The rise of responsible, sustainable, and inclusive capitalism

South Africa remains one of the most economically unequal societies in the world, as indicated by the latest available Gini coefficient. The Gini coefficient is a measure of the distribution of income in a country and provides an index to determine the income and wealth inequality within a nation. In an ideal situation where income is perfectly distributed, the Gini coefficient is equal to zero, whereas a Gini coefficient of one represents the highest inequality. The latest officially published Gini coefficient for South Africa that was calculated in 2015 was 0.65 points, which is heavily weighted towards inequality. �

These challenges have not only resulted in a demand for greater transparency of the financial results of entities but also the need for entities to report on broader aspects of the business operations as they relate to environmental, social and governance (ESG) matters, to provide stakeholders with insight into the future sustainability of the entity. Increasingly, investors and analysts are incorporating ESG considerations in their decisions and the demand for assurance on these broader matters as reported on in the entity’s Extended External Reporting (EER) is increasing.

The assurance function plays a crucial role in enhancing investor confidence, thereby promoting the stability of the capital markets. In this continuously evolving business world with its opportunities and perils, auditors need to be responsive to changing needs of the stakeholders in repositioning themselves as necessary to ensure that they retain their role as the conscience of the capital markets and protectors of the public interest.�

One can argue that auditors are best placed to offer assurance on EER given the position of privilege that they have when it comes to having insight into an entity’s activities and information. Auditors are also best poised to be able to connect the financial information to other reporting areas. However, for the profession to take a lead in this area, auditors will need to go beyond the traditional route of providing assurance on the financial statements alone.

The combination of internationally recognised reporting frameworks and assurance standards; and highly skilled assurance providers, complimented by useful guidance on the assurance process are crucial in ensuring the credibility of EER of entities.�

Assurance

In the area of EER, there are two main assurance standards used to perform assurance engagements, including:

• International Standard on Assurance Engagements (ISAE) 3000 (Revised), Assurance Engagements Other Than Audits or Reviews of Historical Financial Information, (ISAE 3000 (Revised)), as issued by the International Auditing and Assurance Standards Board (IAASB); and
• AccountAbility 1000 Assurance Standard (AA1000AS), as issued by the AccountAbility Standards Board.

ISAE 3000 (Revised) is premised on the basis that the members of the engagement team performing the assurance engagement are subject to a recognised Code of Ethics for Professional Accountants related to assurance engagements and that the practitioner is a member of a firm that is subject to International Standard on Quality Control (ISQC) 1, Quality Control for Firms that Perform Audits and Reviews of Financial Statements, and Other Assurance and Related Services Engagements (ISQC 1). In South Africa, auditors are required to comply with the Independent Regulatory Board for Auditors Code of Professional Conduct for Registered Auditors (Revised November 2018) and all firms of professional accountants that provide auditing services are required to comply with ISQC 1. This further supports the notion that, in South Africa, auditors are in a good position to provide assurance on EER related engagements.

On 18 March 2021, the IAASB approved the Non-Authoritative Guidance on applying ISAE 3000 (Revised) to EER Assurance Engagements.

EER encapsulates many different types of reporting that provide information about the financial and non-financial consequences of an entity’s activities and includes information relating to ESG considerations reported on by an entity. EER may also include future-oriented information relating to these matters.

The aim of the IAASB in issuing the guidance is to promote consistent high-quality application of the Standard in EER assurance engagements to:

• Strengthen the influence of such engagements on the quality of EER reporting.
• Enhance trust in the resulting assurance reports.
• Increase the credibility of EER reports so that they can be trusted and relied upon by their intended users.

Such aims, however, may never be achieved in the absence of transparent, consistent, and comparable reporting frameworks and standards.

Reporting

In the context of financial reporting, International Financial Reporting Standards (IFRS) developed by the International Accounting Standards Board (IASB) provides a framework for comparable financial reporting for entities across the world. Within the EER space, there is currently no globally recognised framework that has been issued by an international body. Rather, there are several reporting frameworks that exist which is not conducive to comparability.

A common form of EER is a sustainability report issued by an entity that combines the economic performance of the entity with the social and environmental matters of interest to stakeholders. To create transparency, consistency and comparability in sustainability reporting, the International Financial Reporting Standards Foundation has made a proposal to establish a global sustainability standard-setter alongside the IASB, namely the Sustainability Standards Board (SSB). This standard setter would build on the existing frameworks and standards to develop a global set of sustainability reporting standards.

The transition towards an economically equal nation that supports responsible, sustainable, and inclusive business operations is resulting in changes to the information needs of the capital markets. Responding to these needs requires a global response, where all of those within the financial reporting eco-system play their respective roles in achieving harmony across the system. Those charged with governance have the responsibility to produce transparent, consistent, and comparable EER of high quality. Given that auditors are in a position to connect EER to the financial statements that they provide assurance on, they may be best placed to enhance the credibility of these reports. Standard-setting bodies and regulators should work together to promote internationally recognised frameworks that result in transparent, consistent, and comparable reporting.

The South African Institute of Chartered Accountants (SAICA), South Africa’s pre-eminent accountancy body, is widely recognised as one of the world’s leading accounting institutes. The Institute provides a wide range of support services to more than 50 000 members and associates who are chartered accountants (CAs[SA]), as well as associate general accountants (AGAs[SA]) and accounting technicians (ATs[SA]), who hold positions as CEOs, MDs, board directors, business owners, chief financial officers, auditors and leaders in every sphere of commerce and industry, and who play a significant role in the nation’s highly dynamic business sector and economic development.

Chartered Accountants are highly valued for their versatile skill set and creative lateral thinking, that's why all of the top 100 Global Brands employ Chartered Accountants.

Ms Karin Jacobsen
Project Manager: Marketing and Communications
SAICA Nation Building Division
Tel: ‪011 621 6913
Email: ***@saica.co.za

Mr Kulani Chauke
Corporate Communications Co-Ordinator, Marketing & Communications (SAICA)
Tel: 011 479 0698
Email: ***@saica.co.za