Select Committee on Environmental Audit Minutes of Evidence

Memorandum from The Association of Chartered Certified Accountants (ACCA)

  The Association of Chartered Certified Accountants (ACCA) is pleased to have this opportunity to make a submission to the Environmental Audit Committee of the House of Commons. We look forward to the opportunity to discuss some of the points raised below with the Committee. The introductory section of this submission provides some background to ACCA itself and to its involvement in the environmental debate.


  With roots going back to the late 19th century, ACCA enters the new millennium as probably the largest international accountancy body in the world, with over 200,000 members and students working and studying in over 150 countries world-wide.

  ACCA's core values relate to equality of opportunity—we are an "open access" organisation (ie we do not demand a degree as a condition of entry) and we offer students the option to study for the ACCA qualification on the basis of international accounting standards. As far as we are aware we are the only professional accountancy body in the world to do this.

  Our internal governance structures reflect the international nature of our membership, with an elected International Assembly meeting annually to discuss and influence our corporate strategy.


  ACCA's involvement with environmental issues began in 1989 shortly after the publication of "Blueprint for a Green Planet" by Professor David Pearce. Our first publication was "The Greening of Accountancy: the profession after Pearce" by Professor Rob Gray. Subsequent to that publication we have continued to support academic research in the areas of environmental accounting, environmental reporting, full cost accounting, ecological footprinting, accounting for bio-diversity etc.

  A full list of our publications in the environmental and social area is attached at Annex 1 to this submission.

  In 1991 we established the UK Environmental Reporting Awards scheme which is now entering its 10th year. Since the inception of the scheme both DTI and DETR have been willing and valuable members of the panel of judges—and for the last three years we have been fortunate to have the current Environment Minister, Mr Meacher, as our principal guest and speaker. The award scheme is widely cited as having been influential in the development of best practice in environmental reporting—not just in the UK—but internationally: for this reaction, much credit must go to the panel of judges who as individuals are seen as being both neutral and committed to the topic.

  The award scheme has proved so popular that ACCA now leads a group of 11 EU member states in presenting an annual European Environmental Reporting Award. Details on both these schemes are provided at Annexes 2 and 3 respectively.

  We have now established our own Social and Environmental Issue Committee chaired by John Elkington of SustainAbility, with members drawn from a variety of organisations including the CBI, PIRC, ISEA, Traidcraft Exchange, Friends Provident and BT.

  At the policy level ACCA is currently represented on the following bodies:

    —  The Environmental working party of the European Federation of Accountants (FEE)

    —  The Steering Committee of the Global Reporting Initiative (GRI)

    —  The Steering Committee of the DTI/BSI led "Project Sigma"

    —  The sustainability working group of ACBE (in an advisory capacity)

    —  The environmental committee of UEAPME, the leading pan-European small business organisation.

  We have carried out two major consultancy projects in recent years dealing with environmental accounting and reporting for UNCTAD (in Geneva) and have recently completed a programme of environmental accounting workshops (in Brazil, the Czech Republic, Egypt, India, Malaysia and Thailand) funded by UNCTAD and the World Bank with the co-operation of UNEP. In 1999, at the request of DG XI and DG XV, we completed a study on environmental financial disclosures at the corporate level. Further information on these activities can be found in Annex 4.


  ACCA's involvement with environmental auditing is directly related to the activities described above:

    —  As promoters of the annual environmental reporting award scheme we have been concerned to encourage greater adoption of independent external verification of public environmental reports. We estimate that roughly two thirds of the 70+ entries for the scheme now come with some form of independent assurance statement.

    —  At the same time, we have been anxious to work with the verifiers to develop acceptable standards for external verification. We are currently participating in the environmental audit sub-group of the FEE Environmental working party (a discussion memorandum on adding assurance to environmental reports has just been published).

        We are also working with a sub-group of the International Auditing Practices Committee (IAPC) which expects to issue formal guidance on the verification of environmental reports some time in 2001.

    —  Our work with the Global Reporting Initiative on developing guidelines for sustainability reporting has resulted in our becoming a member of the GRI Verification Working Group. On 10 May last, we hosted the first formal meeting of the working group which brought together representatives from all the main organisations with an interest in external verification—IAPC, FEE, BSI, UNEP, and various environmental consultancies and accounting firms. We expect that this working group will issue a set of general principles for the external verification of sustainability/triple bottom line reports towards the end of this year.

