Sustainability assurance: A qualitative study exploring the assurance process, team and report of sustainability assurance

Sustainability assurance

A qualitative study exploring the

assurance process, team and

report of sustainability assurance

Maria Eklind, Jafar Al-Halwachi

Department of Business Administration Civilekonomprogrammet Degree Project, 30 Credits, Spring 2020

Abstract

Sustainability assurance is on the uprising. Nowadays, more and more companies are thinking about sustainability which resulted in a growing market for sustainability assurance. The global reporting initiative (2013, p.6) defines sustainability assurance as “the use of external, independent reviews of sustainability management processes and final disclosures is intended to increase the robustness, accuracy and trustworthiness of disclosed information.”. Unlike financial auditing, sustainability assurance is mostly unregulated and there are various guidelines and frameworks issued to help the assurance provider. The lack of mandatory regulations has resulted in a fragmented assurance environment where different approaches is used by different assurance providers. This in turn has contributed to the sustainability assurance process being unknown. The uncertainty around sustainability assurance affect the users of the assurance report, for example stakeholders’, which can find it difficult to identify, interpret and compare the results of the sustainability assurance.

The purpose of this study is to contribute to the limited knowledge on sustainability assurance, by investigating the sustainability assurance from both auditors’ and non- auditors’ perspectives. To assist in fulfilling the purpose, four main themes were developed; assurance team, assurance process, assurance report and the future of sustainability assurance. To fulfill the purpose of this study, the research questions are;

“What is the audit process of sustainability reports?” “What does the sustainability assurance team look like?” “What does the sustainability assurance report look like?”

The result in this study suggests that the process of sustainability assurance looks different depending on the assurance provider. The findings also suggest that the assurance team almost looks the same, regardless who is the assurance provider. When it comes to the results regarding the assurance report, it is evident that there are many ways to improve the usefulness and informativeness of the report. Furthermore, the findings of this study contribute to the limited knowledge of sustainability assurance by thoroughly exploring the assurance process.

Keywords: sustainability assurance, Sweden, sustainability assurance process, non-financial assurance, external assurance on sustainability reports, stakeholder theory, legitimacy theory

Acknowledgement

First of all, we would like to thank the participants in this study for taking their time to participate in this study. Without their contribution and insight, this study would not be possible. Last but not least, we would like to thank our supervisor, Tobias Svanström, for guidance and feedback in the research process.

Umeå, Sweden, 2020-05-21 Maria Eklind & Jafar Al-Halwachi

Table of Content

Chapter 1: Introduction ... 1

1.1 Background ... 1

1.1.1 Sustainability ... 1

1.1.2 Sustainability Reporting ... 2

1.1.3 Introduction to Auditing and Sustainability Assurance ... 2

1.2 Problematization and Research Gap ... 4

1.3 Purpose ... 6

1.4 Research Question ... 6

1.5 Delimitation ... 6

Chapter 2: Institutional Setting ... 7

2.1 Sustainability Reporting in Sweden ... 7

2.2 The Auditing Environment in Sweden ... 7

2.3 Guidelines in Sustainability Auditing ... 8

2.3.1 ISAE 3000 ... 8

2.3.2 RevR 6 ... 9

2.3.3 AA1000AS ... 9

Chapter 3: Theoretical Framework ... 11

3.1 Benefits of Financial Auditing ... 11

3.2 Theories in Sustainability Assurance ... 12

3.2.1 Legitimacy Theory ... 12

3.2.2 Stakeholders’ Theory ... 12

3.3 The Non-Financial and Sustainability Assurance Process ... 13

3.3.1 Materiality in Sustainability Assurance ... 15

3.3.2 Professional Judgement ... 16

3.3.3 The Effect of Sustainability Assurance ... 16

3.4 Sustainability Assurance Statements ... 17

3.5 Conclusion on Theoretical Framework ... 19

Chapter 4: Theoretical methodology ... 21

4.1 Ontology: Interpretivism ... 21

4.2 Epistemology: Interpretivism ... 21

4.3 Research Approach ... 22

4.4 Research Method ... 22

4.5 Research Design ... 23

Chapter 5: Practical methodology ... 24

5.2 Selection of Respondents ... 25 5.3 Interviews ... 27 5.4 Data Analysis ... 30 5.5 Descriptive Research ... 30 5.6 Literature Search ... 31 5.7 Source Criticism ... 32 5.8 Ethics ... 32

Chapter 6: Empirical Results ... 34

6.1 Empirical Results on the Descriptive Part ... 34

6.2 Empirical Results from the Interview ... 37

6.2.1 Information about Interview Participants ... 37

6.2.2 Sustainability Assurance and the Team ... 38

6.2.3 Sustainability Assurance Process ... 40

6.2.4 Sustainability Assurance Report ... 44

Chapter 7: Analysis ... 48

7.1 Sustainability Assurance Classification and Team ... 48

7.1.1 Classification of Sustainability Assurance ... 48

7.1.2 Sustainability Assurance Team ... 48

7.2 Sustainability Assurance Process ... 49

7.2.1 The Sustainability Assurance Process ... 49

7.2.2 Materiality Assessment ... 51

7.2.3 Challenges in Sustainability Assurance ... 51

7.3 Sustainability Assurance Report ... 52

7.4 Future of Sustainability Assurance ... 53

7.5 Summary on Analysis ... 53

Chapter 8: Conclusion ... 55

8.1 Conclusion and Final Discussion ... 55

8.2 Contribution ... 57

8.3 Societal and Ethical Implications ... 57

8.4 Limitation and Future Research ... 58

8.5 Criteria of Quality ... 58

References ... 60

Appendix 1 ... 66

Appendix 2 ... 67

List of Figures

Figure 1: Sustainability assurance ... 19

Figure 2: KPMG’s process of sustainability assurance ... 20

Figure 3: Mind map of the interview ... 28

Figure 4: The sustainability assurance process as suggested by auditor 1 ... 41

List of Tables

Table 2: Information about the people interviewed ... 27

Table 3: Data collected from the sustainability reports ... 31

Table 4: Overview of Assurance/Non-assurance ... 35

Table 5: Overview of Audit firm, Assurance Scope and Conclusion ... 35

Table 6: Overview of Assurance Frameworks ... 35

Table 7: Average Number of Words in the Sustainability Assurance Report ... 36

Table 8: Interviewee Information ... 37

Glossary

CSR - Corporate Social Responsibility. GRI - Global reporting initiative.

The big four - Refers to the four biggest international auditing firms; PwC, KPMG, E&Y,

Deloitte.

ISA - International standards for auditing. A set of principles for independent auditors to

follow.

IAASB – International Auditing and Assurance Standards. FAR – Föreningen Auktoriserad Revisor.

ISAE 3000 - An international framework on non-financial auditing, developed by ISA. AA1000AS - A international framework on sustainability assurance, developed by

AccountAbility.

