While the following risks might not include the terms sustainability explicitly, these risks can be linked with the concept of sustainability – in the broad sense of the term:
- Talent management;
- Organizational Governance;
- Economic and political volatility;
- Diversity on the work floor;
- Supply chain;
- Life cycle management of the products;
The opportunity for internal audit lies in the fact that Internal Audit can go back to its core mission and vision and protect the organization’s capital, financial as well as social and environmental contributions, over time. As a reminder, the definition of internal audit reads as follows:
Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes.
The main objective and challenge today for organizations is to get a grip on the risk and opportunities represented by the sustainability transition. These sustainability risks are complex, volatile, and different depending on the business and/or geographic area the organization operates in. For some organizations, the opportunity in reviewing certain sustainability risks or challenges might result in lower operating costs resulting from the review of energy consumption in the light of a reduction in Greenhouse gas emissions.
For Internal audit, the sustainability risks can be an opportunity to increase its scope from a traditional assurance service provider with an additional consulting engagement scope. The transformation projects induced by the sustainability objectives that organizations are setting themselves also represent major opportunities for internal audit.
By reviewing these risks, one should also consider whether the glass is half empty or half full, for each risk that will become transparent during this review, there will probably be an opportunity by which the corporation can have a positive impact on the environment in which it operates, the long-term profit of the corporation and/or other potential benefits for the society, employees, or other stakeholders.
Whilst several organizations were probably already on that track, one of the key trends at the beginning of the pandemic was to reduce the resources invested in Internal audits and/or to re-allocate Internal audits to other activities. As we are evolving to a “back to normal” working environment, the time is right to think about what the “back to normal” would/could mean for Internal Audit.
The objective of this blog is to generate ideas for Internal Audit functions so that:
- Internal Audit can contribute to the accomplishment of the objectives of the organization;
- Internal Audit can be recognized as a value add to the organization;
- As an organization, IA can expand its scope and bandwidth;
- And as a result, be a talent provider for the organization.
What are the major observations on sustainability in the world of Internal Audit?
The risk in focus 2022 report from the ECIIA highlights the most significant risks impacting European organizations based on a survey and interviews with AC chairs, CEOs, and CAEs. The risks are presented in order of relevance, as rated by Risk in focus 2022 respondents.
- Cybersecurity and data security
- Changes in laws and regulations
- Digital disruption, new technology and AI
- Human capital, diversity, and talent management
- Business continuity, crisis management and disasters response
- Financial, liquidity and insolvency risks
- Macroeconomic and geopolitical uncertainty
- Climate change and environmental sustainability
- Supply chain, outsourcing and 3rd party risk
- Organisational culture
What can the value of internal audit be in sustainability matters?
While the definition of the Internal Audit function is widely known and recognized, an additional value of Internal audit is that it can help management to anticipate and navigate around future challenges. Internal audit is in a good position to do this as on top of the requirements cited above such as independence, objectivity and objective assurance, the internal audit function is in a privileged position to have a helicopter view of the whole organization and to have access to all levels in the organization. The positioning and added value of internal auditing in an organization can be better understood.
Role in assurance
The internal audit function should at a minimum provide the following assurance over ESG reporting.
- Review reporting metrics for relevancy, accuracy, timeliness, and consistency: All public ESG reports must provide information that accurately depicts an organization’s ESG efforts. This is particularly important as regulatory oversight and public scrutiny increase.
- Review reporting for consistency with formal financial disclosure filings: While ESG reporting provides non-financial data, any information that conflicts with formal financial disclosures will raise a red flag with investors and regulators.
- Conduct materiality or risk assessments on ESG reporting: Organizations must have a clear understanding of how ongoing ESG efforts or public commitments to reaching ESG goals can rise to the level of materiality.
- A review and assessment of the completeness, accuracy, consistency, and comparability of data and reported non-financial information but also an assessment of the effectiveness of the internal controls governing the processes to collect this information.
Internal audit can guide ESG governance because of its holistic understanding of risk across the organization. It can use its unique perspective to help identify roles and responsibilities, as well as provide training on internal controls.
From a practical point of view, Internal Audits could help to guide the corporation on its way to a sustainability strategy. The topics which everyone will take for granted are the review of the completeness, quality and governance of information provided to external stakeholders as well as the review of compliance with the selected framework for reporting on sustainability.
To conclude
It is important to assess that sustainability is more than caring about the environment only. The social environment and governance environment in which a corporation is acting are also critical for a corporation, but more importantly, sustainability needs to be seen as managing a corporation so that it can continue to operate for generations to come.
As the going concern is a main objective for the Corporation, it is equally important for Internal Audit to ensure to help an organization achieve its objectives and to protect all its assets (whether they being financial, environmental, or social) over time– which in this case is to ensure that the corporation can operate for the years to come.
The role that internal audit can play might be depending on the ESG strategy the corporation has taken. In addition to resources, to be successful, on its path to increase the sustainability of the corporation and as a result, improve the sustainability score of the corporation.
Sustainability could be seen as a risk for a corporation and an internal audit department, however, when given adequate resources, authority, and access to stakeholders, it will be an opportunity for both.
