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Auditing for Sustainability

An Interview with Professor Remko Renes

There are a lot of stakeholders involved in ESG reporting, the auditor is a crucial one. Auditors are playing an increasingly important role in facilitating ESG disclosure. To learn more about the profession and how it's changing, we spoke with Remko Renes, Assistant Professor of Corporate Governance at Nyenrode University.

Remko, can you tell us about yourself and your current roles?

My role is two-fold. I am an Assistant Professor at Nyenrode University. I teach Corporate Governance within the Accountancy program. I also conduct research on topics like financial reporting, corporate accountability and auditing. 

Besides this, I am a Member of the Internship Council (Raad voor de Praktijkopleidingen) of the Royal Dutch Association of Accountants (NBA) and Chairman of the Exam Committee. The Internship Council is responsible for the practical experience assurance programme of all auditors and accountants in the Netherlands. The exam committee is responsible for the integrated final oral exam that determines whether accountants can start their practice, after they have graduated and passed their education (practical and theoretical). Those are my current roles and activities.

Remko Renes

Remko Renes

What do you want to achieve in these roles?

The purpose in my university role is to help others understand why auditors matter. First, of course, I want to ensure auditors have a proper education, but society at large also needs to understand why auditors matter and how they can make a difference. This is what my research focuses on.

The Royal Dutch Association of Accountants is responsible for the education of future auditors. With every economic collapse or case of fraud, people ask “where were the auditors?” This often dominates the headlines in newspapers. It’s important that we address accountability in our programs. 

I would say that in both of my roles my purpose is to make the world a better place, both as an educator and an auditor myself. I have a more sociological view on things. We are very privileged to have a job and a good education. Good auditors can contribute to this purpose too. 

That’s right. Without auditors, companies cannot be made accountable. Good auditors should enhance transparency.

Yes and it’s important when discussing this topic that we focus on people and not just systems. Often, our conversations about auditing and accountability focus too much on systems and IT. For example, the Dutch newspaper Trouw recently published an article about a government IT system with privacy issues. This system is used at a social security agency and contains a lot of sensitive data. The newspaper found out that many municipality officers had access to the system - and to privacy sensitive data in it. It’s good to raise awareness about privacy. However, one thing I found problematic was that the article assumed that the system is bad because government officials can use it to access confidential information. Civil servants take an oath of integrity and confidentiality. So, this is not only an IT problem. You should be able to trust civil servants that take an oath. They must treat confidential information as confidential. If something goes wrong, it won’t be because of an IT problem but due to a cultural and organisational problem. 

So rather than focusing so much on the IT side of things, and implementing technical controls, we also need to look at the human side (often named soft skills).

Another known example is the hospital in the Hague that was fined nearly half a million euros in 2019 for violating European Privacy Law. The officials and employees of this hospital were reprimanded for not having their privacy protections in order. About 85 people at the hospital had access to the patient files of a reality TV star when in fact they did not need them. 

You cannot design a system that is perfect. Every system is as strong or weak as the people who work with it. 

What is a well-governed business in your opinion?

This is not an easy question but I do have examples we can learn from. I have gained quite some insight and knowledge of the organisational processes within Royal Dutch Shell, as an auditor. I’m not an advocate of Shell but I am also not as critical as say, many NGOs. They are in the business of pumping oil, an essential ingredient in a lot of products we all use on a daily basis. What I learned from them is the notion of the “license to operate.” 

In the times of Jeroen van de Veer, when he managed the refinery in Rotterdam, they were gearing up for a billion euro investment to overhaul these facilities. At the time, they changed their process from an internal-oriented to an external-oriented process focused on “dialogue - decide - deliver.” With my colleagues, we were auditing the triple bottom line process. These colleagues actually attended the stakeholder dialogues to see who was at the table, what the atmosphere was, etc. Their point of departure is openness. Accountability is important. Companies should not deny their roles and responsibilities, such as the pollution you provoke. 

So, you think organisations need to be critical of their own processes and open to new information and criticism from society to improve their decision making?

Yes. Let me provide another example of good governance. In 2012, we almost had a 16th elfstedentocht (a long-distance tour skating event which is typically held in cold winters in the Netherlands) but it didn’t go on because we did not have more than 15 cm of ice on the entire 200 km route. How they explain their decision to go forward or not, as well as their transparency, is a great example of good governance. That is: “these are our standards, this is how we assess them, and this is our decision.” 

In a sense, good governance is about empowering people to make the right decision, even if they won’t be popular by making that decision. 

Skaters on a frozen lake with farms and a windmill in the background

There is a lot of talk about accountancy becoming a commodity and that accountants should focus more on advisory services, ESG reporting, IT assurance, etc. There is a shift going on. What are your views on this?

Yes, there is a lot of discussion but I don’t think people become an auditor to fulfill an advisory role. You won’t find a lot of auditors who want to provide advisory services to corporate clients in addition to their role as external auditor, for example. Auditing is a public good, incorporated to private organisations by law. What you are seeing is that auditing firms are being more critical themselves and there is a continuous discussion in society about the role of auditors, which originates in cases of fraud. I haven’t heard of many cases where the auditor is causing the fraud. The auditor is involved in and responsible for a true and fair opinion. However, auditors are often a casualty in these cases. 