RevR 6 – A Swedish application on the international framework ISAE 3000, developed

by FAR

1

Chapter 1: Introduction

This section provides a background to auditing and sustainability reporting,

as well as information about the current market of sustainability assurance.

Thereafter, the problematization and research gap are presented, leading to

the purpose and research question of this thesis.

1.1 Background

1.1.1 Sustainability

Companies nowadays are increasingly emphasizing the importance of being socially responsible in their everyday operations. This awareness arises from the recognition that a company has an impact on the society at large and the various stakeholders dealing with the company, whether it is investors, employees, customers or suppliers.

The Corporate Social Responsibility (CSR) model is arguably the most influential model for companies who act in a socially responsible manner. Corporate social responsibility lacks a definitive definition, but it is well argued that CSR consists of three elements; environmental, economic and social (Haynes et al, 2012, p.7). The concept of social responsibility has been developing since the 1950s, until it further developed to the CSR in the 1970s (Davídsdóttir et al., 2019). The International Organization for Standardization (ISO) defines, in its ISO 26000 standards, CSR as “The responsibility of an organization for the impacts of its decisions and activities on society and the environment, resulting in ethical behavior and transparency which contributes to sustainable development, including the health and well-being of society; takes into account the expectations of stakeholders; complies with current laws and is consistent with international standards of behavior; and is integrated throughout the organization and implemented in its relations.” (ISO 26000 cited in Youmatter, 2018).

As the demand for sustainability increases, companies need to think about sustainability in order to survive. One way for companies to show that they work with sustainability is through issuing a sustainability report. According to Friedli et al. (2014, p. 82), companies operating in the manufacturing industry address the challenge of sustainability in several ways. For instance, they adopt new manufacturing technologies, bring new and greener products to the market and integrate sustainability practices to the firm’s supply chain. Another study about the adoption of CSR practices in the airline industry showed the initiatives taken by airline firms in order to address sustainability, and evaluated their implementation based on CSR reports of the three largest airline alliances (Cowper-Smith & Grosbois, 2011). In this study, CSR initiatives are grouped into three different dimensions; environmental, social and economic dimensions. Sustainability initiatives in terms of the environmental dimension include for example; reducing fuel consumption, recycling onboard waste, using renewable energy and reducing discharge from maintenance facilities (Cowper-Smith & Grosbois, 2011, p. 65). In terms of the social and economic dimensions, airline firms are addressing sustainability in four different aspects; employee wellbeing and engagement, diversity and social equity, community wellbeing and economic prosperity (Cowper-Smith & Grosbois, 2011, p. 68). With

2 regards to employee wellbeing and engagement, airline firms implement several initiatives such as; ensuring good working conditions throughout the supply chain and creating opportunities for employee feedback. In terms of diversity and social equity, CSR initiatives include, amongst many things, increasing the number of women in managerial positions and employing disabled individuals. Within the community wellbeing aspect, airlines are approaching CSR by, for example, taking part in humanitarian aid projects, and donating to charitable organizations. In the economic prosperity dimension, airline firms are creating equal opportunities for all suppliers, and providing promotions to local employees through internships and apprenticeships (Cowper-Smith & Grosbois, 2011, p. 69).

1.1.2 Sustainability Reporting

A legislative proposal was submitted by the Swedish government on the 19th of May 2016, regarding that large corporations are mandated to issue sustainability reports (Mazars, n.d.). The law became binding on the 1st of January 2017 and was expected to affect 2,000 Swedish companies. This legislation applies to Swedish companies that for two years meet two of the following criteria: average number of employees; more than 250 people, total assets; more than SEK 175 million, net sales; SEK 350 million (Worldfavor, n.d). This is also stated in chapter 6, section 10 in the Annual Accounts Act in Sweden (SFS 1995:1554).

The Global Reporting Initiative (GRI) standards are the first global standards developed to guide companies in sustainability reporting (GRI, n.d.). They represent the global best practice for corporate reporting regarding economic, environmental and social aspects. The GRI defines a sustainability report as follows “A sustainability report is a report published by a company or organization about the economic, environmental and social impacts caused by its everyday activities.”. Sustainability reporting can sometimes be referred to as a CSR reporting, non-financial reporting and triple bottom line reporting. The sustainability report is the company's key platform to communicating sustainability related performance. It can also help the company understand and measure economic, environmental, social and governance performance (GRI, n.d).

A study in 2012 found that 53 percent of companies in the S&P 500 published a sustainability report (EY, 2016, p. 5). Today, thousands of companies, all over the globe, are publishing sustainability reports. This is supported by a survey conducted by Ernst & Young global limited (EY), in which the majority of respondents suggested that their organizations issue a sustainability report.

1.1.3 Introduction to Auditing and Sustainability Assurance

The role of the financial auditor is to act as the main control function between principal, in other words the stakeholders, and agents, which in this case refers to the client (Eilifsen et al., 2013, p. 47). Auditing has been given different definitions, but perhaps one of the most interesting and compelling definitions is that of Eilifsen et al. (2013, p. 12); “Auditing is a systematic process of objectively obtaining and evaluating evidence regarding assertions about economic actions and events to ascertain the degree of correspondence between those assertions and established criteria and communicating the results to interested users.” In 1978, an international board was found to supervise the auditing profession, called the International auditing and assurance standards board. They set standards for auditors with the aim to serve the public interest by providing

high-3 quality international standards for auditing, quality control, review, other assurance, and related services (IAASB, n.d.).

Audit firms typically provide different kinds of services. These services include audit services, review services, other assurance services and other types of services. Audit services include for example auditing financial statements. There are no strict rules as to what category the sustainability assurance falls under. When gathering data for the article it was clear that the participants classified sustainability assurance differently but that most participants classified it as auditing service. Therefore, this article treats sustainability assurance as an auditing service. For instance, review services include the review of interim financial information. Whereas, other assurance services are concerned with assurance of an entity’s sustainability report (Eilifsen et al., 2013, p.32-33). Sustainability assurance and financial statement auditing are quite different from each other. Sustainability assurance can be defined as

“The use of external, independent reviews of sustainability management processes and final disclosures is intended to increase the robustness, accuracy and trustworthiness of disclosed information.” (GRI, 2013, p.6).

The differences between financial auditing and sustainability assurance is described in the guidelines RevR 6 (FAR, 2015, p.1171). One of the biggest differences between sustainability assurance and financial statement auditing is that the former does not have a clear set of guidelines and regulations to follow. Furthermore, the user group of sustainability reports are broader and more homogenous than the users for financial statements. Another difference between sustainability reports and financial reports is that the former mainly involves non-monetary measures that often are unrelated to one another. Also, in a sustainability report, the qualitative information is as valuable as the quantitative.

