Assuring the sustainability report you helped to build
You are the audit partner for Ardent Group plc, a FTSE 250 retailer with a market capitalisation of £2.4bn. Total fees from Ardent were £1.35m last year, of which £420,000 was the statutory audit fee; Ardent represents 17% of your firm's £8.2m UK fee income, and the ratio was 16% the year before. The firm's consulting practice designed Ardent's Scope 3 emissions model and supplies the software platform that generates its reported figures, for fees of £380,000 a year. The manager who built that model is proposed as manager on the new limited assurance engagement over Ardent's sustainability report, which the board wants for the current year. The firm's partner appraisal scorecard gives 20% weight to “cross-selling into the audit base”. Ardent's finance director joined the company 18 months ago from your firm, where she was an audit partner. The audit committee has asked you to confirm that the firm can provide the sustainability assurance alongside the audit.
1. Identify and evaluate the threats to independence arising from the proposed limited assurance engagement, and assess whether safeguards can reduce them to an acceptable level.
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Self-review - the dominant threat. The firm designed the Scope 3 model and supplies the platform that produces the numbers. The assurance team would be forming a conclusion on its own work and its own methodology choices (emission factors, boundary, estimation approach). This is not a borderline case: the subject matter of the assurance is the output of the firm's own system. No safeguard reduces a self-review threat to an acceptable level where the firm would be evaluating its own work on the same subject matter, and where the personnel overlap it also risks the firm assuming management responsibility for the reporting - which is prohibited outright.
Self-interest. Ardent is 17% of UK fee income, above the 15% threshold, and has been above it for two consecutive years; total fees are £1.35m, of which £380,000 is the consulting stream that the new engagement would protect. The 20% cross-selling weighting in partner appraisal converts that into a direct personal financial interest for the partner group.
Familiarity and former-partner issues. The finance director was an audit partner in the firm 18 months ago. A former key audit partner moving into a senior financial or managerial role at a public interest entity audit client is subject to a cooling-off period measured in years, not months; 18 months does not satisfy it. The firm must consider whether it can continue as auditor at all, not merely whether the assurance engagement is acceptable.
Advocacy and management threats. Having designed the methodology and selected factors, firm personnel have a position to defend. If the firm also advises on targets or the narrative, it may be making management decisions.
Intimidation. The implied bundling of the assurance with the consulting creates pressure to conclude favourably.
Assessment. The self-review and management threats cannot be safeguarded. Independence - in fact and in appearance - cannot be maintained while the firm provides the model and the platform and then assures the output. The correct answer to the audit committee is that the firm cannot provide the sustainability assurance on the current arrangements.
2. What should the firm do, and what should you tell the audit committee?
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Options appraisal, in order of preference.
Option A - decline the assurance engagement and recommend another provider. The firm can continue as auditor (subject to resolving the former-partner issue) and the client obtains credible assurance from a provider with no involvement in building the numbers. This is the cleanest outcome and should be the recommendation unless the client specifically wants the firm to provide assurance.
Option B - accept the assurance only if the firm exits the consulting. That means terminating the Scope 3 model design and the platform contract, transferring the model to the client or a third party, and ending all involvement, with a transition period long enough that the firm is not still supporting the system it is assuring. The assurance team must be wholly separate from the consulting team, with no personnel overlap (so the manager who built the model cannot be on the engagement), plus an engagement quality review. Even then, the self-interest and familiarity threats must be addressed.
Either way, address the rest.
- Fee dependency: report to the firm's ethics partner, agree a plan to reduce Ardent below the threshold, and disclose the position and the plan to the audit committee. Consider whether continuing as auditor is compatible with independence given two consecutive years above 15%.
- Remuneration: remove the cross-selling weighting from the appraisal of anyone involved in audit work; it is incompatible with the objectivity expected of an audit partner.
- Former partner: take legal and ethics advice, assess the individual's role and influence over the financial and sustainability reporting, and consider whether resignation from the audit is required. Do not treat it as a matter of appearance.
- Approvals and disclosure: obtain audit committee pre-approval for any permitted non-assurance service and disclose the fee split in the auditor's report.
What to tell the audit committee - plainly. Set out each threat, the safeguards considered, and why they do or do not suffice. State that the firm will not provide assurance over numbers it built and continues to generate. Recommend a competitive tender for sustainability assurance, and confirm that the firm's position as auditor is being reviewed because of the fee dependency and the former partner's appointment. Put the same points in writing.
The underlying principle. Sustainability assurance exists to give users confidence in the numbers. A provider that designed the measurement system and depends on the client for 17% of its income offers the form of assurance without the substance - and the audit committee, not the firm, should be the one deciding whether that is acceptable.