Redefining Audit Quality

During the past two weeks, our contributing columnists Steven Mintz and Sri Ramamoorti shared their perspectives on the topic of Audit Quality. This week, Michael Kraten completes the trilogy of blog posts by asking whether the profusion of unaudited sustainability data should compel our profession to modify our definition of audit quality.

As always, when you read the comments of our columnists, please keep in mind that they only speak for themselves. They are not expressing the positions of the AAA or of any other party.

We are presenting this trio of articles to illustrate the rich editorial value of the conversations that you will join when you attend our Midyear Meeting. Please keep in mind that the manuscript submission deadline of our meeting is Monday, January 14, 2019.

Are you aware of the massive volume of disclosure data that is defined by the Global Reporting Initiative? A firm that fully complies with the GRI’s directives must report on 3 sets of universal standards, 6 sets of economic standards, 8 sets of environmental standards, and 19 sets of social standards.

How about the Sustainability Accounting Standards Board? Its standards encompass a set of 77 industries.

And the United Nations? It has defined 17 Strategic Development Goals.

These data sets have become so massive that organizations now require guidance to determine how to organize it all! And thus another entity has developed a framework to meet that need; the International Integrated Reporting Council defines 5 governance, 4 business model, and 6 capital factors that can be employed to structure the reported data.

Because these data sets are gigantic in size, corporate sustainability reports are expanding into massive tomes as well. Let’s assume, for instance, that we are interested in researching Coca Cola’s sustainable agriculture policies and metrics. We would begin by reviewing all 21 pages of its Sustainability Report for 2017. We would then read its 13th page on Agriculture more intently.

What next? A link on that Agriculture page would take us to Coca Cola’s full 2017 Agriculture Update. On that web page, we would find additional links to information about the organization’s Sustainable Agriculture Guiding Principles (SAGPs), Seven Steps to Supplier Verification, 5bv20 Supply Chain program, fifteen research studies, a set of climate protection goals, Field to Market program, Farm Sustainability Assessments, Sustainable Agriculture Initiative Platform …

… and the list continues.

These disclosures are clearly voluminous in length and dense with content. But how much of it was subjected to independent assurance activities?

Hmm. It’s a bit difficult to find the answer to that question. The very last page of the 2017 Sustainability Report sports a circle entitled “Assuring The Adequacy Of Our Disclosures.” A click on that icon carries us to a web page with a brief section entitled “Assurance 2017.”

That section contains a link to Ernst & Young LLP’s Review Report. How much of Coca Cola’s sustainability data was reviewed by the public accounting firm?

Four metrics.

Not much, eh? The Review Report only addressed Coca Cola’s Greenhouse Gas Emissions value of 5.54 millions of metric tonnes, Water Replenishment percentage of “More Than 100%,” Water Use Ratio of 1.92, and Lost Time Incident Rate of 0.57.

Furthermore, although the scope of E&Y’s independent review work was limited to these four measurements, it still failed to address key concerns about the validity of Coca Cola’s water replenishment and use disclosures.

We usually define audit quality in terms of assessing the validity of the information that is presented in the Annual Report. And we often expand that definition to the supplemental disclosures in the 10-K and 10-Q reports.

But should we also consider the massive amounts of data disclosures that are presented to the public outside of these traditional reports? Would it be helpful to redefine our concept of “Audit Quality” to encompass the extent to which the auditors are, in essence, ignoring other critical public disclosures?

Michael Kraten, PhD, CPA is a Professor of Accounting at Houston Baptist University. He is also the President of AQPQ Management Consulting.