Previous studies on the current market for sustainability assurance suggest that audit firms follow different regulations and guidelines when conducting the audit. For example, in Sweden, most audit firms used the guidelines RevR 6, whilst other countries used international standards like ISAE 3000 or AA1000AS (Rao, 2017).

Even though sustainability assurance is voluntary for companies there are a few benefits. A study on corporate social responsibility assurance in the United states (Casey & Grenier, 2015, p.122-123) showed that companies with sustainability assurance have a lower cost of capital and lower analyst forecast errors. The benefits of CSR assurance were higher amongst companies that had assurance made by accounting firms. These findings show that companies without sustainability assurance could benefit from obtaining sustainability assurance services. Such benefits include enhancing internal awareness of material sustainability risks, positively influencing the company’s branding and reputation, ensuring the credibility, reliability and accuracy of non-financial disclosures in the annual and integrated reports, and last but not least improving the company’s positioning in terms of credit, risk, regulatory and sustainability rankings (KPMG, 2019).

A study on the sustainability assurance effect on investors' decisions showed that sustainability assurance has a positive effect on sustainability investments. The study

4 argues that sustainability assurance decreases information asymmetry, which in this case is the imbalance of asymmetry between management and investors. Reduced information asymmetry increases the investors’ ability to monitor the firm's management. The research also found that the internal information available to managers increases which leads to improved sustainability investment efficiency. The study found no evidence that sustainability investment efficiency was higher amongst companies with sustainability assurance provided by an auditing firm (Steinmeier & Stich, 2019, p.205).

In a study conducted by Cheng et al. (2015), two experiments were carried out to examine the impact of strategic relevance of disclosed information in sustainability reports and their assurance on investment decisions of nonprofessional investors. They use environmental, social, and governance (ESG) indicators as the sustainability information in their experimental study. Cheng et al. found that the perception of the strategic relevance of ESG indicators makes investors more willing to invest. They also found that the value of assurance is dependent on the nature of information being assured. In particular, the value of the assurance depends on the manner by which investors perceive the assured information. Furthermore, the study found that investors’ perception of strategic relevance is a significant driving factor of their investment decisions. Therefore, how nonprofessional investors respond to disclosed sustainability information is influenced by the strategic relevance of such information (Cheng et al., 2015, p. 155). In addition, sustainability assurance has a signaling effect in which it affects investment decisions by enlarging the perceived importance of sustainability disclosure (Cheng et al., 2015, p. 156). This emphasizes the importance of publicizing independent assurance to investors.

Another study on the benefits with sustainability assurance showed that sustainability assurance is linked to the quality of the disclosures made by the company. Generally audited companies scored higher on an environmental index than non-audited companies. Similar to the findings by Steinmeier and Stich, this study found no differences between companies that were audited by auditors and by non-auditors like accountants or consultants (Moroney et al, 2012, p.927-928).

The nature of sustainability assurance has undergone some critique. A study on the quality of sustainability reports showed that sustainability reports are rarely addressed directly by the auditors. This in turn indicates that the verification process is not extensive and that conclusions need to be viewed with caution. This phenomenon can partly be explained by the pressure from companies, who tend to use the assurance as a tool to improve their social legitimacy (Boiral et al., 2017, p.715-716). Another study showed some ethical issues with auditing sustainability reports. “The main cause of the observed ethical problems appears to be related to the commercialism underlying sustainability assurance, which is based on a contractual relationship subject to competitive and commercial pressures” (Boiral et al., 2019, p.1120).

1.2 Problematization and Research Gap

Sustainability is on the rise; more and more companies choose to disclose sustainability reports. In fact, a study on the S&P 500, an index of the top 500 largest companies in the US, showed that the number of companies engaging in sustainability reporting has

5 dramatically increased since 2013. In 2018, 78 percent of the companies in the index issued a sustainability report. Nevertheless, the study also shows that there is a lack of external assurance on sustainability reports. The study showed that only 36 percent of the S&P 500 used external assurance (Investor Responsibility Research Center Institute, 2018, p. 4-5).

The demand for external assurance on corporate responsibility and sustainability reports continue to grow. According to a study made by KPMG (2017), the number of companies that have invested in external assurance for corporate responsibility have grown steadily since 2005. The report also showed that Sweden has one of the highest rates of corporate responsibility reporting.

According to Barrett (2005), auditors face difficulties when verifying information in sustainability reports. They claim that there is a lack of mandatory standards for the systematic process of auditing sustainability reports. Barrett (2005, p.8) claim that the auditing standards at the time did not include specific guidelines on the preparation and verification of sustainability reports. Another difficulty auditors face when verifying sustainability information is the lack of available information to assess performance. The evidence auditors gather to assure sustainability reports is limited. For instance, there is certain data which organizations do not collect routinely or systematically, rather such data is voluntarily provided (Barrett, 2005, p.9). Therefore, it might be difficult for the auditor to assure the completeness, accuracy and reliability of the sustainability information. Another difficulty concerns the lack of clarity of information presented. Sustainability reports are to a great extent based on non-financial information that needs to be presented carefully (Barrett, 2005, p.10). Such information should either be presented in a narrative format or in tables so that it would not mislead users of sustainability reports and enable them to clearly understand the disclosed information. In general, auditors need to ensure the clarity of information and that such information is tabularly presented in an honest and ethical manner.

The process of sustainability assurance is mostly unknown and there is very little knowledge that can be found in the business literature. Furthermore, the knowledge about auditing procedures are mostly unknown and Boiral and Gendron (2011, p.339) described the current practices as rational myths. The concept of rational myths can be defined as “the rupture between the reassuring image of rationality, formalism, and intellectual rigor that an organisation attempts to project by adopting somewhat superficial structures and systems perceived as legitimate on the one hand, and the organisation’s real practices on the other hand” (Boiral, 2007, p.128). Furthermore, Best et al. (2014, p.9) stated that there is little known of the real benefits with sustainability assurance. The limited knowledge of the assurance process is a contributing factor to this uncertainty and in order to improve sustainability assurance, the process must be fully transparent. Furthermore, the lack of knowledge about the process of sustainability assurance is evident from the stakeholders’ perspective. A study on the stakeholders’ interest in sustainability assurance showed that there is a lack of stakeholders’ involvement in the process of sustainability assurance. Majority of the assurance engagements are limited assurance which focus on the data accuracy rather than on the broader social perspective. As a result of the lack of stakeholders' perspective, the assurance report does not cover the informational needs of all the users. Lastly, the study found that the lack of mandatory

6 regulations impaired the readers ability to identify, interpret and compare the results of the sustainability assurance (Bephari & Tollik, 2016, p.676).

In conclusion, it is important to know about sustainability auditing in order to know what the assurance provider is actually assuring. It has been shown that the limited knowledge of the sustainability assurance process has slowed down the improvement of the process. The lack of knowledge has also led to confusion amongst the readers of the assurance report, which is also a reason why it is important to know more about sustainability assurance.

