Accounting firms accused of missing climate risks in company audits

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Senior managers at the world’s six largest accounting firms are failing to ensure that climate change is adequately addressed in financial reports and audits, a prominent environmental law charity has alleged. 

In a letter sent to the Global Public Policy Committee — a group made up of senior leaders from the Big Four firms PwC, Deloitte, KPMG and EY as well as BDO and Grant Thornton — Client Earth said it was “very concerned” that auditors were not fully considering climate-related matters when assessing corporate accounts. The group said it also feared audit standards were not being properly followed.

The non-profit group said it had sent the letter, seen by the Financial Times, in May but received no response. That followed 18 months of engagement with the GPPC, which Client Earth said it was directed to after raising its concerns with the Big Four firms in 2021.

“The largest audit and accounting firms have a huge sphere of influence over the crucial issue of how climate risk is reflected in financial reporting and audit, yet it is hard to discern any meaningful leadership from the GPPC when it comes to climate change,” said Client Earth lawyer Robert Clarke. 

David Pitt-Watson, a visiting fellow at Cambridge university’s Judge Business School and former executive at investment group Hermes, said the letter articulated “the elephant in the climate reporting room”.

“We will have fossil assets which are overvalued, and companies not providing for clean-up costs, creating the sort of financial risks which accounting and audit aim to protect against,” he said.

Companies are increasingly coming under pressure from investors and regulators to disclose their climate-related risks and opportunities. They are also subject to a patchwork of reporting guidance set out by global accounting bodies and standard setters.

Investor group Climate Action 100+, which manages a collective $68tn in assets, found last year that 94 per cent of 152 large companies it had assessed on a range of climate-related metrics had not met any of its audit-related criteria.

These included whether and how climate-related matters were incorporated into a company’s financial statements and whether auditors had assessed the effects of material climate-related matters. 

“Most companies do not fully consider material climate matters when preparing their financial statements (and their auditors, in their audits thereof),” CA100+ said in a report published in October.

The International Accounting Standards Board has said that material climate-related matters need to be incorporated into financial reporting standards, and the auditing standards body has issued similar guidance.

The GPPC said in 2020 it would “play its part” in supporting the application of the guidance.

However, Client Earth said in its letter that “the evidence suggests that only limited shifts in financial disclosure practices by companies and their auditors have taken place, and the GPPC has not provided any further public statement as to why this is considered acceptable”.

It was “essential” for the group to publish a “clear public statement” on its position, the letter said. “We do not consider the GPPC’s position (or rather, its lack of a public position) to represent adequate leadership on these issues.”

Client Earth’s letter said it understood from a meeting with the GPPC in January that the group’s position was that its members’ audits complied with the relevant guidance.

The charity said its understanding was that the GPPC also disagreed with findings from the charity Carbon Tracker about corporate accounting and audit failings concerning climate risks, although it had not publicly explained why.

The GPPC said it was “committed to reporting consistent, high-quality information to support stakeholders’ decision making” but recognised that “some want broader information than current standards require”.

“We strongly support standard setters’ efforts to address the current information gap, for example greater connectivity between sustainability-related corporate disclosures and financial statements,” it added.

Climate Capital

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