfeldtdepartment of business lawlund universityamanda.tan-sonnerfeldtbusilaw.lu.se1 introduction1.1purpose of the paperthis paper presents a part of my phd dissertation entitled: “assuring sustainability: shaping the assurance concept in the sustainability reporting domain” the title, theoretical framework and findings are still preliminary. it aims to study the development of assurance on sustainability reports from both a legal and social science perspective. the development of standards in this area has been rapid since2003, energised by: the proactive measures by the different institutions, the synergistic effects generated by development of reporting standards and competition between the accountancy profession and accountability. there had been 2 significant developments since this study: the iaasbs announcement in september 2007 to use nivras standard on sustainability assurance as a starting point to set a specific global standard for sustainability assurance; the swedish governments publication requiring all 55 companies the swedish government offices administers to commission third party assurance on their sustainability report;academic contribution to date is lacking, there is no known study on the role, interaction and influence of institutions at a global level on the development of standards in this field nor is there a developed framework to enable a thorough understanding of how sustainability assurance is understood by various constituencies, how it is current practiced under different institutional environments and the idiosyncratic needs of organisations voluntarily commissioning these engagements. this project attempts to contribute through an explanatory, longitudinal analysis of the contents of standards (legal analysis) at a global level (product of political negotiations) and how these global standards are transposed to the national context and practiced in sweden (social science methods). this paper presents preliminary findings of how assurance on sustainability reports developed in sweden from 1996-2007 in relation to developments in the global context and highlights issues of concerns. other types of assurance services, certifications, consultations are not within the scope of this paper. it also focuses on audit profession (the big 4). the study of other organisations is performed in context of how those activities affect the profession. following the introduction, section 2 presents briefly development of standards of assurance relating to sustainability in the global arena. section 3 presents the swedish case.1.2backgroundglobalisation and development in technological systems have brought about growing interdependence, increased complexity and impersonalization of institutions, organisations and their activities characterising todays “risk society”. critique of the negative environmental and societal impact of globalization, high profile public protest e.g., battle of seattle 99 and law suits against corporations nike, shell, bp, monsanto, etc have generated public distrust of multinationals approach to commerce. restoration of trust: the fundamental building block of social life tomkins, c interdependencies, trust and information in relationships, alliances and networks, accounting, organizations and society2001, vol. 26 no.2, pp.161-91. 1 and key to building social relationships zucker, l.g., production of trust: institutional sources of economic structure, 1840-1920, in staw, b.m., cummings, l.l. (eds),research in organizational behaviour, sage publications, thousand oaks, ca, 1986, vol. 8 pp.53-111. have in particularly the last 8 years been intensified through political, civil and private institutions through a common “sustainability agenda”. although the sustainability notion is well supported, it is not well understood. a widely accepted definition of sustainable development: “development that meets the needs of the present without compromising the ability of future generations to meet their own needs” originates from the brundtland report united nations department of economic and social affairs, division for sustainable development: agenda 21. this development-oriented conception regards sustainability as a global concept concerning eco-efficiency, allocative efficiency of resources over time as well as fair distribution of resources and opportunities between the current and future generations gray, r.h., milne, m., sustainability reporting: whos kidding whom? chartered accountants journal of new zealand, year: 2002, volume: 81, issue: 6, pages: 6670. this term has been widely “borrowed” by the reporting community to refer to or used interchangeably with triple bottom line reports odwyer, b.; owen, d.l “assurance statement practice in environmental, social and sustainability reporting: a critical evaluation” the british accounting review, year: 2005, volume: 37, issue: 2, pages: 205-229. adopting the view that society comprises a set of relationships referred to as social contracts, organisations are laden with the duty to provide account i.e., “measuring and communication of the social and environmental effects of an organisations economic actions to particular interest groups within society and the society at large” gray et al 96 gray, rob.; owen, d. and adams, c. “accounting and accountability: changes and challenges in corporate social and environmental reporting” year: 1996, prentice hall europe. firms report to gain legitimacy to operate in a society or to satisfy the principles of equity and fairness: voluntarily disclosing to avoid regulation benston 62however, importing a broad based systemized concept carrying both a moral and normative imperative into an area of practice strongly characterized by measurement of impact and performance, inevitably creates a performance