1.3 Purpose

The purpose of this study is to investigate the auditing process of sustainability reports by collecting qualitative data on the subject. The demand for sustainability assurance has increased rapidly over the past 15 years (KPMG, 2017). There is a lack of knowledge on the auditing process (Farooq & Villers, 2017, p.80). Sustainability assurance is an unregulated area and there are no mandatory standards and regulations that the auditors must follow when providing sustainability assurance, which contributes to the lack of knowledge about the process. The absence of mandatory regulations has contributed to the limited knowledge (Bephari & Tollik, 2016, p.676). The purpose of this study is therefore to contribute to the limited knowledge by investigating the sustainability assurance from both auditors’ and non- auditors’ perspectives. Furthermore, since there is a limited knowledge on sustainability assurance, a sub purpose for this study is to get an overview of sustainability assurance in Sweden.

1.4 Research Question

This research aims to answer the following questions:

• What is the audit process of sustainability reports?

• What does the sustainability assurance team look like?

• What does the sustainability assurance report look like?

1.5 Delimitation

This research is delimited to Sweden. The process of sustainability is mostly an unregulated area and there are some differences between countries, for example the guidelines being followed. In order to limit the local differences, this study focuses on the process of the voluntary sustainability assurance in Sweden.

Since sustainability assurance is an unregulated process, there are several guidelines and frameworks that assurance providers can follow. This research is delimited to the most relevant frameworks for this study which are; the international frameworks, ISAE 3000 and AA1000AS, and the Swedish framework, RevR 6.

7

Chapter 2: Institutional Setting

This chapter aims to present the institutional settings for this study.

This section starts off by discussing sustainability reporting in

Sweden and the auditing environment in Sweden. The chapter ends

with presenting three sustainability assurance guidelines.

2.1 Sustainability Reporting in Sweden

In Sweden, reporting sustainability is mandatory for companies that meet two of the following criteria, for two years: average number of employees; more than 250 people, total assets; more than SEK 175 million, net sales; SEK 350 million (SFS 1995:1554). For those who are affected by the mandatory requirements to issue a sustainability report also have some requirements regarding the content of the report. According to chapter 6, 12th paragraph in the Swedish accounts Act (SFS 1995:1554), the sustainability report should include information on sustainability that is needed in order to understand the company's development, position and results and the impact of the business. The report should also include information on issues related to the environment, social conditions, personnel, respect for human rights and anti-corruption. Other than this, the report should also contain: The business model of the company; The policy that the company applies to the issues, including the review procedures that have been carried out; the result of the policy; The material risks related to the issues and are linked to the business of the company including, where relevant, the business relationships, products or services of the company that are likely to have adverse consequences; how the company manages the risks; and key performance indicators that are relevant to the business.

When investigating sustainability reports in Sweden, it is evident that the reports look different depending on the company. All of the reports investigated included different types of information and in some cases, the sustainability report included industry specific information in which the company operated in. However, it seems that the majority of the companies have information related to the environment, stakeholder engagement, diversity and equal opportunity and human rights. Almost all of those companies prepare their sustainability reports in accordance with the Global Reporting Initiative (GRI) standards.

In 2007, Sweden became the first country to demand sustainability reports from Swedish governmental owned companies. These reports have to follow the international reporting framework GRI. (Sweden, 2020).

2.2 The Auditing Environment in Sweden

In Sweden, auditors are supervised by the government expert authority; Swedish Inspectorate of Auditors (SIA). They are also responsible for ensuring nationwide access to qualified auditors (Swedish Inspectorate of Auditors, n.d). The SIA is also responsible

8 for ensuring that generally accepted auditing standards and professional ethics are properly developed. When it comes to sustainability assurance, one can say that there are two types of sustainability assurance. One part is a mandatory regulation in chapter 6, section 14 of the annual accounts act in Sweden and it say that the auditor has to state whether or not the statutory sustainability report has been prepared or not. The other part is the actual assurance of the content of the sustainability report and that part is not mandatory for companies to have. This report focuses on the voluntary part of the sustainability assurance.

2.3 Guidelines in Sustainability Auditing

Sustainability assurance is not mandatory and therefore there are several frameworks that can help the assurance provider to conduct the assurance. The assurance provider can use one of the frameworks to follow when conducting the assurance. This section presents three frameworks that are of most value for this study. The ISAE 3000 and the AA1000AS are the two biggest international frameworks whilst RevR 6 is a Swedish application of ISAE 3000 and therefore not a separate framework in itself.

2.3.1 ISAE 3000

The International Standard on Assurance Engagements (ISAE) 3000 was approved by the International Auditing and Assurance Standards Board (IAASB) in March 2011. ISAE 3000 establishes basic principles and essential procedures for professional accountants in public practice (practitioners) for the performance of assurance engagements other than audits or reviews of historical financial information covered by International Standards on Auditing (ISAs) or International Standards on Review Engagements (ISREs) (IFAC, 2011).

ISAE 3000 defines an assurance engagement as “An engagement in which a practitioner aims to obtain sufficient appropriate evidence in order to express a conclusion designed to enhance the degree of confidence of the intended users other than the responsible party about the outcome of the measurement or evaluation of an underlying subject matter against criteria.” (IFAC, 2011, p. 19). The standard recognizes two possible levels of assurance for engagements; reasonable assurance and limited assurance (IFAC, 2011, p. 5). In a reasonable assurance engagement, the practitioner reduces the engagement risk to a satisfactory low level in the circumstances of the engagement to arrive at their conclusion. The conclusion is expressed in a manner that reflects the practitioner’s opinion on the outcome of evaluating the subject in matter (IFAC, 2011, p. 19). Whereas, in a limited assurance engagement, the reduced engagement risk is greater than that in a reasonable assurance engagement. In a limited assurance engagement, a practitioner expresses their conclusion in a manner that shows that, based on the procedures performed, there is nothing that could lead the practitioner to believe that information presented in the subject matter is materially misstated.

Recently, IAASB issued a consultation paper for a new framework called the EER assurance project. The EER assurance project aims to revive the application of ISAE 3000. This guidance will clarify matters that are not addressed in ISAE 3000, for example the materiality process. This framework will provide guidance on non-financial auditing,

9 including sustainability assurance. The final guidance is planned to be published in late 2020 (IAASB, 2019, p.5,10).