In the money laundering case against ING, for example, the media nearly accused the external auditors of running the money laundering machine. ING has to perform mandatory legal checks. The auditor involved is also in the information chain. This problem, also named expectation gap, is persistent. There will always be cases of fraud and there are always auditors involved. So this discussion will be ongoing. 

The other thing that is changing is business reporting. One of the elements of being a good auditor is understanding the client. If your client is changing its business, and if your primary role is to provide assurance on information, you need to be interested in the financial but also non-financial aspects, as these are more forward-looking.

When you say businesses are changing, are you referring to changing business models or different approaches to risk management? 

Yes. Some of these developments are good and others are not. For example, you have some organisations that have nothing on their balance sheet but their market capitalisation is very large. If you want to understand this, and address continuity, you need to understand the business. You need to look, for instance, at the non-financial claims in the report. Forward-looking claims are difficult to audit but they are very important. The auditors’ toolkit needs to change to understand what a company is doing.

If Deloitte is the auditor of a corporation, EY can be the business advisor. If you look at the commercial and operational side of audit firms - not only the big 4 but also the large 10 - they have an international framework. There are very few advisory types of organisations who are able to analyse and service large companies at a global scale. 

What is the role of sustainability in the field of accountancy?

Sustainability is in line with long term goals, like profitability. But it is also important for making assessments on “going concern,'' which is required for integrated reporting, comprising both financial and non-financial information. From a traditional view, going concern is a primary objective of the audit. In the long-run, if organisations are not acting sustainably, this will have financial repercussions. 

We talk to many business leaders who tell us climate change and the Paris Climate Deal are really changing their perspective. How does the accountancy profession combine financial figures and sustainability?

Yes, on the one hand, the Paris Agreement has indeed made climate change very tangible for a lot of organisations. It operationalised a lot of abstract concepts and made clear what the implications will be for business’ fossil fuel usage. On the other hand, we still have politicians that are climate change deniers.

Regarding your question, I think sustainability and financial figures are combined through internal control systems. Internal control systems used for operational processes have an impact on financials. To understand the financials, you need to understand the operational systems. If you can tap into the operational production systems, you get access to the first point of registration. If you can build on registrations, then at least your information is harmonised. The operational and internal control systems can also be used to deliver reports on sustainability.

Do you believe that there are sectors that are more advanced in sustainability reporting than others?

Yes, there are, broadly speaking, two kinds of organisations that are advanced in this space: those that adopt sustainability reporting because it’s required or because of an external influence, and those that want to lead in this space. Some organisations are already confronted with issues like pollution, scarce resources, etc. Even a company like HEINEKEN knows about the importance of clean water supply. If you are using water for your production and the level of water available is decreasing, you have a real problem. For these kinds of organisations, sustainability reporting is quite familiar. For others, where it’s not mandatory, it’s not as advanced yet. 

You also have organisations that show leadership, of course, who want to be first. These are organisations that adopt sustainability reporting autonomously. 

Most economists say that things like carbon trading or pollution rights trading would be effective to drive sustainability, but they are hardly practiced. Do you know why that is?

Economists have this kind of mechanism in their toolkit, that’s why they preach a market solution. If it always remains a possibility to do business outside of this regulated market, if it’s not mandatory, it’s cheaper not to do it. It’s not something companies are voluntarily doing. 

Do you think it should be mandatory? 

I think we can help move it forward by making it mandatory. At least then, it will be on the business agenda. If it’s not mandatory, it will only be on the agenda by choice. For example, I did some research on diversity for the Dutch Corporate Governance Code Committee. One of the things we found is that if you have quota regulations, then at least the diversity issue is on the agenda for every board nomination. This means you are changing culture. The same holds for being carbon neutral or having agreements on waste pollution and so on.

In these turbulent times we are living, is there room for sustainability in business?

I can be short on this one: yes. This is actually the right moment to embrace sustainability. There is immense complexity in the world today, and everything is connected. One small virus and the global economy goes down. That’s one thing. At the same time, we now know who is a key worker in society and who is not. Nurses, doctors, police, they are essential. We have become aware of what is relevant and what is not. In these times of lockdown, you can’t go to a bar or a restaurant. So people are longing to go to places where they can enjoy nature. But there are hardly any natural areas anymore. Why are new cities not being built with more parks and green spaces? These questions are now emerging.

The same thing is happening in business. COVID-19, in a sense, has provided a stimulus for sustainability which is helping us prioritise our objectives. 

Speaking of objectives, one of the most important factors for becoming a sustainable business is non-financial reporting. Non-financial reporting forces you to look at your strategy and collect all kinds of data. Can you talk about the current level of non-financial reporting in the Netherlands?

