For those who may not be familiar, the Public Company Accounting Oversight Board (PCAOB) oversees audits of public companies to ensure auditors produce informative, accurate, and independent audit reports. Basically, they audit the auditors each year. Their 2025 inspection priorities were just published and a couple items are noteworthy even for companies that don’t intend to make sustainability a material issue or reflect such matters in their financial report. Your financial statement auditors may need to change how you – and they – think about that.
Among the items potentially linked to sustainability that PCAOB will check in their upcoming auditor inspections:
- “… public companies that have changed their supply chain and/or logistics. This can increase audit risk as internal controls may change, and new jurisdictions, if applicable to the sourcing and/or logistical changes, may introduce new complexities unique to the location.” Changing suppliers based on sustainability/ESG criteria may not seem like something financial auditors would be particularly interested in, but the PCAOB believes it is.
- “Auditors may look for ways to decrease audit hours, like determining a more aggressive, or higher, materiality level. We will evaluate significant year-over-year materiality changes and scoping of multi-location audits… Did the company have any transactions or business risks that the auditor scoped out of the audit based on planned materiality? If so, what were they?” There has been much emphasis on determining materiality for ESG/sustainability disclosure purposes, but less attention has been paid to how auditors determine materiality in an audit context. They aren’t the same thing. Talk with your assurance provider about audit materiality.
- “Which audit issues were especially challenging to conclude upon that were not disclosed as a CAM [Critical Audit Matter]? What consideration was given to disclosing that as a CAM?” Where sustainability issues impact financial reporting, auditing of those issues will be complex. For instance, the inclusion of GHG in financial accounting (as opposed to the Management Discussion & Analysis) may be uncommon, but where it occurs – that will probably be a good candidate for a CAM of interest to PCAOB.
- “… dialogues between the PCAOB and audit committee chairs continue to provide valuable insights on audits and the work of audit committees. We plan to continue to seek opportunities to interact with the audit committee chairs on some public company audits selected for review.” Board level interest and participation in ESG/sustainability materiality determinations, disclosures and assurance has grown. PCOAB is likely to get an earful on those topics.
Some may argue that sustainability topics are relegated only to the MD&A – which is not in scope for financial statement audits in the US. That isn’t always the case – and the lines are being blurred more and more. For instance, the IFRS announced a series of webcasts to “illustrate how applying the [IFRS Accounting Standards and IFRS Sustainability Disclosure Standards] together results in complementary and connected reported information.” Yes, IFRS standards don’t generally apply to companies using US-based FASB standards – but there will be spillover.
I’ve said before that while raising ESG/sustainability matters to the financial accounting/reporting level of importance has long been the Holy Grail for those working in the space, that comes with a host of unfamiliar burdens/risks. Working closely with your internal audit department can help everyone involved prepare for otherwise unforeseen audit and disclosure risks.
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