2.3.2 RevR 6

RevR 6 is a Swedish application to the international guidelines ISAE 3000. RevR 6 are issued by Föreningen auktoriserade revisorer known as FAR and are a certified member of IFAC. The framework is aimed to guide the auditor in the process of sustainability assurance. The framework applies to the two types of assurance services, reasonable assurance and/or limited assurance (FAR, 2015, p.1171). The goal of the sustainability assurance is to review the content of the sustainability report to determine if the report meets relevant criterions. The guidelines also state that the intended users' informational needs are a central part of the sustainability assurance process (FAR, 2015, p.1166). The intended user’s information needs are categorized into sex groups. The first group are suppliers which also includes any partners in procurement. The second group are the employees of the reported company. The third group that are identified are the customers and users of the product/service that the reported company provides. The fourth group are stakeholders regarding the reported company's impact on the social aspects of society. The fifth group includes the reported company's stakeholders regarding their environmental impact. The sixth and final user group are the reported company's financial and economic stakeholders, for example the shareholders. During the assurance process, it is important to evaluate if the sustainability report fulfills the informational need of all six user groups (FAR, 2015, p.1172). Although, the framework never specifies the informational need for each group.

2.3.3 AA1000AS

The first edition international guidelines AA1000AS was developed in 2003, by AccountAbility. In 2008 the second edition was released which is also the current edition of the guidelines. AccountAbility is a London-based sustainability consulting firm (Accountability, n.d). The guidelines are aimed to go beyond just the verification of data. According to AA1000AS, there are two types of sustainability assurance engagements. The first type aims to provide assurance on sustainability performance, communication, and reporting without verifying the reliability of the reported information. The second type of sustainability assurance engagement aims to provide assurance on sustainability performance, communication, and reporting as well as evaluate the reliability of the reported information (AccountAbility, 2008, p.9-10).

AA1000AS are based on four principles; Inclusivity, Materiality, Responsiveness and Impact. Inclusivity means that people should have a say in the decision that impacts them. Materiality means that the ones making the decision should be clear on sustainability topics. Responsiveness refers to the organization’s transparency. The fourth principle, impact, means that firms should monitor, measure and be accountable for their impact on the ecosystem (AccountAbility, 2008, p.2).

The framework states different levels of assurance; high or moderate. A high level of assurance might be applied on part of the sustainability report whilst other parts are assured on a moderate level. The objective of a high level of assurance should be to obtain sufficient evidence to support the assurance provider's conclusion. High level of assurance regarding the evidence character means that the assurance providers should obtain evidence from both internal and external sources, at all levels of the company,

10 using sufficient sampling. The concluding statements of a high-level assurance should be on the nature and extent of adherence relating to disclosures, on reliability and on specified performance information. Moderate level of assurance is less extensive where the evidence obtained is generally restricted to corporate/management levels in the organization. Moderate levels of assurance often use a limited sampling. The concluding statements of an assurance at a moderate level are based on the work and should be on the specified performance information and on reliability based on procedures undertaken (AccountAbility, 2008, p.11).

The steps of an AA1000AS engagement are; Planning, performing and reporting. The aim of planning the engagement is to ensure a sufficiently comprehensive, robust and balanced assurance process. The planning process includes planning for the tasks and activities, for the evidence gathering requirements, for sampling methods, for associated risks and for the schedule for the engagement (AccountAbility, 2008, p.17). The performance phase of the engagement refers to gathering and analyzing evidence. The performance of the engagement should be done with an attitude of professional skepticism. The last step, reporting, involves writing and issuing the assurance report. According to AA1000AS, the minimum required disclosure for the assurance report are; intended users of the assurance statement, responsibility of the reporting organization and the assurance provider, assurance standard/s used, description of the scope and type of assurance, description of disclosures covered on methodology, limitations of the assurance reference to criteria used, findings and conclusions concerning adherence to the AA1000 AccountAbility Principles of Inclusivity, Materiality and Responsiveness, findings and conclusions concerning the reliability of specified performance information (for Type 2 assurance only), observations and/or recommendations notes on competencies and independence of the assurance provider, name of the assurance provider, date and place (AccountAbility, 2008, p.18-22).

11

Chapter 3: Theoretical Framework

This chapter presents previous research in the area of sustainability

assurance. This section is divided into four parts; benefits of financial

auditing, theories in sustainability assurance, the non-financial auditing

process and sustainability assurance statements.

3.1 Benefits of Financial Auditing

The demand for auditing arises with the principal-agency problem. The most basic principle of the theory suggests that a firm's managers, which are the agents, are in direct control of the financial statements and therefore in a position to manipulate numbers. The stakeholders which act as the principal, cannot directly observe the financial and must trust the numbers provided by the managers. This is where the principal agent problem arises. Therefore, the role of the auditor is to act as an independent supervisor between the principal and the agent (Eilifsen et al., 2013, p.6-7).

Agency cost is a term in agency theory. This refers to the cost to the company’s expenses to control the agent. The agency cost is higher when, for example there is a conflict of interest between the principal and the agent. An agency cost can be the fees that relates to the dispute between the agent and the principal (Bloomenthal, 2019). Townsend created a model in the agency theory. He created a two-stage process; agency communication followed by verification. He looked at the so-called costless verification and came up with information from two sources: management's reported value of the outcome (e.g., earnings forecast) and a noisy verification of outcome (e.g., the audit process) (Townsend, 1979, cited in Penno, 1985, p.242).

Chow (1982, p.287) studied the demand for auditing from the agency theory framework. He found that the primary reason for a company to hire external assurance is to help control the conflict of interest between managers and its investors. He stated that “Unless there are controls on the manager's reporting procedures the financial information presented should be heavily discounted by external shareholders” (Chow 1982, p. 274). Furthermore, he also found that agency cost, which can be explained as the cost to control the agent, plays an important role in external auditing decisions (Chow, 1982, p.287).

Another benefit with financial auditing is that it reduces the information asymmetry between the company and its lenders (Cheng et al., 2015, p.136). The information asymmetry occurs when the managers have more information on the company than what the investors have (Simunic, 1990, p.243).

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3.2 Theories in Sustainability Assurance

3.2.1 Legitimacy Theory

One of the foundations in sustainability assurance is legitimacy theory. Legitimacy theory partly explains why external assurance exists and why it is important to know of the sustainability assurance process. According to Boiral and Gendron (2011, p.336), the primary key feature of sustainability assurance is to produce trust and social legitimacy with the stakeholders. Further, Boiral and Gendron argue that sustainability assurance is designed to meet the same institutional pressures as financial audit. The framework in financial audit, ISO, covers legitimacy of the audit function. A few examples of what the auditing function includes are; appearance of rigor, objectivity and trustworthiness underlying the certification process, independence and professionalism. The lack of legitimacy in sustainability assurance has the tendency to become a rational myth in society.

There is no clear definition of legitimacy. Suchman (1995, p.754) defined legitimacy as; “Legitimacy is a generalized perception or assumption that the actions of an entity are desirable, proper, or appropriate within some socially constructed system of norms, values, beliefs, and definitions.”. Legitimacy occurs when the company’s value system and the larger social system in which they operate are aligned (Suchman, 1995, p.573). In legitimacy theory, it is important for the company to increase their legitimacy and companies may use external assurance to enhance their legitimacy. There are different types of legitimacy. Suchman (1995) identified three types of legitimacy; Pragmatic, moral and cognitive. These types of legitimacy can be further divided.