expectation gap. although stand alone sustainability reporting continues to be on an upward trend kolk 2003, with 64% of the g250 reporting on corporate responsibility issues (in separate report or part of annual report) compared to 45% in 2002 kpmg 2005, these reports had not restored trust toward the corporate community. due to managements dominant influence on the content and scope of reporting, these reports were therefore believed to add value to the corporation instead of accountability and transparency towards stakeholders. (see doane, 2000, belal, 2002, gray & milne, 2002, owen 2000 & 2004, gray 2001, dando & swift 2002,2003, adams 2004, adams & evans, 2004). to inspire confidence in reporting, management themselves seeking legitimacy and better stakeholder management, together with providers seeking market share; have strategically routed for the “business case” for assurance services. third parties including academics, meta-organisations (including the european federation of accountants fee papers - benefits of sustainability assurance (2003) & call for action: assurance for sustainability (2004) (fee) representing the profession) and others (such as the european commission european commission “promoting a european framework for corporate social responsibility” green paper july 2001, page 18., the global reporting initiative encourages independent assurance and development of standards and guidelines for assurance process gri 2002 17,18 (gri) and the institute of social and ethical accountability institute of social and ethical accountability aa1000: assurance standard (2003), the state of sustainability assurance (2003) (accountability) call for assurance that is of high level professional quality and independent to be performed on such information reported to narrow the credibility gap. the increase in sustainability assurance engagements thus may be explained by a “push-pull-endorsement” mechanism involving multiple actors, for different purposes based on this normative proposition.1.3what is sustainability assurance?the word assurance originates from the latin term “ad securus” i.e. to make safe. its existence is attributable to its inverse relationship to risk. hence, logically, an assurance engagement on sustainability reports is engaged to reduce risk of material misstatements by the reporting organisation.the term assurance in this context, is an “artificially created construct by accountants to serve a specific purpose” fee 2003. there is no agreed clear and precise definition for either sustainability or assurance, neither is there agreement on whether it should be considered from the assurance providers, users of the report or a broader constituencys perspective. ibid the only consensus agreed by providers is that it is not a financial audit. reflected in fees study: “in defining the purpose, one can then determine what the nature ought to be”. sustainability assurance is characterised by:1.3.1voluntary and undergoing developmentassurance on sustainability reports is not a legal requirement; it is viewed as a natural outgrowth from modern society power1994 whose existence is determined largely by the driving forces behind potential parties seeking engagements (the demand). hence, as much as standards guide the direction and practice of performing assurance engagements, the market (those that demand and supply the engagement) and institutional factors plays a crucial role in determining the purpose and contents of the standards. this interaction between the market demands, standards and practice within an institutional setting hence determines the “concepts” of and in sustainability assurance. 1.3.2 multiple actors with conflicting needsdrawing from definitions of assurance by standard setting organisations ifac, accountability, farsrs and nivra, assurance can be generally understood as when a assurance provider (independent third party) is hired for a fee to perform an engagement that results in issuing a report of his opinion based on the outcome of the evaluation or measurement of a subject matter against criteria to enhance the degree of confidence of the intended users. the differences in definitions lie in that the engagement has to be performed within conditions and constraints which the provider is bounded.the need for financial audits can be explained by agency theory jensen & meckling (1976) the simple agency model serves as a basic model to explain the need for financial audits. the principal agent theory explains that as a result of information asymmetries and self-interest, principals lack reasons to trust their agents and will seek to resolve these concerns by putting in place mechanisms to align the interests of agents with principals and reduce the scope for information asymmetries and opportunistic behaviour. on the other hand, agents are accountable to the principal i.e., the agent acknowledges and assumes responsibility for his/her actions, products, decisions, and policies including the administration, governance and implementation within the scope his/her employment position. the agent thus has an obligation to report, explain and be answerable for resulting consequences. concerns about the reliability of information creates a need for audit, i.e., an independent check on the work of agents and of the information provided in this context, audits serve to give credibility thus “value” to reporting. the auditors competence and independence are thus key elements of effective control. this theory however focuses on bilateral contract and is insufficient to understand the social construct of different interests and impact of the institutional environment pertaining to sustainability assurance matten, moon, 2004, aguilera and jackson 2003. comparing the financial audit and sustainability