Investor advocates, finance executives and auditors are urging the US audit board to overhaul its outdated and little-used assurance requirements to keep pace with expected SEC mandates for greenhouse gas disclosures.
Stakeholders support the Public Company Accounting Oversight Board’s plans to update a suite of attestation rules that accountants tap to provide certain compliance audits and other reviews that go beyond financial statement audits, according to letters submitted to the board in late October.
The board’s September request for feedback on the changes it should consider making to its attestation standards didn’t mention climate risk or environmental, social or governance reporting. But most of the 20 letters it received in response did, underscoring the importance of ESG reporting to the financial markets.
“We suggest that you provide guidance and update PCAOB attestation standards to ensure that the level of attestation on ESG matters is fit for purpose for investors, the intended users of attestation reports,” the Interfaith Center on Corporate Responsibility, a coalition of investors and asset managers, wrote to the board.
“We suggest the board consider potential future ESG applications as a necessary improvement to attestation standards, given the evolving impact ESG data has in financial reporting,” wrote Rudolf Bless, who chairs the Committee on Corporate Reporting for Financial Executives International in a letter to the board. “As limited and eventually reasonable assurance may be required over emissions metrics, having additional guidance for attestation standards over these metrics could facilitate more consistent reporting.”
The Securities and Exchange Commission proposed climate reporting rules in March that would require the largest US-listed companies to obtain third-party assurance of their direct greenhouse gas emissions and certain indirect emissions. Companies could choose an audit firm or another third-party provider to test those metrics.
Auditors typically rely on assurance standards set by the industry for international or privately-held businesses, not PCAOB standards, when vetting those carbon metrics.
The board said previously that it had no plans to address ESG in its standard-setting or research projects. And its main advisory group was divided over whether it should set standards for vetting the environmental and climate data that companies share with investors, questioning whether the board has the legal authority to do so.
Still, the board is monitoring the SEC’s climate work, because it will drive financial reporting, and the board sets rules for accountants who will then be responsible for auditing that reporting, said board member Christina Ho last week while addressing corporate controllers and other finance executives in New York.
“It’s important for us to not get ahead of the SEC rulemaking,” she said. “And once they finalize the rules, then we will know how best to move forward.”
Progressive groups Americans for Financial Reform and Public Citizen said the board is uniquely positioned to tie attestation of greenhouse gas metrics to the financial statement audit. And those metrics will be critical to estimates and assumptions that are baked into financial reporting, they said in a joint letter to the PCAOB.
“The PCAOB should not wait for the SEC to finalize its climate disclosure rule to update its attestation standards to reflect GHG emissions attestation engagements,” the two groups said. “To omit GHG emissions attestations now would require another rulemaking later, using valuable staff time and resources.”
Leaning on Peers
Several audit firms told the board that it should lean on existing assurance requirements—rules set by the Audit Standards Board, part of the American Institute of CPAs, or the International Auditing and Assurance Standards Board—and adapt them to the needs of public company audits.
“The forthcoming requirement for attest engagements on scope 1 and scope 2 GHG emissions information is the most compelling reason to update the PCAOB’s attestation standards,” PwC LLP wrote to the board. “There have been significant investments made by other standard setters that can be leveraged to help the PCAOB further its goal to modernize its attestation standards.”
As demand for assurance work—whether for ESG or digital assets—will continue to grow, the board should monitor the “expectations of other regulators and needs of users of attestation reports so the Board can adopt standards that are clear, scalable, and responsive,” Crowe LLP said.
Crowe and Deloitte LLP also suggested the board consider providing requirements for how they should incorporate specialists into their carbon emission testing and how to oversee the work of other auditors spread across the globe who will assist with assurance work for multinational clients.