Environmental and social transparency under the ... - ClientEarth

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34 | Environmental and social transparency under the Companies Act 2006Chapter 1: Governance of company accounting and reporting | 35environmental or social damage, the reputation of the company may be1.2 Legal mechanisms established to provide scrutiny todamaged, or the social licence to operate may be damaged, regardless ofaccounting and reporting of environmental and socialwhether the company had majority control over the relevant decisions, orimpactswhether the operation was undertaken through a subsidiary.There are a number of mechanisms established by law that provide scrutinyto the accounting and reporting process. These mechanisms areThere is a limited exemption to this requirement, whereby reporting is notrequired where it would, in the opinion of the directors, be seriously prejudicialto that person and contrary to the public interest. 77 This exemptionreports exercise their discretion appropriately when preparing them, anddesigned to ensure that those responsible for preparing the accounts andwas reportedly added following government discussions with the pharmaceuticalindustry, with the intention of avoiding ‘misuse’ by extrememechanisms are not currently providing an adequate standard of scru-fulfil their legal obligations. However, ClientEarth considers that theseanimal rights activists who might target business associates of companiestiny, indeed particularly in relation to accounting and reporting on environmentaland social matters. They do not currently provide adequatewho test on animals and thus compromise their safety. 78safeguards to ensure the provision of information that fulfils legal requirements,or that accurately or fairly reflects the position, performance and1.1.3 Circulationactivities of the company.Companies are required, as the default position, to circulate copies ofthe annual accounts and reports to every member of the company, every1.2.1 Auditing of environmental and social accounting andholder of the company’s debentures, and every person entitled to receivereportingnotice of general meetings. 79 However, the company now often has theoption to send a ‘summary financial statement’, along with explanatoryOne way in which company accounts and reports are subjected to scrutinymaterial relating to the directors’ report (in the case of listed companies), 80is by external ‘audit’. Under the Companies Act 2006, there are obligationson companies to ensure that independent auditors are appointed,instead of the full annual accounts and reports. This explanatory materialdoes not need to include information about environmental or socialgiven certain rights of access to information, and charged with a duty tomatters.prepare an ‘auditors’ report’, 84 the purpose of which is to verify the accuracy,reliability and quality of the accounts and reports. The report mustWhile persons entitled to receive copies (see above) retain the right tothen be presented to the company members alongside the accounts andreceive the full accounts and reports if they expressly notify the companyreports. 85as such, 81 and companies must open consultation with all such personsbefore they can send summary financial statements, 82 it is uncertain as toAuditors have broad and wide-reaching rights of access to information fromhow many shareholders will go out of their way to receive the full accountsthe company. As well as access at all times to company books, accountsand reports. Many companies will now take this option to save costs, andand vouchers, 86 an auditor may require any information or explanationsthis considerably reduces the level of detail that shareholders will receivethat they think necessary for the performance of their duties 87 from a widein hard copy relating to environmental and social matters.range of persons currently or formerly related to the company. 881.1.4 PublicationThe auditor’s report must satisfy a number of requirements, primarily inrelation to the annual accounts. The report must describe the scope of theQuoted companies are required to publish their full annual accounts andaudit, and the auditing standards which were applied in carrying it out. 89reports on an open website maintained by or on behalf of the company,The auditor’s report must either be unqualified (i.e. report that the financialstatements give a true and fair view), or qualified (report a significantavailable free of charge and at least until the next financial year’s annualaccounts and reports are made available. 83
36 | Environmental and social transparency under the Companies Act 2006Chapter 1: Governance of company accounting and reporting | 37disagreement with the disclosures made or techniques employed, or anopinion that the audit has been too limited in scope). 90The auditor’s report must state a clear opinion as to whether the accountshave been properly prepared in accordance with the requirements of theCompanies Act 2006, 91 and the relevant financial reporting framework. 92It must also state a clear opinion as to whether the accounts give, at bothindividual and group level as applicable, a true and fair view of the stateof affairs of the company as at the end of the financial year (in relationto the balance sheet), 93 and of the profit or loss of the company for thefinancial year (in relation to the profit and loss account). 94 Auditors mustcarry out all necessary investigations 95 to form an opinion as to whetheradequate accounting records have been kept, 96 and whether the company’sindividual accounts are in agreement with the accounting records andreturns. 97 Where the auditor is of the opinion that any of the above is notthe case, they must state that fact in their report. 98 If they fail to obtain allinformation and explanation necessary for the audit, they must state thatfact in the report. 99However, in relation to the directors’ report, and therefore the majorityof environmental and social information provided, auditors are onlyrequired by law to make a statement as to whether in their opinion thedirectors’ report is consistent with the company annual accounts. 100 Thereis no requirement for the audit to check for any inconsistencies againstany information other than the annual accounts. 101 These requirementsare inadequate. The narrow standard of scrutiny required by law is illsuitedto reporting of this nature. Assessment of the accuracy and qualityof reporting on environmental or social matters requires reference toa broader range of information than this; an audit which only providesassurance in relation to broad financial data is inadequate and potentiallymisleading in this context. 102Some companies, especially those with high public profiles, now gobeyond minimum legal requirements for auditing, and contract ‘assurance’engagements for their ‘corporate responsibility’ reporting. ‘Assurance’often involves broader and more detailed investigations into thequality of reporting, sometimes from new, novel or specialist types of‘provider’. However, these assurance exercises are entirely voluntary andare not regulated by law; there is no legal standard for the form, scopeor methodology of assurance that such information is subject to. Thereis no uniformity of practice between companies, leading to a confusinglandscape of verification and “assurance” for environmental and socialreporting which renders the area of reporting as a whole devoid of clarityor certainty, despite the efforts of and progress made by a number ofinternational assurance standards and frameworks. 103 Essentially thesepractices allow company management to engage in unregulated communicationpractices, where they set the rules of play and the boundaries oftheir scrutiny.Questions must also be asked as to the suitability of the mainstream auditingprofession for the new challenges presented by scrutinising reportingof environmental and social issues.The firms that carry out the majority of audits on these reports, such asthe ‘Big Four’ accountancy firms, bring financial and legal expertise tothe table, which is necessary to apply and understand the complex rulesrelating to financial accounting. But are these individuals necessarily bestplaced to ensure and embrace the integration of environmental or socialmatters into business reporting? Institutional inertia, deep-set culturesand internal pressures (discussed below) all may have influence on the wayin which these issues are interpreted and the rigor with which any suchstandards are applied. What is required to provide effective scrutiny tothese reports is a body that balances financial expertise with progressiveunderstandings of the risks and opportunities for companies relating toenvironmental and social matters, and ensures that an appropriate institutionalbalance is struck. There are also questions as to the suitability ofsolely desk or data-based audits for this kind of information. It is commonlycomplained that in the context of environmental or social reporting,there is a lack of ‘reality’ to such processes, and that there is a need foraudits that involve research and engagement conducted ‘on the ground’ oron site, 104 to properly scrutinise the effectiveness of policies and managementsystems in reality. 105In summary, the current auditing system is not effective or fit for thepurpose of providing adequate or appropriate verification and assurancefor the reporting of information on environmental and social issues. ClientEarth’sproposals would compensate for these inadequacies by creatinga low cost legal framework that would ensure that the objectives of theCompanies Act 2006 are fulfilled, with adequate scrutiny provided to the
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