Verification and credibility

  ACCA believes strongly that independent external verification helps establish the credibility of environmental reports that might otherwise be seen to be simply the self-interested report of the management team. However, we do not believe that there is a single model for environmental verification: external "audits" can and should be supplemented by the results of internal audits and reviews by stakeholder panels.

  While the quality of some external reports has rightly been criticised, we believe that we are now observing a fundamental shift in the rigour applied to external verifications. The recent Shell 2000 Report ("How do we stand? People, planet & profits") is notable for its multiple verifications from KPMG and PwC, supplemented by stakeholder input. It is a clear indication of the way in which the verification market is shifting. It is also a very good triple bottom line report.

  Another excellent example of high quality verification can be found in the environmental reports of the Danish company Novo Nordisk which was the winner of the European environmental reporting awards for the first three years of the scheme's existence. Both Shell and Novo Nordisk have gone to great lengths to ensure that their published reports are credible.

Verification and independence

  Independence is a major issue, not just for environmental verifiers but for financial statement auditors also. In the financial domain, pressure from the US Securities and Exchange Commission (SEC) looks set to result in the break up of the Big Five auditing firms—forcing a clear separation between their audit and consulting arms. This insistence upon absolute independence echoes the tough independence regulations that underpin the EC EMAS scheme.

  ACCA believes that the arguments tabled to permit provision of multiple services such as financial audit and consultancy have always been open to criticism. In the environmental and sustainability reporting domain, however, we believe that some caution is needed—the notion of stakeholder engagement involves both the verifier and the verified. The recent verification report on the first Social Report of Camelot Plc by the New Economics Foundation (NEF) demonstrates that verifiers can justifiably become involved in the social accounting process without compromising their integrity or independence.

  Potential regulation of external verification of public sector entities perhaps needs to bear in mind the shift towards greater stakeholder involvement at all levels of the process. A strict definition of auditor independence is perhaps not the only hallowed concept that will need to be modified as the scope of public sector accountability and transparency widens.

Verification and consistency/standards

  Environmental verification is a relatively new activity and there is still considerable debate over who should adjudicate over the question of reporting and auditing standards. It is also problematic that environmental reporting is rapidly widening into social and sustainability reporting. Whilst the environmental reporting framework is relatively well established, the same cannot be said for social and sustainability reporting, although the issue in July 2001 of the revised "Sustainability Reporting Guidelines" by the Global Reporting Initiative (see above) may help to crystallise some of the most vexatious reporting issues.

  As far as consistency in environmental auditing standards is concerned we expect that the International Auditing Practices Committee (IAPC) will issue a formal practice statement in 2001. This statement will however be mandatory only for accounting firms engaged to conduct environmental verifications. In the absence of any definitive statement from the GRI, it is difficult to see which body will set the verification standards for environmental consulting firms carrying out comparable verification activity.

Verification of policy implementation

  With regard to the greening of policy and the verification of policy "embeddedness" it seems to us that the Committee could usefully explore either

    (a)  the ISO 14000 route, whereby environmental management systems are put in place and then certified by an external assessor, or

    (b)  the AccountAbility 1000 route, whereby a set of procedural measures are put in place that reflect the needs of the stakeholders. There is no external certification process for AA 1000.

  It does appear that some sort of uniform framework needs to be put in place across the public sector if any meaningful conclusions as to progress are to be drawn.

Verification and the role of NAO/Audit Commission

  As yet we are unaware of any major public sector verification initiatives. Our recommendation is that NAO and the Audit Commission combine forces to review this area. They should also develop contacts with the GRI Verification Working party to add a much needed public sector strand to its deliberations.


  Our experience over the last 10 years has shown us that the public sector—whilst showing an increasing level of interest in environmental accounting, reporting and auditing issues—has not progressed as rapidly as the private sector. That is not to say that there has been no progress:

    —  we are pleased to see the DETR and the Environment Agency issue public environmental reports and we note that a number of local authorities have achieved EMAS accreditation (and possibly ISO 14000 as well). The Corporation of London has issued an environmental report also.

    —  the Environment Agency itself has proved a strong advocate of improved environmental accounting

    —  we have also been pleased with the recent upsurge of interest in environmental reporting demonstrated by DETR over the last three years. We warmly welcome their programme of developing guidance on CO2 and waste reporting (but see our comments below).

    —  the Higher Education sector has been active via Agenda 21 in developing environmental management systems for the sector and a number of universities have issued environmental reports.

    —  we have seen examples of environmental reporting from the health sector from mainland Europe but not from the UK. This strikes us as an example of a sector where narrowly environmental reporting may be inappropriate—a wider scope of report covering social and economic issues might well be more appropriate for trust.