If you look at the current level, I think it is growing. All listed companies have non-financial reporting and it has been made mandatory. From a compliance perspective, they have this. Auditors have a responsibility in figuring out whether non-financial reporting elements are available. However, if you look at businesses in the Netherlands, I would say that roughly 20% is doing it for autonomous reasons (because they want to). The remaining 80% is only doing it for compliance. You do have large multinational corporations and even government entities that are innovating in this space. It’s not mandatory to have an integrated report, but in many cases, they have one. 

When I was at KPMG around 2005, only a small group of companies was interested in this. Now, there’s a lot more, because they see examples in peers. It has become more important because of legal obligations, but also because they see their competitors doing it. For example, if you want to work as a service supplier with these companies, you need to disclose environmental information about your own production process. 

Integrated reporting is still in its infancy. What will contribute to its growth?

If integrated thinking is on the agenda for the board, then integrated reporting will be as well. There is no requirement for integrated reporting, that I know of. But more and more companies are taking an integrated view on strategy, and making “people-planet-profit” kinds of decisions. If you have integrated reports for management reporting, you can use this data for external purposes as well. It has to start with leadership being compelled to make integrated decisions. If leadership is using it, then it will take off.

Integrated reports are already best practice in countries like South Africa, the Netherlands, and Germany. These countries are known for having a thorough understanding of this, so it’s also a cultural topic to a degree. 

The most important standards for non-financial reporting are GRI and SASB. Can you tell us more about these standards?

I’m not an expert in SASB but I’ve known about GRI for some time and I know it’s widely applied by companies. In the Netherlands, almost all the examples of non-financial reporting I have seen are GRI-based. As an auditor, we work with industry types. For example, if we’re talking about a trading company, we know we can expect certain things. If you want to start with non-financial reporting, using GRI, you should know how the internal control systems work, tapping into the operational management systems. I do know that GRI is rather open, so this makes it easier to make this link with your internal control system.

SASB is known mostly in the English-speaking world. It’s focused more on materiality for shareholders, also known as single materiality, and not on all stakeholders (double materiality). Can you comment on the matter of standards generally?

There are some developments at IFRS as well, to develop non-financial reporting standards. IFRS is the world standard for financial reporting. I am not an advocate for a particular standard, though I think you need to start somewhere. 

You mentioned earlier that the audit function performs a public service. In one of your scholarly articles you proposed an “audit board”. What is this audit board?

In “Auditing in the public interest: Reforming the profession by building on the strengths of the existing accounting firms,” we tried to solve the problematic tension between commercial pressure and public requirements. We envision an organisation consisting of a core permanent staff of experienced audit experts that is complemented by fellows drawn from existing accounting firms who take a job at the Board for a certain time period. This board will audit large and listed companies (so called Public Interest Entities), and fulfills the role as group auditor. The board makes use of the strength of private audit firms while acting as a public institution. Public interest entities are obliged to get an auditor’s opinion. The audit fee is based on a predetermined formula and not subject to auditor–client negotiations. The audit board provides an opinion. 

Philips, for example, is a public interest entity in the Netherlands. They have a lot of plants and subsidiaries in other countries, so you have to work with several private audit firms who serve as component auditors. These firms report to the audit board, which serves as the only institution that issues auditors opinions in the Netherlands. This means all information about these listed companies is available within the audit board, and not in the technical department of individual firms. You get a powerhouse of expertise. Integrated reporting requires integrated auditing. It’s the public function of the auditor being organised. It would create an entity that is an expert in auditing, but avoids many of the independence and commercial problems faced by private audit firms. While this proposal certainly deviates from the current model, we hope that it will spark good conversations that may lead to rethinking of the status quo.

More and more municipalities are having trouble getting auditors, for example. That is because audit companies cannot make margins here and they have limited resources. The audit board also de-commercialises the audit function, so it will make it easier to access auditors.

We are facing enormous challenges: climate change, loss of biodiversity, the collapse of entire ecosystems. These are interconnected but reinforce each other. Which one do you believe is the most pressing? 

I think these challenges are symptoms of one underlying factor, which is that there are too many people on a planet with finite resources and we do not take into account the consequences of living like this. I can go to the supermarket and get food without problems. But there are rainforests that are getting cut down to produce the food I consume. From an economic perspective, we are not willing to pay for it. You ask which is the most pressing. My opinion is that if people are willing to pay a fair amount of money for what it costs, then it won’t be a problem. If you raise the price of meat, less people will eat it, for example. We need to make the right choices at the micro and macro level. 

Climate change deals with the tragedy of the horizons. The current generation is facing the problems caused by previous generations, but it’s also the last generation that can change things. I remain optimistic as a lot of things are changing in the right direction.

You mentioned the Elfstedentocht earlier. For our non-Dutch readers, I’d like to mention that this yearly ice skating event is very iconic. Many people from Friesland list it as a reason to be active in sustainability efforts, as their children should have the opportunity to participate as well. Something that is obviously impaired by climate change. Are you also optimistic about the Elfstedentocht?

Yes, I am optimistic. Just recently, in February this year, we enjoyed skating on natural ice and experienced old winter scenes like those painted by Hendrick Avercamp. Something we didn’t think possibly anymore. I think another Elfstedentocht is likely.

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