The market for sustainability assurance in the Europe Union is about to expand dramatically. The Corporate Sustainability Reporting Directive (CSRD) introduces new disclosure obligations and mandates companies to seek ‘limited’ assurance. Significantly, it also allows EU member states to permit ‘independent’ assurance providers to provide the checks.
Panos Prodromides, chair of the Committee of European Auditing Oversight Bodies (CEAOB), warns that, under certain circumstances, these changes could result in independents rather than qualified auditors becoming the lead providers of sustainability assurance.
‘Independent assurance providers must match auditors’ standards’
Independents
Four EU member states (France, Lithuania, Belgium and Spain) have so far decided to green-light independent providers (ie those not qualified as statutory auditors). Prodromides says: ‘If independent service providers are assessed as being of higher quality than auditors, then under certain circumstances they could dominate.’
According to 2021 research from the International Federation of Accountants (IFAC), independents currently have only a small share of the sustainability assurance market in Europe, but dominate in South Korea, Hong Kong and Japan.
‘Ensuring a level playing field is essential’
Prodromides, who is also director general of the Cyprus Public Audit Oversight Board, made his comments to AB in one of his first interviews after taking over chairmanship this year of the body that advises the European Union on oversight of audit quality. While CSRD permits the use of independents competing alongside established audit firms, Prodromides believes they should face regulation that is just as ‘robust’ as that imposed on statutory auditors.
He argues that the rules should touch on training and examination, continuing education, quality assurance systems, professional ethics, independence, objectivity and confidentiality. ‘Ensuring a level playing field between the independent assurance service providers and traditional practitioners is essential for maintaining trust, consistency and high standards in sustainability assurance across the EU,’ he says.
Education, training and ethics
ACCA is in agreement. Fiona Murray, head of EU public affairs in ACCA’s Brussels office, says: ‘Allowing independent assurance providers into the market can boost competition in member states that choose this option, but they must match auditors’ education, training and ethical standards to ensure high-quality assurance.’
The EU does not yet have its own sustainability assurance standard, although work is underway on one. CEAOB has been invited to submit technical advice on the drafting of EU legislation on what would be a limited standard. The likely foundation for a new standard could be the International Auditing and Assurance Standards Board’s ISSA 5000, but it may be reshaped along the way. Prodromides says there could be ‘EU-specific’ add-ons or carve-outs, although he adds that it remains ‘early days’ to detail what those might be.
Pre-standard guidance
Until the standard appears, observers worry about the emergence of a ‘gap period’, when the assurance standards are undefined. EU member states have been permitted to apply their own standards, and those that intend to should find guidelines published by CEAOB at the end of September 2024 a help.
‘CEAOB guidelines play a crucial role reinforcing stakeholder confidence’
Prodromides is enthusiastic about the guidelines. ‘They provide a unified framework for practitioners, establishing clear and consistent principles for conducting limited assurance engagements for sustainability reporting, thereby fostering coherence during this transition phase,’ he says.
He adds that the guidelines ‘encourage alignment’ across the EU, even though jurisdictions may opt for different ‘interim standards’. The guidance will ensure assurance takes place ‘rigorously and transparently’, he says, and will act as a bridge to the incoming EU standard, helping practitioners achieve a smooth transition.
They should also help the users of sustainability reports. ‘The guidelines play a crucial role in reinforcing stakeholder confidence as non-financial information becomes increasingly integral to decision-making,’ he says.
Watered down
The Corporate Sustainability Reporting Directive has not had an easy path to implementation. It was hotly debated, and some EU states have been slow to transpose it into national law. It will also soon become part of an ‘omnibus’ consolidation and simplification package, expected to be presented by the European Commission in February 2025, along with the Corporate Sustainability Due Diligence Directive and the EU Taxonomy Regulation. There is pressure from within some EU member states for the directive to be watered down.
Prodromides says CEAOB finds the transposition delays ‘concerning’, especially given ‘the challenges that practitioners and preparers face in terms of uncertainty and compliance’.
ACCA maintains a watching brief on pressures affecting the CSRD but remains confident it will survive intact. Murray says: ‘Despite the pushback on EU Green Deal regulations, such as the CSRD, the European Commission is signalling no deregulation while planning various support measures, including an omnibus package, to ease SMEs’ administrative and reporting burdens.’
Should assurance be ‘compliance’ or ‘fair representation’?
Retrospective effect
CEAOB is in touch with assurance providers, government agencies and local audit bodies to gather their views on the transposition issues. Prodromides will also take part in discussions with other oversight bodies with a view to finding solutions.
The big issue for many states is whether CSRD will be retrospective – will it apply to reporting periods prior to the official implementation date? That would mean collecting, analysing and preparing data for the entirety of 2024 when companies may not have had time to prepare. ‘That’s something each member state will need to address in cases where there is a delay to transposition,’ Prodromides says.
A second issue is a debate among many states over which assurance conclusion they will mandate: ‘compliance’ or ‘fair representation’, an issue Prodromides describes as a ‘technical and legal’ challenge. ‘We are continuously discussing these issues.’
Prodromides is just a few months into the job, but he clearly has his hands full in promoting CEAOB’s agenda. ‘I am determined to build on the CEAOB foundation to promote the highest standards of audit regulation globally,’ he declares.
Shaping Europe
ACCA Brussels leads efforts to advance the accountancy profession and sustainability across Europe, working closely with EU policymakers. A key focus is the implementation of the Corporate Sustainability Reporting Directive, which will promote robust, transparent sustainability reporting and assurance. Supported by a Europe-wide network of offices in the Czech Republic, Ireland, Poland, Romania and Ukraine, as well as Brussels, ACCA engages members and stakeholders to shape policies that drive sustainable growth and societal impact.
