The consideration of environmental matters in financial reports: some preliminary evidence on current audit practices

This paper reports preliminary findings on what are current practices in the audit consideration of environmental matters in financial reports. It also reports on auditors’ perceptions of their responsibility for verifying environmental matters and whether AGS 1010 has impacted on current audit practice. The preliminary findings indicate that auditors do not consider environmental matters as a key audit risk area despite their implications for the community and public interest. Environmental matters (provided they have a financial impact on the company’s financial report) are considered mainly for those companies operating in a sector or industry that is exposed to significant environmental risk. Auditors depend on management in the client company to disclose information of any audit significance. They do not pro-actively search out environmental risk exposures for all their audit clients. The promulgation of AGS-1010 in 2001 apparently has little impact on how auditors take environmental matters into consideration when auditing financial reports

Audit materiality and environmental matters

Purpose – This paper examines the issue of audit materiality in regard to the disclosure of environmental matters in financial reports. Its purpose is to reveal auditors’ views and practices when judging the materiality of environmental matters. It also highlights implications for how environmental matters are audited and for the reliability of financial reporting by firms whose activities may generate adverse environmental effects. Design/methodology/approach – In-depth, semi-structured interviews were conducted with twenty-seven senior public and private sector financial auditors in New Zealand. Findings – The findings reveal that auditors’ interpretations of materiality criteria tend to preclude them from considering environmental matters in their audits. This contributes to a ‘type II audit expectation gap’ – i.e. a gap between the expectations of standards setters and the practices of auditors (Specht and Waldron, 1992) – which impedes the achievement of appropriate, independent assurance on environmental matters in financial reports. Originality/value – This paper is the first to draw on interview evidence from auditors to examine how they deal with the issue of materiality in regard to this important, emerging aspect of audit practice. Research limitations/implications – This study was conducted in a New Zealand context only. However, since auditors’ duties are similar the world over, the findings point to general avenues for promoting improved practice in regard to the audit of environmental matters

The financial crisis in New Zealand: an inconvenient truth

The financial crisis has been the topic of recent financial debate and the motivation behind initiatives to tighten the regulations governing the financial sector. In New Zealand the financial crisis reached its height in 2006. This paper traces the development of the financial sector in New Zealand from the early 1970’s through to the financial collapse of 2006-2009 and the aftermath of regulatory reviews, finger-pointing and corrective measures that dominated the last three years to the present day. The paper argues that the financial crisis is the product of an inconvenient truth that has been legitimised over the past century, encouraged poor corporate governance practices, and that the knee-jerk reaction to correcting the regulatory framework is too-little too-late

Environmental matters in financial reporting: a question of audit materiality??

This paper examines the issue of audit materiality in regard to the disclosure of environmental matters in financial reports. Its purpose is to reveal auditors’ views and practices when judging the materiality of environmental matters. It also highlights implications for how environmental matters are audited and for the reliability of financial reporting by firms whose activities may generate adverse environmental effects. In-depth, semi-structured interviews were conducted with twenty-seven senior public and private sector financial auditors in New Zealand. The findings reveal that auditors’ interpretations of materiality criteria tend to preclude them from considering environmental matters in their audits. This contributes to a ‘type II audit expectation gap’ – i.e. a gap between the expectations of standards setters and the practices of auditors (Specht and Waldron, 1992) – which impedes the achievement of appropriate, independent assurance on environmental matters in financial reports. This paper is the first to draw on interview evidence from auditors to examine how they deal with the issue of materiality in regard to this important, emerging aspect of audit practice. This study was conducted in a New Zealand context only. However, since auditors’ duties are similar the world over, the findings point to general avenues for promoting improved practice in regard to the audit of environmental matters

The consideration of environmental matters in financial reports: some preliminary evidence on current audit practices