In the study “Seeking legitimacy for new assurance forms” (O’Dwyer et al, 2011) identified several types of legitimacy that are relevant for auditors in different stages in the sustainability assurance process; Pragmatic-, moral-, consequential- and procedural legitimacy. Pragmatic legitimacy is the easiest type of legitimacy to seek and refers to persuading clients of the benefits with sustainability assurance. Moral legitimacy refers to seeking out the users of the assurance report. Consequential legitimacy refers to the assurance opinion. The procedural legitimacy is legitimacy in the different procedures that the assurance provider conducts. Organizations seek pragmatic legitimacy. They assure their sustainability reports to increase their legitimacy in activities related to sustainability. In doing so, they send out a positive signal. On the other hand, stakeholders seek moral and cognitive legitimacy (O’Dwyer et al, 2011, p.48-49). Cognitive legitimacy occurs when companies pursue different objectives and activities that are appropriate, proper and desirable (O’Dwyer et al, 2011, p.36).

Furthermore, companies tend to use the assurance process as a tool to improve their social legitimacy (Boiral et al., 2017, p.715-716). The assurance enhances the report’s credibility which improves their social legitimacy. In legitimacy theory, the sustainability assurance statements must include information that satisfy the informational needs of the stakeholders. Only then will the legitimacy of the CSR reports improve (Rossi & Tarquinio, 2017, p.583).

3.2.2 Stakeholders’ Theory

In addition to legitimacy theory, stakeholder theory is a popular theory in sustainability assurance. Stakeholder theory is also important to know since it is the basis of

13 understanding sustainability assurance and is an important part of the sustainability assurance frameworks ISAE 3000, AA1000AS and RevR 6 (IFAC, 2011; AccountAbility, 2008; FAR ,2015). Stakeholder theory is a theory that looks at the relationship between a firm and its stakeholders (Fernando & Lawrence, 2014). A stakeholder is “any group or individual who can affect or is affected by the achievement of the firm's objectives.” (Freeman, 1984 cited in Fernando & Lawrence, 2014, p. 157). Stakeholder theory views the company as being a part of a wider social system in which the company operates (Boiral and Gendron, 2011, p.431).

Under the stakeholder perspective, a firm has to meet, besides its shareholders’ expectations, the different expectations of its multiple stakeholder groups (Guthrie et al., 2006, p. 256 cited in Fernando & Lawrence, 2014, p. 157). Under the stakeholder theory, an organization’s management should be accountable to all its stakeholders by implementing activities that are considered important by its stakeholders. Thus, the stakeholder theory builds on the aspect of organizational accountability and how an organization can deliver its accountability to the different stakeholders. (Smith, 2008 cited in Fernando & Lawrence, 2014, p. 158)

There seems to be many interpretations and classifications for stakeholder theory in the literature field. According to Fernando & Lawrence (2014, p. 158), two major branches of stakeholder theory stand out; the ethical branch and the managerial branch. The ethical branch is relevant in sustainability assurance. The ethical perspective of stakeholder theory proposes that all stakeholders should be considered and given equal ethical treatment by the organization. Under the ethical perspective, the organization should meet the expectations of all its stakeholders, rather than maximizing the shareholders’ wealth. The ethical perspective has a direct relation with the accountability model of stakeholder theory, that is; the organization is accountable to all its stakeholders, rather than to only one financial stakeholder that has a significant effect on the organization. It is challenging for managers to treat all stakeholders equitably, particularly when their interests are in different and contradictory directions (Fernando & Lawrence, 2014, p. 159).

Stakeholders theory may not be able to stand alone. This is because the theory has been criticized for not capturing the dynamics of the relationship between stakeholders and the company itself. The theory also fails to capture the relationship between different stakeholders. The theory mainly focuses on the functional and legal dependencies of the firm itself, rather than looking at the relationships between stakeholders (Smith et al., 2011, p.431).

3.3 The Non-Financial and Sustainability Assurance Process

There is not a lot of previous research on the sustainability assurance process, but the sustainability assurance is classified under the broader category; the non-financial auditing processes. It is important to know of the assurance process in order to compare it to our result and finally answer the research question “What is the audit process of sustainability reports?”. As said, non-financial auditing is a broad term that involves several types of auditing, for example sustainability assurance and audit of management. The non-financial auditing process shares some similarities with the financial auditing process. An article by KPMG (KPMG, n.d.) briefly explains the non-financial assurance

14 process. According to KPMG, the non-financial assurance process consists of six steps; preparatory work: elaborating an audit program; analysis of the control environment; site inspections; audit procedures; preparing an independent assurance conclusion; and elaborating recommendations for management. Another KPMG article (KPMG, 2019) broke down the sustainability assurance process into three categories: Desk review and internal stakeholder consultation; in depth review of sustainability performance; and review of Sustainability and Integrated reports. Each of these three categories involves different procedures. The first category involves a desk review of different indicators as well as elaborating an audit plan. The second category involves an interaction with the client’s stakeholders, a review of the client’s processes and internal control as well as a trend analysis. The third and final category involves reviewing protocols and previous reports, test linkage between materiality and stakeholder management with performance indicators, and lastly create a management letter and issue an assurance report.

Developing a sustainability auditing system can be very complex. A study on the practical implications of CSR auditing found a few areas that were highlighted as a crucial part when developing the CSR auditing system (Morimoto et al., 2005, p.322). They found that a CSR auditing process should include all significant stakeholder groups. They also saw that there is a difficulty in developing measurements for CSR since there is no agreed definition of CSR. They also found that avoiding the tick box approach is a crucial factor when developing a CSR auditing system. The tick box approach means ticking boxes to assess a company which does not provide enough explanation (Morimoto et al., 2005, p.320). Another crucial point is that the CSR assurance system should include both quantitative and qualitative measurement of CSR. The idea to include a mix of quantitative and qualitative measurements comes from the fact that some aspects of CSR can easily be quantifiable, for example environmental impacts, while other aspects cannot, for example social issues (Morimoto et al., 2005, p.320).

Previous research in the area of sustainability auditing has focused on the outcome of sustainability assurance. One study researched audit fees of sustainability assurance provided by the big four auditing firms in Spain. They gathered data of 1312 firm year observations, composed from Spanish non‐financial listed firms over the period 2004– 2014. They tested three hypotheses surrounding CSR disclosure and audit fees. The study confirms that audit fees have a positive influence on CSR disclosure. Other than that, the study showed a positive correlation between sustainability audits provided by the big four and CSR disclosures. In conclusion, the result of this study shows that auditing firms play a relevant role in sustainability assurance (Pucheta‐Martínez et al, 2018, p.54).