    —  we also note a number of reports from the public sector auditing bodies that have focused on environmental issues.

  In the late 1980s, a series of ACCA research reports authored by Professor Andrew Likierman (then at London Business School—now Head of the Government Accounting Service) argued strongly for improved departmental financial and performance reporting. We would argue that that particular battle has largely been won and all government departments and NDPBs now issue informative financial reports containing a considerable amount of financial and operating performance data.

  To a certain extent the absence of environmental transparency in the public sector may be a cultural issue—reporting and audit cultures take time to embed—especially outside of the conventional finance function and when the organisational target may not perceive itself as a high impact entity in the first instance!

  The picture is very incomplete however, and it would be helpful to have a clearer picture of what is actually happening in the public sector: a survey of EMAS, ISO 14000 and public reporting take-up seems overdue. Such research might establish precisely why the public sector has lagged behind the private sector in terms of public reporting and transparency. From this distance, however, we feel safe in saying that the crusade for improved environmental accountability in the public sector is really only just beginning.

  In terms of promoting sustainable development we believe that through its programme of developing sustainability indicators for the UK, through the work of the Advisory Committee on Business and the Environment (ACBE) and the UK Round Table on Sustainable Development, and through progressive developments in the use of economic instruments, the UK Government has done more to raise public and (especially importantly) business awareness of the issues surrounding the sustainability debate than many (perhaps most) other countries.


  We are not in a position to address all of the questions posed by the Committee—especially those relating to the ability of Government itself to respond to the sustainability debate. Instead, in making the recommendations below, we have focused on what lessons might be learned from a decade of environmental accounting, reporting and auditing in the private sector.

  The various experiences and involvements described above lead us to suggest to the Committee that

  1.  The Government should—through the vehicle of the Company Law Review—mandate a minimum set of environmental disclosures for the annual report and accounts (see annex 5 for a list of suggested disclosure items).

  The pace of take-up of environmental reporting outside the FTSE 350 has been slow and DETR cannot use the carrot and stick/naming and shaming ploy indefinitely.

  In parallel with the above suggestion we are aware that civil servants within DTI appear to have reservations regarding the environmental disclosure requirements set out in a draft Recommendation prepared by DG XV and currently under review by the Contact Committee on the accounting directives. We do not share these reservations—especially as a Recommendation is a voluntary instrument. We urge the Committee to take steps to ensure that the UK Government supports the disclosures recommended in the Commission's paper.

  2.  As a matter of some urgency, DETR should engage in a review of the mandatory environmental reporting systems now in place in Denmark and the Netherlands with a view to introducing a mandatory reporting requirement in the United Kingdom.

  The Danish experiment in mandatory environmental reporting is now three years old and the UK could usefully study the lessons learned. The Dutch reporting regime has only been recently introduced but could also be studied. We understand that public environmental reporting requirements also exist in Norway and Sweden although at a less detailed level.

  The current UK approach of issuing separate guidance statements could be improved upon by devising an integrated framework approach—perhaps based around the environmental section of the GRI guidelines. And again, the pace of take-up of external environmental reporting in the UK has been too slow—it is now time to give serious consideration to a mandatory requirement.

  3.  The Government itself should put pressure on its own departments to engage in more public environmental reporting and to provide regular disclosures of performance objectives (to be followed by an assessment of progress in achieving those targets by an independent verifier).

  As noted above there is a very low incidence of environmental reporting in the public sector. DETR, the Environment Agency and a number of EMAS registered local authorities probably represent the sum total for the public sector—even after 10 years of private sector experimentation and growth.

  4.  The NAO and the Audit Commission should jointly develop a discussion paper on the use and application of both internal and external environmental audit techniques across all aspects of the public sector.

  Both organisations would be welcome to join the GRI Verification Working Group mentioned above—where a public sector perspective is missing and would be most welcome.

  5.  DETR should encourage research into the application of environmental accounting techniques within the public sector—including greater support for investigations into full-cost accounting and sustainable profit assessment. ACCA would be willing to discuss the possibilities of matched funding in this context provided that a suitable researcher could be identified.

  The work currently being undertaken "in-house" by the Environment Agency could usefully form the basis for a discussion paper showing its application to a wide range of departments, NDPB's and other public sector organisations. ACCA would be happy to discuss with DETR/DTI/the Committee, the possibility of developing a matched fund research programme to explore some of these important issues.

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