Joanna Krasodomska, Roger Simnett, and Donna L. Street. “Extended External Reporting Assurance: Current Practices and Challenges.” Journal of International Financial Management and Accounting, 32(1), February 2021, 104-142. Open access https://onlinelibrary.wiley.com/doi/full/10.1111/jifm.12127
Elmar R. Venter and Lanise van Eck. “Research on Extended External Reporting Assurance: Trends, Themes, and Opportunities.” Journal of International Financial Management and Accounting, 32(1) (February 2021): 63-103. Open access https://doi.org/10.1111/jifm.12125
In this article, we review two companion academic articles recently published in the Institutional Perspectives section of the Journal of International Financial Management and Accounting1 that together provide a contemporaneous and comprehensive assessment of the Extended External Reporting (EER) assurance landscape. The articles clearly document considerable current momentum related to EER and its assurance. The articles are intended to inform all interested parties, including assurance practitioners, EER users, standard-setters, regulators, and academics regarding major developments and insights of interest learned from a review of the burgeoning academic literature.
Current Practices and Challenges
In the first article, Krasodomska,Simnett,and Street (hereafter KSS) outline views heard from panelists at a United Nations Conference on Trade and Development – International Standards of Accounting and Reporting (UNCTAD ISAR) and World Business Council for Sustainable Development (WBCSD) Webinar – Assurance on Sustainability Reports: Current Practices and Challenges2 (hereafter Webinar). The Webinar objectives included exploring views and practices on the assurance of EER, identifying key challenges, and exploring the best way forward. Panelists emphasized that various stakeholder groups are presently demanding a greater range of accountabilities. From a reporting perspective, this is reflected in a significant increase in the publication of EER and a number of current regulatory developments. Panelists stressed that EER plays an important role in rebuilding trust by catalyzing corporate focus and disclosure of business-centric matters such as strategy, business model, and governance, on matters material to stakeholders. Relatedly, EER will not rebuild trust unless the disclosures are credible and seen to be credible. Therefore, it is important that assurance and other credibility enhancing techniques are developed alongside EER models and frameworks and take account of regulatory initiatives in the reporting of EER information.
Both the Webinar presentations and concluding question and answer (Q&A) segment addressed ongoing reporting initiatives, in particular announcements of collaborations and mergers from sustainability standard-setting bodies aimed at streamlining a plethora of existing frameworks3 and consultations around both Directive 2014/95/EU (e.g., non-financial reporting directive (NFRD)) and the international standard-setting process (e.g., Guidance from the International Auditing and Assurance Standard Board (IAASB) on International Standard on Assurance Engagements (ISAE) 3000 (Revised) - Assurance Engagements Other Than Audits or Reviews of Historical Financial Information. For example, during the Webinar, panelist Dugelay4 addressed the contributions of the European Union (EU) and Accountancy Europe in enhancing the reliability of EER throughout Europe. KSS build on his comments by providing an historical overview of EU regulation regarding EER assurance and related Accountancy Europe publications. KSS also note that the NFRD represents the most significant EU legislative initiative regarding non-financial disclosure in nearly a decade and more importantly addresses the EU’s 2020 consultation aimed at potential revisions to the Directive. Recent developments include the publication of the associated outreach document on 11 January 2021 by the EFRAG European Reporting Lab. The document presents the results of on-going work on the elaboration of possible EU non-financial reporting standards. The project is expected to be completed by the end of February 2021.5
As outlined by Grabowski6 during the Webinar, the IAASB is poised to issue guidance for assurance practitioners to enable more consistent and appropriate application of ISAE 3000 (Revised) to EER assurance engagements and greater trust in the resulting assurance reports by EER users. This guidance addresses 10 key challenges identified by the IAASB in providing assurance on EER, including assurance of narrative and forward-looking information, both of which are commonly contained in EER frameworks. The IAASB is expected to approve this guidance at its board meeting in March 2021 and publish it soon thereafter.
An obstacle for the progress of EER assurance is the ability to provide reasonable as opposed to limited assurance. During the Webinar Q&A, Dugelay addressed whether reasonable assurance requires further development of certain competencies for the assurance provider as well as for the company seeking assurance. He acknowledged that it is a challenge to provide reasonable assurance on EER, especially when the reporting entity is not sufficiently competent in preparing EER. This may result in a qualified assurance report being issued because the assurer is not able to conclude that the report is not materially misstated in accordance with the reporting criteria. Dugelay, however, believes the ability to provide reasonable assurance is improving, due largely to the level of internal control over NFI, which has improved significantly in recent years. Furthermore, internal audit can be beneficial to EER, and if management processes, the internal control function, and internal audit all function together (commonly referred to as combined assurance), the likelihood of a clean assurance report is higher.
While reasonable versus limited assurance was not one of the ten key challenges addressed by the IAASB, it represents an issue the IAASB received feedback on during the exposure process and is addressed in the guidance. KSS, in their overview of practice-focused literature, highlight stakeholder demand for reasonable assurance of EER. Furthermore, during a presentation at an October 2020 UNCTAD ISAR WBCSD Workshop Assurance on Sustainability Reports: Current Practices and Challenges, Dugelay reiterated that Accountancy Europe believes reasonable assurance is the way forward.7 The ability of the assurance provider to place greater reliance on the developing internal control systems is also identified as an area requiring further guidance and is being addressed by the IAASB.