This paper reports preliminary findings on what are current practices in the audit consideration of environmental matters in financial reports. It also reports on auditors’ perceptions of their responsibility for verifying environmental matters and whether AGS 1010 has impacted on current audit practice. The preliminary findings indicate that auditors do not consider environmental matters as a key audit risk area despite their implications for the community and public interest. Environmental matters (provided they have a financial impact on the company’s financial report) are considered mainly for those companies operating in a sector or industry that is exposed to significant environmental risk. Auditors depend on management in the client company to disclose information of any audit significance. They do not pro-actively search out environmental risk exposures for all their audit clients. The promulgation of AGS-1010 in 2001 apparently has little impact on how auditors take environmental matters into consideration when auditing financial reports

Auditors' perceptions of environmental issues and its implications for the consideration of environmental matters

This study investigates New Zealand auditors’ perceptions on environmental issue and considers their possible implications for the consideration of environmental matters in financial audits. Information used in this study was gathered from a postal survey questionnaire. Survey responses indicated that auditors seem unable to translate their personal views on environmental issues to the auditing sphere of activity and they seem generally ill-informed about environmental matters. There appears to be a conflict between auditors’ awareness of environmental issues and their ability to translate this into their audit practice in considering environmental matter sin financial reports

Audit materiality and environmental matters in financial reports: some interview evidence

This paper reports interview evidence on audit materiality and environmental matters in financial reports. The findings were based on interviews with twenty-seven senior financial audit practitioners in New Zealand. Significant findings from the research interviews are (1) the auditors’ interpretation and perception of the materiality assessment would fundamentally preclude them from even considering environmental matters in their audits, (2) a legislative mandate may be needed to bring about the same awareness in and focus on environmental matters in financial auditors, as is presently evident in public sector auditors; (3) there is evidence of an ‘expectations gap type II’ – i.e. a gap between the expectations of standards setters and practicing auditors (Specht & Waldon, 1992). However further research is required to investigate the cause(s) for the ‘expectations gap type II’ and what might be done to bridge this gap

Audit materiality and environmental matters in financial reports: some interview evidence

This paper reports interview evidence on audit materiality and environmental matters in financial reports. The findings were based on interviews with twenty-seven senior financial audit practitioners in New Zealand. Significant findings from the research interviews are (1) the auditors’ interpretation and perception of the materiality assessment would fundamentally preclude them from even considering environmental matters in their audits, (2) a legislative mandate may be needed to bring about the same awareness in and focus on environmental matters in financial auditors, as is presently evident in public sector auditors; (3) there is evidence of an ‘expectations gap II’ – i.e. a gap between the expectations of standards setters and practicing auditors (Specht & Waldon, 1992). However further research is required to investigate the cause(s) for the ‘expectations gap II’ and what might be done to bridge this gap

Do significant environmental matters relevant for financial reporting present concerns for auditors? Evidence from interviewing New Zealand auditors

The question for this study is whether significant environmental matters relevant for financial reporting raise concerns for auditors. 18 New Zealand audit partners and managers from the North and South Islands were interviewed for their views on the research question. This study adopted an interpretive methodology. Legitimacy theory informed the interpretation of the research findings. The research findings revealed that auditors could risk omitting environmental matters and environmental risks exposure in audit planning if disclosures are not made in the financial report or communicated to the auditor; also for new clients or clients not operating in obviously environmentally sensitive industries or sector. The auditors are challenged by the prolific environmental laws and regulations. AGS-1010 recommended that auditors apply the accounting standard for ‘Provisions, Contingent Liabilities and Contingent Assets’, however, it is subjective and creates some confusion in its application. Generally, auditors do seek technical advice but there are few suitable qualified environmental experts in New Zealand to assist them. Therefore, the research findings provided evidence which indicates that significant environmental matters relevant for financial reporting do present real concerns for auditors. The general implication is that the audit of significant environmental matters seems to extend the boundary of financial audits, reflecting perhaps unreasonable expectations of auditors’ knowledge of environmental issues and auditing environmental matters