Recently the Federal Department of Climate Change (DCC) issued a consultation paper on one of the last key remaining pieces of the National Greenhouse and Energy Reporting scheme (NGERS).
This consultation paper, which is the External Audit Consultation Paper (EACP) and runs to just 26 pages, is important as it will largely influence:
- the data recording and record keeping requirements for businesses that are required to participate in either the NGERS or the forthcoming Australian Emissions Trading Scheme (AETS) as part of the Carbon Pollution Reduction Scheme (CPRS)
- the process for the engagement of auditors by businesses where required by either the NGER scheme or the AETS
- compliance costs relating to carrying out of audits.
Submissions on the EACP are due to the DCC by Friday 14 November 2008. An outline of the key proposals and stakeholder questions raised in the EACP that may warrant consideration of a submission to the DCC follows.
Key proposals and stakeholder questions under the EACP
Key proposals for audits under the EACP include:
- that external audits cover 'compliance audits' or 'reviews' established by Sections 73 and 74 of the National Greenhouse and Energy Reporting Act 2007 (NGER Act), as well as proposals for audits of annual emission reports of liable parties emitting 125 kilotonnes of CO2-e or more under the CPRS
- the adoption of auditing standards developed by bodies such as the Australian Auditing and Assurance Standards Board (AUASB) and the International Organisation for Standardisation (ISO)
- risk-based audit approach for external audits with the scope of audits as planned and determined by the Greenhouse and Energy Data Officer, and
- the adoption of the concept of 'assurance' for external audits that recognises the value of independent third party verification over particular NGER and CPRS/AETS matters.
The EACP makes a number of proposals relating to external auditor expertise and qualifications. These proposals not only seek to establish an appropriate body of auditors with appropriate character (the fit and purpose test), experience and qualifications, but also establish how auditors can be identified by businesses requiring an external audit under either the NGERS or the CPRS/AETS. The EACP lists four options for stakeholder input for the identification of external auditors being: self-identification, where auditors themselves assess that they meet the requirements to undertake external audits; registration by the DCC of auditors following self-assessment; registration by the DCC subject to external assessment of interested auditors; and finally accreditation process before eligibility for registration by the DCC arises.
Other key stakeholder inputs sought by the DCC include:
- Question 11 – The form and extent of potential limitations that may be appropriate to apply to external auditors with regards to independence and the handling of potential conflicts of interest in the external audit process
- Question 12 - Appropriateness of differentiated requirements for lead external auditors versus other team members in relation to independence and conflicts of interest
- Question16 – Use and referencing of existing standards in the external audit guidelines.
Questions 11 and 12 are significant in that businesses need to be aware that as external audit reports under the NGERS and the CPRS/AETS are in effect prepared for the purpose of the Federal Government, external auditors need to show some independence from the business being audited. (Under the NSW Greenhouse Gas Abatement Scheme, the regulator has the power, and has exercised that power, to refuse an appointment of an external auditor of a business to also carry out an audit under the NSW scheme.)
Question 16 is also significant in that the DECC is flagging that the following standards would be acceptable for data recording and record keeping requirements under the NGERS and CPRS/AETS:
- the AUASB Standard on Assurance Engagements ASAE 3000 - Assurance Engagements other than Audits or Reviews of Historical Financial Information
- ISO 14064-3:2006 Greenhouse gases - Part 3: Specification with guidance for the validation and verification of greenhouse gas assertions
- ISO 19011:2002(E) Guidelines for quality and/or environmental management systems auditing
- the International Standard on Related Services (ISRS) 4400 - Engagements to perform agreed-upon procedures regarding financial information, and
- the former AUASB standard, AUS 904 - Engagements to Perform Agreed-upon procedures.
Implications for businesses
With the release of the EACP, the Federal Government has reiterated its intention to align regulatory requirements of businesses between the NGERS and the CPRS/AETS. That is, the Federal Government may strengthen provisions of the NGER Act to ensure that the first reports under that Act are sufficiently robust to support the CPRS/AETS.
Further, the EACP provides businesses with a greater appreciation of the data recording and record keeping requirements under the NGERS and CPRS/AETS. The Federal Government's preferred position is that external audit reports for the CPRS/AETS are to be aligned with the regulatory requirements of the NGER Act legislation as well as standards produced by the Australian Government's Auditing and Assurance Standards Board.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.