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114 | Environmental and social transparency under the Companies Act 2006Annex 4: Auditing of company environmental and social accounting and reporting | 115scope). The report must also refer to any matters the auditor wishes todraw attention to without qualifying the report.The auditor’s report must also state clear opinions on a number of issues.The auditor must state their opinion as to whether the accounts give, atboth individual and group level as applicable, a true and fair view of thestate of affairs of the company as at the end of the financial year (in relationto the balance sheet), and of the profit or loss of the company forthe financial year (in relation to the profit and loss account). The auditormust also state an opinion as to whether the accounts have been properlyprepared in accordance with the relevant financial reporting framework,and prepared in accordance with the Companies Act 2006 or Article 4 ofthe IAS Regulation, as applicable.s498 Duties of auditor(1) A company’s auditor, in preparing his report, must carry out such investigationsas will enable him to form an opinion as to—(a) whether adequate accounting records have been kept by the company andreturns adequate for their audit have been received from branches not visitedby him, and(b) whether the company’s individual accounts are in agreement with theaccounting records and returns, and(c) in the case of a quoted company, whether the auditable part of the company’sdirectors’ remuneration report is in agreement with the accountingrecords and returns.(2) If the auditor is of the opinion—(a) that adequate accounting records have not been kept, or that returnsadequate for their audit have not been received from branches not visitedby him, or(b) that the company’s individual accounts are not in agreement with theaccounting records and returns, or(c) in the case of a quoted company, that the auditable part of its directors’remuneration report is not in agreement with the accounting records andreturnsthe auditor shall state that fact in his report.(3) If the auditor fails to obtain all the information and explanations which, to thebest of his knowledge and belief, are necessary for the purposes of his audit, heshall state that fact in his report.(4) If—(a)(b)the requirements of regulations under section 412 (disclosure of directors’benefits: remuneration, pensions and compensation for loss of office) arenot complied with in the annual accounts, orin the case of a quoted company, the requirements of regulations undersection 421 as to information forming the auditable part of the directors’remuneration report are not complied with in that report,the auditor must include in his report, so far as he is reasonably able to do so, astatement giving the required particulars.(5) If the directors of the company have prepared accounts and reports in accordancewith the small companies regime and in the auditor’s opinion they were notentitled so to do, the auditor shall state that fact in his report.Auditors have a range of other duties relating to annual accounts. Auditorsmust carry out all necessary investigations to form an opinion as towhether adequate accounting records have been kept, whether the company’sindividual accounts are in agreement with the accounting recordsand returns, and whether the auditable part of the directors’ remunerationreport is in agreement with the records and returns. Where the auditoris of the opinion that any of the above is not the case, they must state thatfact in their report. If they fail to obtain all information and explanationnecessary for the audit, they must state that fact in the report.Directors’ reports496 Auditor’s report on directors’ reportThe auditor must state in his report on the company’s annual accounts whether in hisopinion the information given in the directors’ report for the financial year forwhich the accounts are prepared is consistent with those accounts.Auditors must make a statement in their report as to whether in their opinionthe directors’ report is consistent with the company annual accounts.There is no legal requirement that the audit have regard to any informationother than the annual accounts, to check for any other inconsistenciesor omissions. 292Information surplus to legal requirementIn the past, company reports have often included environmental or socialinformation beyond minimum legal requirements. For example, manycompanies extensively document their environmental sustainabilityinvestments in their annual report, which is information that prior tothe Companies Act 2006 was not required by law. Therefore the questionarises; how far must this type of information be audited under currentUK law?So far as any of this information can be said to constitute a part of thedirectors’ report, 293 it must be audited according to the legal standard
116 | Environmental and social transparency under the Companies Act 2006Annex 4: Auditing of company environmental and social accounting and reporting | 117explained above. However, some environmental and social informationwill fall below the threshold of what companies are required to reportunder section 417 Companies Act 2006. There is no legal requirement forthe auditor to scrutinize this information.A.4.2AssuranceAssurance is a broader concept than audit. It is an evaluation method thatuses a specified set of standards to assess the quality of an organisation’sreporting, and its underlying systems, processes and culture. 294 Auditing,verification and validation are some of the tools and processes by whichassurance is obtained. It is a voluntary process for companies that wishto go beyond minimum legal requirements. It is heavily associated with‘corporate responsibility’ reporting, and providing scrutiny to this type ofnon-financial information.In the vocabulary of ‘assurance’, greater emphasis is usually placed on theneeds of diverse ‘users’ of the reports. 295 It is also often framed as an aspirationalprocess, the ultimate goal being to assure all users, rather thansolely to certify data with a certain degree of rigour.Thus ‘assurance’ is a broader concept than ‘audit’ (perhaps most accuratelyfinancial auditing might be said to be a specific form of assurance), and ithas less clearly defined edges and limits. Its nebulous character reflectsthe nature of the reporting that it is usually applied to.A.4.2.1Voluntary take-up of external assurance for voluntaryenvironmental and social reportingKPMG’s periodic survey of corporate responsibility reporting in 2005296provided insight into the scale of voluntary take-up of assurance for voluntaryenvironmental and social reporting. It found that globally, anaverage of 33% of N100 297 company corporate responsibility reports containedexternal assurance statements, 298 while 54% of UK N100 companycorporate responsibility reports contained external assurance statements.Interestingly, the statistics show that large UK companies have voluntarilysought assurance statements for their ‘corporate responsibility’ reportingin higher numbers than the global average. 299However, the scope and methodology of the assurance is left entirely tothe individual company’s discretion. Indeed the KPMG 2005 study foundin its detailed analysis of the statements of the G250 (Global Fortune 250companies), 300 that there was considerable variation in the scope of theassurance engagement and the methodologies used, which led to greatlydivergent statements. 301 KPMG found that it ranged from scrutiny solelyof company reporting on management systems at company-selected sites,up to detailed and wide-ranging opinions on aggregated performancedata. 302 However, it found that the majority was restricted to assurance onspecific information or data sets. 303 Only 22% covered the entire corporateresponsibility report. 304While assurance has been undertaken by a fair number of large companiesbased in the UK for their ‘corporate responsibility’ reporting, the standard,scope, and value of the assurance undertakings are highly variableand difficult to understand.A.4.2.2 Types of assurance providerThere are a range of external providers which carry out assurance forenvironmental and social reporting. These providers range from themajor accountancy firms, such as KPMG and PricewaterhouseCoopers,to specialist corporate social responsibility (‘CSR’) consultancies suchas SustainAbility, SD3 and many others worldwide. However, the majoraccountancy firms still dominate the field; in 2005, an average of 58% ofN100 companies used major accountancy firms to carry out assurance ontheir voluntary environmental and social reports. 305New types of assurance provider are also being used to provide greater (ordifferent types of) assurance. A significant example is the use of ‘StakeholderPanels’. Stakeholder panels are groups of experts, ‘stakeholders’, 306or their representatives who are invited by a company to examine someaspects of its policies, actions or performance and deliver reports or statementsto which the company has made a specific commitment to respond. 307While they were originally used mostly in relation to the development ofcompany policies on corporate responsibility, they have found increasingprominence in providing assurance for corporate responsibility reporting.308 When used in relation to reporting, a panel may be used to giveinput to determine the scope of the report, and on the extent to which theexpectations of stakeholders have been met in that regard. Thus they servea different purpose to standard assurance: they usually seek to commenton whether the company is reporting on the right things, not whetherthose things are being reported well. 309
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