Although the sustainability assurance market is mostly unregulated and the process is mostly unknown, there are some indications that the market is maturing. The use of international standards had increased from 18 per cent in 2002-2004 to 45 per cent in 2006-2007 (Mock et al cited in Farooq & Villiers, 2017, p.85). Furthermore, the process of sustainability assurance may look different depending on the assurance provider. A study on the differences between non-accounting and accounting sustainability assurance providers showed that non-accountants prefer to use the guidelines in AA1000AS whilst accountants prefer to use ISAE 3000 (Farooq & Villiers, 2017, p. 89).

A study by Martínez-Ferrero and García-Saínchez (2016) researched sustainability assurance levels. The study aimed to examine the sustainability assurance level and how it might be influenced by specific attributes of the assurance providers. This study showed

15 that the assurance engagement is closely related to the assurance provider and the specific attributes of the assurance provider. What Martínez-Ferrero & García-Saínchez (2016, p.972) did was that they examined attributes related to brand reputation and industry expertise of the assurance providers, with a sample of 1233 companies over a seven-year period . They found that the probability of detecting material errors in a sustainability report is higher if it is verified by a Big 4 auditing firm and by an industry expert. Because of the high level of accuracy in the big 4, they have an increased number of limited assurance engagements that are expressed in a negative way. The big 4 are associated with a high level of experience, knowledge, skill and training, which are all determinants to issue a more accurate audit opinion (Martínez-Ferrero & García-Saínchez, 2016, p.985). With accuracy, the researchers mean the ability to detect material errors, omissions, and misrepresentations in sustainability reports. Furthermore, the study suggested that the assurance provider’s brand name reputation and industry expertise are determinants of the assurance engagement. The study also suggests that the level of assurance is reflected by the propensity to report a negative opinion in the conclusion statement (Martínez-Ferrero & García-Saínchez, 2016, p.986).

A study found that two new assurance practices have emerged in the field of non-financial auditing services; stakeholder or specialist reviews and mixed approach (Best et al., 2014, p. 9). The emergence of said assurance practices is the result of companies’ attempt to enhance the current assurance process. They claim that the increased need of companies to improve the assurance process could be explained by their dissatisfaction with assurance processes that are provided by accounting and non-accounting firms. The limited scope of assurance services provided by both accounting and non-accounting firms is possibly another reason why companies want to improve the assurance process. Furthermore, the study states that “in order to improve transparency for sustainability reports, the current assurance process must first be transparent in itself.” (Best et al, 2014, p.9). With transparency they mean that the full version of the assurance statement must be disclosed, with details about the work carried out, scope, results obtained, and recommendations must be available, explicit and understandable to stakeholders.

3.3.1 Materiality in Sustainability Assurance

One important aspect in order to understand the sustainability assurance process is the materiality assessment. Materiality actually originates from financial auditing but in recent years, the concept has also increased its importance in sustainability assurance. Although, sustainability assurance considers a broader scope than traditional financial auditing which requires a broader definition for materiality in sustainability assurance (Dosal, 2013).

One study researched the difference between assessing materiality in financial auditing and in sustainability assurance (Moroney & Trotman, 2015). This study states that the frameworks for materiality assessment differs from financial auditing and sustainability assurance. The first difference is that in financial auditing, more focus is put on the company's shareholders whilst in sustainability assurance, the focus is directed towards the stakeholders. The study mentions another difference in terms of the materiality assessment. In financial auditing, the materiality is much more precise, and it can be determined by benchmarks, which is also mentioned in the standards. Although, when assessing materiality, there is no similar benchmark strategy mentioned in the frameworks for sustainability assurance (Moroney & Trotman, 2015, p.556).

16 The sustainability assurance framework, ISAE 3000, refers to professional judgement when assessing materiality. The framework considers a misstatement material when “individually or in the aggregate, could reasonably be expected to influence relevant decisions of intended users taken on the basis of the subject matter information.” (IFAC, 2011, p.55).

The social accounting standards board have issued materiality frameworks for some industries. This process determines the materiality in sustainability from five categories; Environmental Capital, Social Capital, Human Capital, Business Model & Innovation, and Leadership & Governance (SASB cited in Dosal, 2013). A study on materiality in non-financial reporting found that in non-financial materiality, more emphasis is put on defining the user of the information (Eccles et al., 2012, p.66). The study argues that developing a sector specific standard for materiality would improve companies’ ability to report. Furthermore, materiality is an important part of the financial auditing process. Another thing is that when the auditor assesses the level of materiality, the auditor relies on professional judgement (Eilifsen et al., 2013, p.83).

3.3.2 Professional Judgement

Professional judgement is a key aspect in the sustainability assurance process, especially when assessing materiality. According to ISAE 3000 paragraph 34, the assuror should exercise professional judgment when planning and performing the assurance engagement (IFAC, 2011, p. 27).

Professional judgement is defined as “the application of relevant training, knowledge and experience, within the context provided by assurance and ethical standards, in making informed decisions about the courses of action that are appropriate in the circumstances of the engagement.” (IFAC, 2011, p. 22).

Professional judgment is crucial to the proper conduct of an assurance engagement because in order for the assuror to interpret relevant ethical requirements and relevant ISAEs and to make informed decisions throughout the engagement, they have to apply their relevant knowledge and experience to the facts and circumstances (IFAC, 2011, p. 52-53). It is necessary for the assuror to exercise professional judgement when making decisions about, for example, materiality and engagement risk, evaluating the sufficiency and appropriateness of evidence obtained.

3.3.3 The Effect of Sustainability Assurance

Although the sustainability assurance process is mostly unknown, there have been several studies on the effect of sustainability assurance. It is important to know the effects of the assurance and which companies choose to assure their sustainability report in order to understand the process and to be able to put it in a concept. The framework article “A Conceptual Model for Understanding Corporate Social Responsibility Assurance Practice” (Maroun, 2020) summarizes the current research in the area of sustainability assurance. Companies, with a stakeholder-oriented system and who are operating in an industry with a high social and environmental impact react by preparing sustainability reports to satisfy their information needs and credibility. This is also the case for industries where the legal system alone cannot ensure the stakeholders’ confidence in the reporting process (Hahn and Kuhn, 2013 cited in Maroun 2020, p. 203).

17 The study “CSR report assurance in the USA: an empirical investigation of determinants and effects” (Cho et al., 2014, p. 141-142) investigated sustainability assurance amongst the US fortune 500 companies. This study shows that companies are obtaining sustainability assurance to increase the credibility of the CSR disclosure. Although, this does not appear to be reflected on the market since they did not find any evidence suggesting that sustainability assurance is associated with a higher market value. Nevertheless, what they did find was that the extensiveness of the disclosure in the company's sustainability report plays an important role in the choice for assurance. The suggested explanation for this is that companies with more sustainability disclosures are more willing to incur the cost for sustainability assurance.

