Technical Articles



International Journal of Auditing – April 2004

Regularity Auditing and the Environment: The South African Experience

Traditionally, generally accepted accounting principles have not made broad environmental disclosures mandatory in an entity’s financial statements. In the conventional model of financial accounting and reporting, the emphasis is on financial performance.

However, environmental management and strategy experts have been talking about the need for more holistic reporting on the performance of companies and organizations. The term “triple bottom line,” or sustainability reporting, has been adopted to describe reporting that encompasses financial, environmental, and social matters. The integration of these three facets has grown out of the focus on sustainable development.

While these trends and influences may be considered interesting, the question arises, what relevance do they have to regularity audits? Understanding the financial implications of environmental matters is fundamental to integrating environmental and business issues. Arguably, it is important that regularity auditors keep abreast of developments and issues in this field to ensure that environmental issues are adequately and appropriately addressed during the audit.

In the Office of the Auditor-General (OAG) of South Africa, we have developed audit procedures at the planning stage to help auditors understand these issues and identify international environmental liabilities. More often than not, a regularity auditor will need to draw on the skills and knowledge of an environmental specialist to develop a basic understanding of environmental terms and issues. At the same time, it is important for environmental specialists to have a working knowledge of the financial audit process. Hence, there is a strong case for these two professions to work together and to develop an understanding of each other’s disciplines. A framework for implementing this teamwork is based on integrating environmental audit procedures with the financial audit process, taking into account accepted environmental audit practices, such as those detailed in the International Standard for Environmental Management Systems.

The OAG’s Research and Development Unit researches environmental auditing issues and maintains a technical support hotline for regularity auditors to assist with the consideration of environmental matters in financial statements. One function of the Research and Development Unit is to report on specific issues, initially assessing current risk areas and providing a comprehensive review of the environmental situation. For example, the Research and Development Unit assists the Department of Environmental Affairs and Tourism in identifying risks of noncompliance in light of the relevant legislation.

At the 16th INCOSAI in Montevideo, the OAG was nominated to serve as the “trekker” (or initiator) for developing environmental auditing in English-speaking Africa. In this capacity, the OAG has hosted and chaired the inaugural meeting of the Working Group on Environmental Auditing in Africa.

Environmental auditing and reporting is still in its infancy in South Africa, and our approach is, therefore, focused on increased awareness, development, and training with a regional perspective. The OAG faces many challenges, including the following:

  • creating capacity and enthusiasm within other units of the OAG to assist the Research and Development Unit with a systematic approach to implement concepts related to corporate governance and sustainable development into the normal audit process and getting auditors to buy into these new developments and
  • influencing key government players to establish a framework for reporting on economic, environmental, and social performance without harming the OAG’s independent status.

These challenges reflect the dilemma in which the OAG is currently operating. Momentum cannot be gained before regularity auditors and the government are in a position in which it is possible to report accurately on nonfinancial activities and sustainability issues.