Audit is not an end in itself, but an indispensable part of a regulatory system whose aim is to reveal deviations from accepted standards and violations of the principles of legality, efficiency, effectiveness and economy of financial management early enough to make it possible to take corrective action in individual cases, to make those accountable accept responsibility, to obtain compensation, or to take steps to prevent or at least render more difficult, such breaches.
1977 Lima Declaration on Guidelines on Auditing Precepts
A few days ago, a massive hole, known as a polynya, almost the size of South Carolina, appeared in the middle of the frozen Wendell sea of Antarctica. It is located far from the coast where such occurrences frequently take place, which makes this occurrence unusual. Scientists are uncertain whether it is related to climate change, some having speculated that the polynya’s formation is part of a cyclical process.
Earlier this month, an iceberg about four and a half times the size of Manhattan broke off Antarctica. It occurred in the interior section of the glacier, leading scientists to theorise that it could be the result of warm ocean water attacking the ice from below causing instability. Were the glacier to melt in its entirety, sea levels could rise by over one and a half feet. Earlier this year, a similar occurrence took place when an iceberg about the size of Delaware broke off Antarctica. Currently, carbon dioxide levels in the atmosphere are at their record high due mainly to drought conditions in South America, Africa and Indonesia which result in less carbon dioxide being absorbed by plants during photosynthesis. And in Northern California, wild fires continue to rage mainly due to heat which causes water to evaporate.
Now for today’s article. The Auditor General announced his office’s intention to carry out environmental audits commencing next year and indicated that some of his staff are trained in the techniques of this form of auditing. Today, we explore the concept of environmental auditing.
Environmental auditing in perspective
Environmental auditing is not a new concept nor is it separate and distinct from other forms of audit. Rather, it is an integral part of a normal audit, be it financial, performance or compliance. It is an assessment of the extent to which an organization is carrying out its operations with due regard to the need to protect and preserve the environment from adverse consequences.
External auditors tend to adopt a restrictive approach by examining a set of financial statements and carrying out whatever tests as they consider necessary in order to express an opinion on their fair presentation and compliance with applicable laws. They prefer to remain within their traditional comfort zone and avoid reviewing operational matters, such as how organizations – both private and public – use the resources at its disposal to achieve stated objectives in an economical, efficient, effective and ethical manner, and with due regard to issues relating to the protection and preservation of the environment. We could also include issues relating to adherence to the principles of equity, fairness, transparency and competitiveness. This comprehensive approach to auditing, although widely considered as desirable, is yet to be practiced in a holistic way.
While one may argue that this operational aspect of auditing is more suited to the work of internal auditors, many internal units, at least in the Guyana context and more especially internal auditing in government, are not organized in a manner to do so. Nor do they have the level of independence and appropriate reporting relationships to undertake such reviews.
Many private sector organisations issue statements and reports highlighting their corporate social responsibilities (CSRs) which are about the impact of businesses on the rest of society and the environment. However, such statements and reports are to a large extent lacking in respect of public sector organisations. CSR is a broad concept with varied definitions, and covering issues relating to human rights, corporate governance, health and safety, environmental effects, working conditions and contribution to economic development. The Financial Times describes CSR as a business approach that contributes to sustainable development by delivering economic, social and environmental benefits to all stakeholders.
This column has highlighted in several articles the importance of the 2015 Paris Agreement and recent events that are directly linked to climate change and global warming, most notable being the catastrophic effects of hurricanes Harvey and Irma that we have witnessed in recent weeks. We have also highlighted efforts by countries such as China, India, France, Germany and the United Kingdom, among others, to restrict or phase out the use of fossil fuels to generate energy and to replace it with clean renewable sources. With the Paris Agreement in place, and in the light of recent events referred to above and actions being taken by various countries, environmental auditing assumes a much more significant role.
Auditors are well placed to carry out environmental audits, given their relative independence and objectivity, their experience and expertise in financial and compliance auditing, and their role in gathering, analysing, reporting and communicating information on which decisions are based and performance is evaluated. They can therefore make a significant contribution in encouraging greater transparency and informed decisions about the application of resources and the impact of activities on environmental outcomes.
