Environmental auditing: a closer look (Part II)

Last Monday, the United Nations Framework Convention on Climate Change began its meeting in Bonn, Germany, mainly to review progress made since the 2016 Paris Agreement on climate change to which 197 countries are signatories. Some 25,000 officials from various countries, including scientists and lobbyists, are in attendance. As part of its efforts to have a ‘green’ conference and to assist in offsetting emissions from air travel to the conference, Germany has made available hundreds of bicycles and electric buses to shuttle participants to and from the conference, among other measures. Since 1990, CO2 emissions from air travel have increased by 83%.

The U.S. Global Change Research Program has released Volume I of a special report on climate change. The report confirmed several of the findings contained in other studies, some of which have been highlighted in last week’s article. A key finding is that global climate is projected to continue to change over this century and beyond. The magnitude of climate change will depend primarily on the amount of greenhouse (heat-trapping) gases emitted globally and on the remaining uncertainty in the sensitivity of Earth’s climate to those emissions. With significant reductions in the emissions of greenhouse gases, the global annually averaged temperature rise could be limited to 3.6°F (2°C) or less. Without major reductions in these emissions, the increase in annual average global temperatures relative to the pre-industrial period could reach 9°F (5°C) or more by the end of the century.

The United States has withdrawn from membership of the Extractive Industries Transparency Initiative (EITI) on the grounds that domestic implementation of the EITI Standard will conflict with the U.S. legal framework. Earlier in the year, President Trump had signed a congressional resolution repealing the Securities and Exchange Commission rule requiring oil, gas and mining companies to publish the payments they make to governments. According to Bloomberg News, the decision to quit the EITI followed a long lobbying battle waged by the American Petroleum Institute, Exxon Mobil Corp. and Chevron Corp. against the disclosure of such payments. Bloomberg further stated that the decision “may undercut the effort that aims to give citizens and watchdogs in poor but mineral-rich nations details on how much their government leaders get in taxes, royalties and lease payments. With that information, they can ensure the money is spent on roads and schools, not squirreled away in foreign bank accounts”.

All the major oil companies are members of not only the Multi-Stakeholder Group of the EITI but also the EITI board. They also contribute financially to meet its cost of operations. It therefore appears inconsistent, indeed a conflict of interest, for these companies to be part of the EITI while at the same time lobbying for the United States to pull out of the membership of this transparency watchdog group.

The EITI’s main objective is to strengthen government and company systems, inform public debate and promote understanding. In each of the implementing countries, the EITI is supported by a coalition of government, companies, and civil society. It shares the belief that natural resource wealth should benefit citizens and that this requires high standards of transparency and accountability. The EITI has promulgated standards which participating countries are required to observe. A key requirement is for countries to publish timely and accurate information on key aspects of their natural resource management, including how licences are allocated, how much tax and social contributions companies are paying and where this money ends up in the government. Through the EITI, companies, governments, and citizens increasingly know who is operating in the sector and under what terms, how much revenue is being generated, where it ends up and who it benefits. From the perspective of the State, the EITI helps to improve the investment climate by providing a clear signal to investors and international financial institutions that there is commitment to greater transparency. It also assists in improving governance and promoting greater economic and political stability.

Over in India, the city of New Delhi ordered the closure of schools for the greater part of last week because of an air pollution emergency caused by illegal post-harvest burning in farms around the city, fumes emitted from vehicles using the city’s roads, limited public transportation and dust from construction works. The authorities are planning to spray water over the city as a means of containing the emergency. Stabroek News cited a 2016 World Bank report which estimated that nearly 1.4 million people died in India due to air pollution in 2013, causing an economic loss worth 7.7 percent of the nation’s GDP.

Now for today’s article which is a continuation of last week’s article based on a presentation I had made at Moray House.

 

How does environmental auditing differ from other forms of auditing?

There are two main forms of auditing, namely internal auditing and external auditing. Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organisation’s operations. It helps an organisation accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control and governance processes. The focus is on internal controls and other managerial issues, and on the reporting of the results of the assessment to the board of directors of the organisation.

On the other hand, external audit is concerned with the examination of the financial statements of an organisation and conducting tests as are considered necessary in order to express an opinion on their fair presentation and compliance with applicable laws, regulations and policy directives. Its main purpose is to enhance the credibility in the financial statements and degree of confidence of intended users of these statements for decision-making and other purposes.

An environmental audit 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, and in compliance with applicable laws, standards, regulations, rules and policy guidelines. Where deficiencies or gaps are identified, they are reported along with an assessment of their impact, and recommendations made for corrective action. Environmental auditing is therefore not dissimilar to the other two forms of auditing referred to above, except that the focus is on the environment. It can be argued that environmental auditing is an integral part of both internal and external auditing.

 

Who is responsible for conducting environmental auditing?

An environmental audit of an organisation is normally undertaken by its appointed auditors or by an independent expert contracted to undertake the review. However, according to the International Organisation of Supreme Audit Institutions (INTOSAI), auditors are well placed to carry out such 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 can be undertaken by both internal and external auditors. In the case of the former, it will help to improve the operations of an organisation and more especially the effectiveness of risk management, control and governance processes. In the United States, many companies prefer to have dedicated environmental audit units staffed by specialists in the field, leaving the internal auditors to focus on their traditional role of reviewing internal controls and other managerial issues.  Whether undertaken by internal auditors or by specialist units, the review is internal to the organisation and needs to be supplemented by an independent external review to provide added assurance to external stakeholders that the organisation’s operations are not conducted in a manner that will harm the environment.

The conduct of an environmental audit presents some degree of difficulty for both internal and external auditors. Internal auditors are guided by auditing standards promulgated by the Institute of Internal Auditors. However, there are no standards currently in existence on environmental auditing. The same applies to external auditors who are guided by the International Standards on Auditing. That apart, there is the question of risk of liability, especially for external auditors, should the results of an environmental audit be challenged in a court of law because of some loss that has been incurred.

In last week’s article, we stated that the cities of San Francisco and Oakland in California have filed separate lawsuits against five oil companies – ExxonMobil, Chevron, ConocoPhillips, BP and Royal Dutch Shell –  seeking compensation to protect them against rising sea levels which they blame on climate change. The two cities are alleging that the companies have “knowingly and recklessly created an ongoing public nuisance that is causing harm now and in the future risks catastrophic harm to human life and property.” They are seeking compensation to finance infrastructure to deal with rising sea levels. Several counties in California have filed similar lawsuits while prosecutors for New York and Massachusetts are investigating ExxonMobil over the possibility that it misled investors in public statements on the risks of climate change. In a recent interview, Al Gore asserted that ExxonMobil has produced the “finest” climate change denial and is operating in a manner deeply unethical in terms of the promises made every year.

In situations like these, it is always tempting to ask the question: Where were the auditors?

 

Conclusion

Despite its 47 years of history, the approach to environmental auditing remains an evolving one, and much more work needs to be done to have it as an institutional arrangement. The starting point is the promulgation of auditing standards for use by both internal and external auditors. National Audit Offices are now better placed to conduct environmental audits because there is now an INTOSAI standard on the subject. A review of the standard, however, indicates the need to develop specific techniques for the conduct of this form of auditing.

Finally, it would appear necessary for legislation to be in place to make it mandatory for both public and private sector organisations to develop and publish annually their environmental plans; and to produce annual environmental reports duly certified by their appointed auditors.

 

 

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