Another study, “Impact of disclosure and assurance quality of corporate sustainability reports on access to finance” (García-Saínchez, 2019, p.844), investigated the sustainability report and assurance impact on the financial market. This study found that the financial market reacted positively to companies with CSR disclosures and more so if the companies also had external assurance on their sustainability report. They argue that CSR assurance improves the investors’ confidence and credibility in the disclosed information. Although, this research did not find any evidence that suggests that the financial market reacts differently to the quality of the assurance. This could partly be explained by the lack of expertise and knowledge for general investors to understand the complex information in the sustainability assurance report.

In conclusion, companies mainly chose to have sustainability assurance to increase the credibility of the CSR disclosure. Also, in industries with a high stakeholder involvement and in industries with lack of regulations companies react by issuing a sustainability report to satisfy their own informational needs. There is limited evidence that sustainability assurance is reflected on the market. Although, one study found that the financial market reacted positively to companies with external assurance on their sustainability report.

3.4 Sustainability Assurance Statements

Similar to the financial statement audits, the audit opinions are expressed differently depending on the level of assurance. The different levels of assurance are either expressed in a negative or positive audit opinion. According to ISAE 3000, there are two different types of assurance; limited and reasonable. In a limited assurance engagement, the assurer expresses a negative audit opinion, for example “nothing has come to the practitioner’s attention to suggest that the subject matter does not comply with the given criteria” (IFAC, 2011, p.5). Unlike limited assurance, the opinion in a reasonable assurance is expressed in a positive way. The users of the assurance report have difficulties in recognizing the difference between the assurance levels. The study “Understanding assurance services reports: A user perspective” (Roebuck et al., 2000, p.214) researched assurance reports from the user’s perspective. What they found was that the users in the study were unable to distinguish between limited assurance- and reasonable assurance statements. This shows that the description of the different levels of assurance are not understood by users. An example of a sustainability assurance report can be found in appendix 3.

18 The process of sustainability assurance is mostly unknown. Previous research, however, found some trends in the area. The study “Stakeholders’ interest in sustainability assurance process” (Bephari & Mollik, 2016) examined assurance statements of corporate sustainability reports in Australia. They found that the sustainability assurance providers seem to prefer the framework ISAE 3000 over AA1000AS. The study also found that the basic principles of accountability in accordance with AA1000AS; inclusivity, materiality and responsiveness, are missing from the majority of the assurance statements. In addition, Bephari & Mollik (2016) claim that assurance statements do not clearly define the issue of materiality in terms of what is included as material social and environmental aspects. This indicates the lack of comprehensiveness in the assurance statements regarding the content they cover. The study also shows that accountant assurors maintain a high level of professional skepticism and caution in financial auditing. Whereas, consultant assurors rarely address the issues of inclusivity and responsiveness to stakeholders’ concerns in the assurance statements (Bephari & Mollik, 2016, p. 679). A study, by Hassan in 2019 (2019, p.444-445), examined the sustainability audit report amongst 162 companies, derived from FT Global-500 companies. This study is limited to a short-term perspective since all the observations were made under 2013. The findings showed that sustainability assurance providers are more careful in using an optimistic tone. One suggested reason for this is that they try to avoid being criticized for lack of professionalism and the use of lower-level optimism denotes a likely attempt to avoid negative violation of stakeholders’ expectations. The sustainability assurance reports are mainly positive in favor of the reporting entities. Assurance providers have a tendency to be careful when using optimism and certainty in attempts of persuasion. Further, the study suggests risk as a potential explanation. Professional audit firms both have their professional integrity to protect and professional codes of ethics to consider. The audit firms’ careful behavior implies that users of sustainability assurance statements can rely on sustainability assurance statements for making decisions about sustainability performance of reporting entities.

A study by Gürtürk and hahn (2016) researched sustainability assurance statements and scored the quality of the statements based on different variables. The variables that they based the quality score on were the level of assurance, the scope of the assurance, the addressees of the statements, the guidelines used, the type of assurer and the primary method used. What they found was that the assurance statements lacked transparency as well as sufficient evidence (Gürtürk and hahn, 2016, p.39). They also observed that the majority of assurance engagements are limited assurance. The study also compared assurance statements made by auditing firms and statements made by non-auditing firms. What they found was that the average length of the assurance report was longer when it was made by non-auditing firms. They also found that the average quality score was significantly higher amongst the assurance statements made by the non-auditing firms (Gürtürk and hahn, 2016, p.38). Best et al. (2014) claim in their study that the lack of regulations for assurance of sustainability reports could drive companies to only include a statement in their sustainability reports without considering the quality of the assurance process performed.

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3.5 Conclusion on Theoretical Framework

There are two major theories in sustainability assurance; legitimacy theory and stakeholder theory (Boiral & Gendron, 2011, p.336). Legitimacy theory might explain why companies choose to have their sustainability report assured. Rossi & Tarquinio (2017, p.583) found that the assurance on sustainability reports enhances the report’s credibility which improves their social legitimacy. Stakeholder theory is also an important aspect of sustainability assurance and the majority of frameworks are based on the stakeholder theory.

Researchers have found some benefits with sustainability assurance. For example, one study showed that companies are obtaining sustainability assurance to increase the credibility of the CSR disclosure (Cho et al., 2014, p. 141-142). Another study found that the financial market reacted positively to companies that have external assurance on their sustainability report. The explanation for this is that CSR assurance improves the investors’ confidence and credibility in the disclosed information (García-Saínchez, 2019, p.844).

Another study, “Impact of disclosure and assurance quality of corporate sustainability reports on access to finance” (García-Saínchez, 2019, p.844), investigated the sustainability report and assurance impact on the financial market. This study found that the financial market reacted positively to companies with CSR disclosures and more so if the companies also had external assurance on their sustainability report. They argue that CSR assurance improves the investors’ confidence and credibility in the disclosed information. Although, this research did not find any evidence that suggests that the financial market reacts differently to the quality of the assurance. This could partly be explained by the lack of expertise and knowledge for general investors to understand the complex information in the sustainability assurance report.

Sustainability assurance is part of the non-financial auditing process (see figure 1). Even though little is known about the process of sustainability assurance, previous research has found some trends in the area. Morimoto et al. (2005, p.322) identified some important parts when developing a sustainability assurance system, for example including all stakeholders’ and to include both qualitative and quantitative measures. Another study found that the process of sustainability assurance may look different depending on the assurance provider. The study showed that non-accountants prefer to use the guideline AA1000AS whilst accountants prefer to use ISAE 3000 (Farooq & Villiers, 2017, p. 89).

Figure 1: Sustainability assurance

Financial auditing

Non-financial