Auditors play a vital role in contributing to the efficiency of financial markets.
Their audits provide an independent check on companies’ financial reporting, providing investors a level of comfort that can contribute to more effective engagement and capital allocation. As part of assessing financial statements [1] for material misstatement, auditors must consider the financial impacts of various risks, including climate-related matters.
Examples of such matters include declining demand for oil and gas, the switch to renewable energy for power, the phase-out of internal combustion engines, and regulations to limit emissions.
What’s more, the international audit standard-setter, the International Auditing and Assurance Standards Board (IAASB), has set out clear guidelines related to auditor consideration of climate change. It states that “[i]f climate change impacts the entity, the auditor needs to consider whether the financial statements appropriately reflect this in accordance with the applicable financial reporting framework (i.e., in the context of risks of material misstatement related to amounts and disclosures that may be affected depending on the fact and circumstances of the entity). Auditors also need to understand how climate-related risks relate to their responsibilities under professional standards, and applicable law and regulation.”[2]
This note highlights the concerning differences between reporting on climate-related matters by auditors under different auditing standards (ISAs vs US PCAOB).