During the Webinar Q&A, Grabowski indicated the proliferation of reporting standards has a practical impact on getting to reasonable assurance. Companies realize that many EER frameworks are already advanced, but differ, in their reporting requirements, forcing companies to make decisions regarding what standards/frameworks to follow in communicating information on specific sustainability issues. This will not necessarily result in the most effective comparability and makes it harder for assurance practitioners to address those judgments and have confidence that the judgements are appropriate in the circumstances of each engagement. When considering these judgments, the assurance provider is trying to determine whether the approach is appropriate in terms of the users of that information. Diversity of reporting standards and lack of harmonization is a factor that makes it hard to perform an EER assurance engagement. Thus, Grabowski would like to see consolidation within the current proliferation of EER frameworks.
KSS, however, highlight that EER assurance frameworks are generally framework neutral. As Skoberev8 described during the Webinar, the IAASB developed ISAE 3000 (Revised) for performing any type of assurance other than financial audits and reviews of historical financial information, and professional accountants must follow the standard (and other assurance providers are permitted to use the standard under certain conditions) when conducting an EER assurance engagement. The other assurance standard frequently utilized in practice, AA1000, is for assurance on sustainability information and more commonly utilized by assurance providers from outside the accountancy profession (e.g., engineering firm). Thus, both assurance frameworks should be able to react to any further developments in reporting frameworks.
Review of the Academic Literature and Potential Research Opportunities
The second paper – Venter and Van Eck (2021) (hereafter VV) – reviews 121 research articles on EER assurance published between 2009 and 2020 across 35 academic journals. The review is directed at serving as a possible input for the IAASB’s standard setting activities, as well as the practice of EER assurance. The research contributes to the EER assurance literature by being the most current and comprehensive review to date. VV documents a rapid increase in the literature with almost half of the publications appearing between 2018 and 2020. This shows that academic research is growing alongside developments in practice and that it has the potential to inform EER assurance related standard setting decisions.
VV categorizes the literature by research methods and documents that the quantitative archival literature (analyzing available EER and related assurance) commonly focuses on the determinants and consequences of EER assurance. The literature provides evidence that firm size, profitability, leverage, corporate governance, social and environmental performance, and media pressure are some of the determinants associated with the decision to obtain EER assurance. These firm-level characteristics also influence the choice between an accountant versus non-accountant assurance provider. Industry-level characteristics also affect the demand for assurance and the choice of assurance provider, because certain industries have greater social and/or environmental impacts. In this regard, the findings in the literature are mixed. Some studies document that firms in industries with greater social and environmental impacts are more likely to obtain assurance. Other studies observe that assurance is more common in less socially and environmentally sensitive industries, potentially because of lower assurance costs in these industries. Country-level characteristics such as legal system/origin, strength of the legal environment, strength of legal enforcement and pressure toward sustainable corporate practices are also associated with the demand for assurance and type of assurance provider.
An important question is whether assurance improves the quality of EER and provides economic and other benefits. The quantitative research provides evidence in this regard by documenting an association between assurance and EER disclosure quality. Assurance is also associated with a higher incidence of EER restatements, suggesting assurance improves EER quality through the identification of errors in prior periods and methodological updates that require restatements for comparability. Assurance and the type of assurance provider are also associated with capital market effects. In this regard, the literature provides evidence that EER assurance is associated with lower cost of capital, lower analyst forecast errors, and lower analyst forecast dispersion. Some of these capital market outcomes are more pronounced for accounting assurers.
Another quantitative research method often used is experiments, where cause and effect can be better isolated than using actual firm and market data. This literature provides evidence that non-professional investors have more confidence in EER with a reasonable level of assurance and when a top tier accounting firm is the assurance provider. Two experimental studies investigate the decisions of professional analysts. The evidence suggests that U.S. analysts perceive EER information as being more credible when the assurer is a professional accountant, while Australian and U.K. analysts do not make this distinction. When different levels of assurance are applied, analysts negatively perceive the lowest level of assurance. Furthermore, the experimental literature suggests that the effect of assurance is context-specific and affected by factors such as country, industry, managerial incentives, positive versus negative EER information, strategic relevance of environment, social and governance (ESG) indicators, and management and investors views about ESG.
Studies using qualitative methods such as interviews, surveys, and content analysis investigate a range of issues, including managerial and professional capture, turf wars between accountant and non-accountant assurers, scope of assurance engagements, level of assurance, assurance report wording, and lack of regulation and standards.
Finally, based on their comprehensive literature review, VV offer research ideas linked to the IAASB’s forthcoming guidance. Research opportunities are outlined for some of the chapters of the guidance to identify and explore its impact on consistent and high quality application of the guidance, including but not limited to the areas of biases arising in multidisciplinary engagement teams, professional skepticism and judgment, the rational purpose requirement and scope of engagements, and assurance reporting. Also, the proliferation of the development and consolidation of observed EER frameworks raises questions about the assurability of the concepts in these frameworks and is of great interest to standard-setters. Given the importance of evidence informed policy and decision making, we encourage academic researchers to examine VV’s literature review and carefully consider the associated identified research opportunities.
 JIFMA is the research journal of the International Association for Accounting Education and Research (IAAER).
 See https://isar.unctad.org/blog/2020/06/03/unctad-isar-wbcsd-webinar-16062020/#Recording.
 See https://29kjwb3armds2g3gi4lq2sx1-wpengine.netdna-ssl.com/wp-content/uploads/Statement-of-Intent-to-Work-Together-Towards-Comprehensive-Corporate-Reporting.pdf and https://cdn.ifrs.org/-/media/project/sustainability-reporting/consultation-paper-on-sustainability-reporting.pdf.
 Partner, Deloitte and member Sustainable Finance Group, Accountancy Europe.
 See https://www.efrag.org/Activities/2010051123028442/Non-financial-reporting-standards.
 Director Audit Policy Financial Reporting Council (FRC) UK and former member (IAASB).
 See https://isar.unctad.org/presentations/#30Oct.
 Partner and Head of Corporate Governance and Sustainability FBK Grant Thornton, Russian Federation.