Environmental auditing and national audit offices
National audit offices are members of the International Organisation of Supreme Audit Institutions (INTOSAI) which promulgates standards to be used by these offices. One such standard – INTOSAI Standard No. 5120 – relates to environmental auditing. The Standard defines an environmental audit as performance, compliance or financial audit addressing the approach taken by responsible bodies (e.g. government) to a specific environmental problem, or environmental policies, or programmes, as well as their performance in managing environmental issues. A Supreme Audit Institution (SAI) does not need to have a specific mandate to conduct environmental audits and may perform such audits as part of the financial or compliance audit. Where the SAI does have the mandate to undertake performance auditing, environmental auditing may be included in this framework.
Environmental auditing as part of the financial audit
The objective of a financial audit is to enable the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an identified financial reporting framework. Material respects can be directly linked to environmental costs, obligations, impacts, and outcomes. In such a situation the auditor needs to consider environmental regulations, and in particular environmental issues and matters if they have material effect on the financial statements.
During an audit of financial statements, the following environmental issues may arise:
(a) initiatives to prevent, abate or remedy damage to the environment;
(b) the conservation of renewable and non-renewable resources;
(c) the consequences of violating environmental laws and regulations; and
(d) the consequences of vicarious liability imposed by the State.
Environmental auditing as part of compliance auditing
Compliance auditing assesses the extent to which an organisation is adhering to applicable laws, regulations and policy directives. The Comptroller and Auditor General of India considers it as an assessment as to whether the provisions of the applicable laws, rules and regulations made there under and various orders and instructions issued by the competent authority are being complied with. Com-pliance auditing promotes accountability, good governance and transparency as it is concerned with reporting deviations, identifying weaknesses and assessing propriety.
Compliance auditing with regard to environmental issues may relate to providing assurance that governmental activities are conducted in accordance with relevant environmental laws, standards and policies, both at national and international (where relevant) levels.
Environmental auditing as part of performance auditing
Performance auditing assesses the extent to which an organization utilises the resources at its disposal to achieve stated objectives in an economical, efficient and effective manner and whether the desired outputs, outcomes and impacts have been achieved. In Guyana, the Audit Act 2004 describes performance or value-for-money auditing as an assessment of “the extent to which a public entity is applying its resources and carrying out its activities economically, efficiently, and effectively and with due regard to ensuring effective internal management control”.
Performance auditing of environmental activities may include ensuring that:
(a) indicators of environmental-related performance are adequate to fairly reflect the performance of the audited entity; and
(b) environmental programmes are conducted in an economical, efficient, and effective manner.
How does environmental auditing differ from the work of the Environmental Protection Agency?
The Environmental Protection Agency (EPA) Act 1996 provides for the management, conservation, protection and improvement of the environment, the prevention or control of pollution, the assessment of the impact of economic development, and the sustainable use of natural resources. The Act establishes the EPA whose main responsibility is to provide effective management of the natural environment for the protection and sustainable use of the natural environment. Key activities relate to conducting environmental impact assessments, and the prevention and control of pollution. Other activities include:
(a) processing of research applications and issuing permits to conduct research and to export biological specimens, including coordinating, executing and implementing projects and programmes relating to the implementation of the objectives of the Convention on Biological Diversity;
(b) screening and processing of applications for Environmental Authorization for new projects as well as for renewals, including projects that require Environmental Management Permits (EMPs) and Environmental Impact Assessments (EIAs); and
(c) promoting compliance by providing practical, constructive and authoritative advice on how to comply with the law and, where non-compliance is found, how to remedy it.
The EPA is therefore a regulatory body and not an auditing agency of the environment. The EPA operates on an ex ante basis by reviewing applications and granting approval for various permits relating to the protection of the environment as well as the monitoring of compliance. An environmental audit, on the other hand, is an independent and objective ex post evaluation of an organisation’s efforts to operate in a manner that does not in any way cause harm to the environment.