Regnan submission to the International Integrated Reporting Council (IIRC) on the paper Assurance for <IR> from an investor perspective

December 2014

Mr Paul Druckman
Chief Executive Officer
The International Integrated Reporting Council
via email:

1 December 2014

Dear Paul

We are pleased to provide feedback on the paper Assurance for from an investor perspective.

About Regnan
Regnan – Governance Engagement & Research was established to investigate and address environmental, social, and corporate governance (ESG) related sources of risk and value for long-term shareholders in Australian companies.

Regnan's research is used in decisions made by institutional investors, and in directing the engagement and advocacy Regnan undertakes on behalf of 13 institutional investors with over $61bn invested in the S&P/ASX200 (representing more than 4% of index weight): Advance Asset Management; ACT Treasury; BT Investment Management; Catholic Super; Commonwealth Superannuation Corporation; Hermes; HESTA Super Fund; Local Government Super; NT Government and Public Authorities Superannuation Scheme; Vanguard (Australia); VicSuper; and the Victorian Funds Management Corporation.

Regnan participated in the Integrated Reporting investor network.

Introduction and Key Points

Assurance and assurance providers are not immune from the crisis of trust that has emerged from the global financial crisis. The Assurance on paper notes the potential for mechanisms other than external assurance to build credibility, such as sound leadership, robust internal systems, and the involvement of internal audit and stakeholders. We agree that there is a need for all of these mechanisms to be utilised to build credibility and trust in integrated reports. There should not be a sole or excessive reliance on external assurance, regardless of its scope or form.

Transparency about the application of these credibility mechanisms is also central to their effectiveness.

Integrated reporting practice is still in its infancy and, in our view, further innovation and evolution is needed to achieve ’s aims. Seeking to detail assurance requirements at this stage may constrain innovation in both reporting and assurance and, thus, hamper the achievement of ’s aims.

In our view, the focus in the near term should be on:

  • Leadership, in particular the role of those charged with governance – both the board and audit committee. In particular, we consider that as part of the responsibility statement (s1.20 of the framework) those charged with governance should describe how they achieved comfort on the report’s integrity. Such a statement would enhance credibility while continuing to provide sufficient flexibility on approach and would enable a conversation between the company and its investors and other stakeholders about the extent to which the approach meets user needs.
  • Supporting the development and entrenchment of quality – standard setters through providing guidance (for example, developing minimum procedures in particular areas, such as completeness and materiality); academic institutions providing training; and firms dedicating senior time to audit judgements and communication of findings.

Integrated assurance presents a serious risk of widening the expectation gap - the difference between what the public and financial statement users believe auditors are responsible for and what auditors themselves believe their responsibilities are - given the scope of subject matter and the types of assertions involved. External assurance should not overreach its capability, nor should it oversell what has been done.

We note that this has often occurred in sustainability report assurance, with the result that the assurance is treated with scepticism by stakeholders. In our view, this has led to a vicious circle of stakeholders questioning the value of assurance, leading the reporting entity to question whether the cost is warranted and place downward pressure of fees and scope, leading to further narrowing of the assurance and further discounting by stakeholders - a race to the bottom to secure an assurance statement (any assurance statement) for the least possible cost. Shifting the focus of assurance from stakeholders at large to those charged with governance can put a stop to this cycle and help ensure assurance is meaningful and adds value for the business and for stakeholders.

In Regnan’s experience there is little engagement by financial market participants in the detail of financial assurance. There is some understanding of its limits and a tendency to discount the value that it adds. This discounting tendency is compounded by the fact that financial assurance focusses on a report that contains little new information (lagging release of financial results) and, thus, small market sensitivity.

In our view, this discounting is unjustified. Assurance of the key periodic report plays a critical role in ‘confirming, and hence disciplining’2 other disclosures to the market. The accuracy of preceding unaudited disclosures is tested and proved by their consistency with subsequent audited accounts. Further, assurance adds considerable value by testing the underlying systems and processes that produce both the audited statutory report and other financial disclosures.

We consider it unlikely that financial market participants will develop strong views on the details of assurance in isolation from examples in practice. Placing an emphasis on the role of the audit committee and board (those charged with governance), along with transparency in the responsibility statement (s1.20 of the framework) about the credibility mechanisms applied enables a conversation between investors and the board that will inform practice and result in superior approaches being rewarded. It is through such conversations that the expectation gap could be closed and greater understanding be built among investors of the value that external assurance adds.

Our response to each of the specific feedback questions is attached.

We thank you for the opportunity to provide our perspectives. Queries in relation to this matter can be addressed, in the first instance to, Alison George, ESG Engagement Manager

Yours sincerely,
Amanda Wilson
Managing Director
Regnan - Governance Research and Engagement

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