Mohammad Amimul Ehsan Kabir
Deputy Director, FAPAD

One area of audit activity that has grown in recent years is environmental audit. The environmental accounting ‘movement’ began in the mid-1980s, when it was first coherently argued that there was a moral case for businesses, in addition to reporting on their use of shareholders’ funds, to account for their impact on social and natural environments. While accounting instruments already existed for reporting financial performance, there wasn’t any accounting for non-costable impacts, and it was this that gave rise to modern environmental accounting. If, for example, a meat processor buys beef and processes it for onward sale (eg. burgers), then the cost of the beef includes all of the identifiable costs incurred by the supply chain up to that point such as elements of farming, land costs, logistical costs, and so on.

However, the farmer who produced the beef may have reared the cattle on land bought as a result of forest clearance. He may have paid a market price for the land upon which to graze his cattle, but the initial deforestation has implications that could not have been factored into the price he paid for the land. How, for example, could you attribute a cost to the loss of species habitat or the loss of greenhouse gas processing capacity? It is because of the difficulties in allocating the costs of these externalities that, environmental activists say, the price of that beef does not reflect the true – or full – cost, which should include the cost to the environment. What has all these got to do with audit? It is important because, increasingly, many investors and other stakeholders want to know about an organization’s environmental footprint in addition to its economic performance.

Sustainability is concerned with the ability to maintain stable economic growth for a long period of time, to achieve justice in equity distribution between generations to use natural resources and limit the possibility of pollution to increase in order to maintain the current environmental quality. Governments are progressively acknowledging that the costs resulting from executing environmental responsibilities and strategies as well as from failure to execute or fully execute these responsibilities and strategies may be considerable. These responsibilities and strategies may present contingent and material liabilities, such as the costs associated with the clean-up or remediation of contaminated sites, environmental fines, penalties and taxes, and the purchase of pollution prevention technologies.
Environmental impacts can also considerably influence the valuation of equipment, factories, properties and structures. The said environmental impacts, liabilities and costs influence the planning and audit of financial accounts.

Environmental audit is defined as a systematic, documented verification process of objectively obtaining and evaluating evidence to determine whether specific environmental activities, events, conditions, management systems, or information about these matters conform with audit criteria and communicating the results of this process to the client.

In the context of achieving sustainable development in the public sector, International Organization of Supreme Audit Institutions (INTOSAI) has outlined the role of the Auditor General Office as an autonomous organization to have the freedom to audit the government programs and activities to ensure the public resources have been used properly and effectively; the financial system is properly organized; activities are properly implemented; and to report objectively to the Parliament as well as to the public. Thus, the audit can have potential influence on the policy and environmental management system implemented by the government.

Considerable areas of environmental audit normally include
1. Material management, savings and alternatives
2. Energy management and savings
3. Water management and economy of use
4. Waste generation, management and disposal
5. Noise reduction, evaluation and control
6. Air emissions and indoor air quality
7. Environmental emergency prevention and preparedness
8. Transportation and travelling practices
9. Staff awareness, participation and training in environmental issues
10. Environmental information publicity
11. Public enquiry and complaints response
12. Environmental management system set up, suitability and performance

In this paper, Guidance on Conducting Audits of Activities with an Environmental Perspective, the Working Group on Environmental Auditing (WGEA) identified three types of audits in which environmental issues can be addressed which are audits of financial statements, compliance audits and performance audits.

During an audit of financial statements, environmental issues may include the following:
1. Initiatives to prevent, abate or remedy damage to the environment,
2. The conservation of renewable and non-renewable resources,
3. The consequence of violating environmental laws and regulations, and
4. The consequence of vicarious liability imposed by the state.

Compliance audit with regard to environmental issues may relate to providing assurance that governmental activities are conducted in accordance with relevant environmental laws, standard and policies, both at national and international (where relevant) levels.

Performance auditing of environmental activities may include ensuring that
1. Indicators of environmental related performance (where contained in accountability reports) fairly reflect the performance of the audited entity; and
2. Environmental programs are conducted in a economical, efficient and effective manner.

Environmental accountability, particularly on the part of the government and the public sector is required to achieve the Sustainable Development Goal (SDG). Environmental audit can be used to ensure environmental accountability in the public sector.

However, in the context of developing countries in which economic development takes priority over the interests of preserving the environment, issues of harmonization between the environment and development become a crucial factor that limits the role of environmental audit.

Harmonization between the environment and development is considered as deterrent factor and a major challenge to the achievement of sustainable development not only to the public sector, but also to the auditors. As harmonization between development and the environment for sustainable development is difficult to achieve because economic development eventually requires the use of environmental resources that in turn affects the quality of the environment, conflict may arise with the development as a result of the use of environmental resources in terms of whether is it necessary for the environment to be preserved or used for development purposes.

To overcome this problem, harmonization with the environment that gives tolerance to the environment must be given a priority because it is generally difficult to implement development without compromising the environment, especially if the country is in the developing stage.

To conclude, although environment audit is considered to have important role in strengthening environmental accountability, but its role to contribute to the achievement of sustainable development in context of developing countries is unclear due to the possibility of conflict of interest between the need for economic development or to preserve the environment. In that case, the role of environment audit in the context of sustainable development is considered merely as a preventive mechanism to ensure development is properly implemented in the interests of the environment and mankind.The environmental problems of the world will neither be solved overnight nor will they be solved solely by the actions of SAIs.

However, much trust is placed in the role of the SAIs and they can be part of the solution. The role of a SAI is to respond to the expectations of citizens by providing independent, credible and objective verification of the information provided by the government agencies with respect to their activities and their impact on the environment.

As this paper illustrates, the audit of financial statement enables the auditor to express an opinion on whether the financial statement is prepared, in all material respects, in accordance with an identified financial reporting framework. It also shows how “material respects” can be directly linked to environmental costs, obligations, impacts and outcomes.

In this context, the audit of financial statements requires the auditor to consider environmental matters as part of the regularity audit. In addition, auditors need to be aware of ongoing developments- such as recognizing environmental assets. They should seek out opportunities to encourage their clients to adopt regimes that may be considered good practice but are not currently mandatory, for instance, the production of environmental reports. As standards- in both financial reporting and corporate governance- move towards fuller reporting and disclosure of environmental, social, and ethical reporting, auditors will need to reappraise their approach.