Thursday, 31 January 2013

Corporate Responsibility Reporting Assurance (1)

Okay Fawks, in the next few posts I want to talk about the independent assurance services provided by the world’s largest professional services firms, PwC, Deloitte, KPMG and E&Y (“the Big Four”) on their clients’ Corporate Responsibility (“CR”) reports.

The Big Four’s core business is audit. All publicly listed companies are legally obliged to publish financial statements, informing shareholders and the general public of the company’s financial position. They are also legally obliged to have these financial statements verified by an external auditor. The Big Four perform this role for the world’s largest corporations. In the UK market for example the Big Four audit all of the FTSE100.

The Big Four’s reputation for independence stems from their auditing of financial statements. The governance structure which they rely upon to protect their independence is also oriented towards this activity.

However, to assure CR reports, a different type of independence is required. Unlike financial statements, CR reports try to address the needs of all stakeholders in a company. Instead of being limited to financially material information, CR reports aim to cover all the social and environmental issues which are important to these stakeholders.

The assurance of CR reports thus requires a type of independence resembling the liberal idea of state neutrality. The Big Four are required to arbitrate among a plurality of often contradictory demands. With only the independence inherited from the financial audit context, the Big Four regularly fail in this role. As a result, many stakeholders remain incredulous towards CR reports, and corporations themselves are confused about the levels of transparency they are achieving.

The Big Four should shift to “critical independence,” abandoning many claims to disinterestedness, and acknowledging the specific place from which they speak.

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