assurance models presented below, the latter is less defined due to: multiple end users with competing and conflicting needs; a variety of assurance providers engaging in market share competition who the reporting organisation can choose from; reporter may be seeking different types of service (consulting, constructing, auditing, assuring) due to differences in corporate philosophy, stage of development, management values etc. financial assurance / audit modelsource: ownsustainability assurance model (note engagement may also be commissioned by an outside party) source: ownfinancial and sustainability assurancewith multiple actors and their conflicting needs with regards to such engagement, no single provider (professional audit firms (also termed auditor, big 4), quality and corporate social responsibility assurance consultancies, civil society assurors and ngos zadek & raynard, 2004) has been unanimously chosen as the choice provider. these providers adopt different approaches, ideals and standards but publish a common end report. their legitimacy is dependent on how each professions work is trusted by society but more so, how much each providers work reduces risk perceived by stakeholders. in the unregulated market, providers are not confined to their traditional roles. for example, a professional audit firm may be engaged to advice on improvement in compliance to reporting standards or data verification. similarly, a consultancy provider may be commissioned to check accuracy of data.1.3.3 characteristics of subject matter (appendix 1)the subject matter includes qualitative information that may be difficult, if not, impossible to measure and interpret, e.g., prospective information on public policy statements, actions to be adopted and projections with little or no guidelines available. the boundaries of reporting may be extended due to wider group of intended users with different needs to include supply chain information and other information where obtaining evidence may not be viable (economic constraints) or possible (legal, geographical or other constraints). there is also no self balancing system as in financial accounting. 1.3.4 stakeholder involvement in the assurance processthe democratic approach to accountability advocates stakeholder participation. it has been normatively set forth that their involvement (a tripartite relationship) could be a countervailing power against “management capture” owen and odwyer, 2005. it has also been proposed that “the involvement of stakeholders, including trade unions and ngos could improve the quality of verification” european commission “promoting a european framework for corporate social responsibility” green paper july 2001 par. 73.there is an agreement that stakeholders should be involved in the assurance engagement. the extent of involvement depends on purpose and philosophical aspirations of different institutions and providers. current assurance standards have made attempts to identify stakeholders role in the assurance process. they range from: performing the engagement from a stakeholder viewpoint; obtained the minutes of stakeholder meetings as documentary evidence independent silent observer in stakeholder dialogues held by the firm; direct contact (dialogue) with stakeholders in assessing risk and obtaining evidence; actual provision of assurance services by stakeholders themselves as individual experts or part of a panel of experts. results of a pilot study carried out in 20041.3.5 terminologysustainability assurance is not an entirely new field of study; it has evolved from social and environmental audits and drawn from the general assurance on credibility of information, financial audit and stakeholder models. terminology used in this field has thus been borrowed from the above mentioned. over time, problems and confusion arise due to: adaptation of borrowed terminology to suit this field; creation of new terminology in attempt to keep check the expectation gap pertaining to financial audits by the profession; evolution of terminology in the original source but not updated in sustainability assurance; e.g., the definition of independence different definitions given to the same terms, for example standard setters adopt the term materiality but redefined differently in accordance to their philosophy or methodology to suit the sustainability domain.1.4 methoda qualitative inductive approach has been adopted as sustainability assurance is still at an infancy stage where its features are undergoing constant redefinitions. this method also allows one to pursue an understanding of the unique elements of each engagement in its own context. the work accepts status quo and does not attempt to be critical or normative. results of a pilot project and expert interviews carried out in 2004 supports the epistemological stance stressing that members of audit profession have different viewpoints and interest (barratt and gendron, 2006). drawing on literature on institutions, audit quality and the big 4 also justifies the assumption that practice of the big 4 may vary nationally due to unique institutional structures embedded within each country and demands of the market (francis, g 2007). though one may argue that institutional isomorphism may pressure corporations towards homogeneity at an international level and that these engagements are practiced by the big 4 on mnes; at this stage of development particular where the organisational and audit fields audit field refer to audit firms, educational institutions, clients, professional organisations, investors and, regulators (robson, 2007) between countries are diverse, one assumes how the concept is understood and practiced is still largely dependent on the national context.1.4.1research design1.4.1.1section 2 (only key poi