Section 5120Part 5

The Conceptual Framework

Introduction

5120.1 The circumstances in which sustainability assurance providers operate might create threats to compliance with the fundamental principles. Section 5120 sets out requirements and application material, including a conceptual framework, to assist practitioners in complying with the fundamental principles and acting in the public interest when performing sustainability assurance engagements. Such requirements and application material accommodate the wide range of facts and circumstances, including the various professional activities, interests and relationships, that create threats to compliance with the fundamental principles. In addition, they deter practitioners from concluding that a situation is permitted solely because that situation is not specifically prohibited by this Part. 5120.2 The conceptual framework specifies an approach for a sustainability assurance provider to:

(a)

Identify threats to compliance with the fundamental principles;

(b)

Evaluate the threats identified; and

(c)

Address the threats by eliminating or reducing them to an acceptable level.

Requirements and Application Material

General

R5120.3

The sustainability assurance provider shall apply the conceptual framework to identify, evaluate and address threats to compliance with the fundamental principles set out in Section 5110Section 5110.

R5120.5

When applying the conceptual framework, the sustainability assurance provider shall:

(a)

Have an inquiring mind;

(b)

Exercise professional judgment; and

(c)

Use the reasonable and informed third party test described in paragraph 5120.5 A9.

Having an Inquiring Mind

5120.5 A1 An inquiring mind is a prerequisite to obtaining an understanding of known facts and circumstances necessary for the proper application of the conceptual framework. Having an inquiring mind involves:

(a)

Considering the source, relevance and sufficiency of information obtained, taking into account the nature, scope and outputs of the professional activity being undertaken; and

(b)

Being open and alert to a need for further investigation or other action. 5120.5 A2 When considering the source, relevance and sufficiency of information obtained, the sustainability assurance provider might consider, among other matters, whether: • New information has emerged or there have been changes in facts and circumstances. • The information or its source might be influenced by bias or self-interest. • There is reason to be concerned that potentially relevant information might be missing from the facts and circumstances known to the practitioner. • There is an inconsistency between the known facts and circumstances and the practitioner’s expectations. • The information provides a reasonable basis on which to reach a conclusion. • There might be other reasonable conclusions that could be reached from the information obtained. 5120.5 A3 Paragraph R5120.5 requires all sustainability assurance provider to have an inquiring mind when identifying, evaluating and addressing threats to the fundamental principles. This prerequisite for applying the conceptual framework applies to all practitioners regardless of the professional activity undertaken.

Under sustainability assurance standards, including those issued by the SRSB, practitioners are also required to exercise professional skepticism, which includes a critical assessment of evidence.

Exercising Professional Judgment

5120.5 A4 Professional judgment involves the application of relevant training, professional knowledge, skill and experience commensurate with the facts and circumstances, taking into account the nature and scope of the particular professional activities, and the interests and relationships involved. For example, application of knowledge of certain location-specific environmental, social, economic, cultural or other sustainability-related issues might be relevant when performing sustainability assurance engagements. 5120.5 A5 Professional judgment is required when the sustainability assurance provider applies the conceptual framework in order to make informed decisions about the courses of actions available, and to determine whether such decisions are appropriate in the circumstances.

In making this determination, the practitioner might consider matters such as whether: • The practitioner’s expertise is sufficient to reach a conclusion. • There is a need to consult with others with relevant expertise. • The practitioner’s own preconception or bias might be affecting the practitioner’s exercise of professional judgment. 5120.5 A6 The circumstances in which sustainability assurance provider carry out professional activities and the factors involved vary considerably in their range and complexity. The professional judgment exercised by practitioners might need to take into account the complexity arising from the compounding effect of the interaction between, and changes in, elements of the facts and circumstances that are uncertain and variables and assumptions that are interconnected or interdependent. 5120.5 A7 Managing complexity involves: • Making the firm and, if appropriate, relevant stakeholders aware of the inherent uncertainties or difficulties arising from the facts and circumstances. (Ref: Para. R5113.3) • Being alert to any developments or changes in the facts and circumstances and assessing whether they might impact any judgments the sustainability assurance provider has made. (Ref: Para. R5120.5 to 5120.5 A3, and R5120.9 to 5120.9 A2) 5120.5 A8 Managing complexity might also involve: • Analyzing and investigating as relevant, any uncertain elements, the variables and assumptions and how they are connected or interdependent. • Using technology to analyze relevant data to inform the sustainability assurance provider’s judgment. • Consulting with others, including experts, to ensure appropriate challenge and additional input as part of the evaluation process.

Reasonable and Informed Third Party

5120.5 A9 The reasonable and informed third party test is a consideration by the sustainability assurance provider about whether the same conclusions would likely be reached by another party. Such consideration is made from the perspective of a reasonable and informed third party, who weighs all the relevant facts and circumstances that the practitioner knows, or could reasonably be expected to know, at the time the conclusions are made. The reasonable and informed third party does not need to be a sustainability assurance provider, but would possess the relevant knowledge and experience to understand and evaluate the appropriateness of the practitioner’s conclusions in an impartial manner.

Identifying Threats

R5120.6

The sustainability assurance provider shall identify threats to compliance with the fundamental principles. 5120.6 A1 An understanding of the facts and circumstances, including any professional activities, interests and relationships that might compromise compliance with the fundamental principles, is a prerequisite to the sustainability assurance provider’s identification of threats to such compliance. The existence of certain conditions, policies and procedures established by the practitioner’s profession, legislation, regulation, or the firm that can enhance the practitioner acting ethically might also help identify threats to compliance with the fundamental principles. Paragraph 5120.8 A2 includes general examples of such conditions, policies and procedures which are also factors that are relevant in evaluating the level of threats. 5120.6 A2 Threats to compliance with the fundamental principles might be created by a broad range of facts and circumstances. It is not possible to define every situation that creates threats. In addition, the nature of engagements and work assignments might differ and, consequently, different types of threats might be created. 5120.6 A3 Threats to compliance with the fundamental principles fall into one or more of the following categories:

(a)

Self-interest threat – the threat that a financial or other interest will inappropriately influence a sustainability assurance provider’s judgment or behavior;

(b)

Self-review threat – the threat that a sustainability assurance provider will not appropriately evaluate the results of a previous judgment made, or an activity performed by the practitioner or by another individual within the practitioner’s firm, on which the practitioner will rely when forming a judgment as part of performing a current activity;

(c)

Advocacy threat – the threat that a sustainability assurance provider will promote a sustainability assurance client’s position to the point that the practitioner’s objectivity is compromised;

(d)

Familiarity threat – the threat that due to a long or close relationship with a sustainability assurance client, a sustainability assurance provider will be too sympathetic to their interests or too accepting of their work; and

(e)

Intimidation threat – the threat that a sustainability assurance provider will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence over the practitioner. 5120.6 A4 A circumstance might create more than one threat, and a threat might affect compliance with more than one fundamental principle.

Evaluating Threats

R5120.7

When the sustainability assurance provider identifies a threat to compliance with the fundamental principles, the practitioner shall evaluate whether such a threat is at an acceptable level.

Acceptable Level

5120.7 A1 An acceptable level is a level at which a sustainability assurance provider using the reasonable and informed third party test would likely conclude that the practitioner complies with the fundamental principles.

Factors Relevant in Evaluating the Level of Threats

5120.8 A1 The consideration of qualitative as well as quantitative factors is relevant in the sustainability assurance provider’s evaluation of threats, as is the combined effect of multiple threats, if applicable. 5120.8 A2 The existence of conditions, policies and procedures described in paragraph 5120.6 A1 might also be factors that are relevant in evaluating the level of threats to compliance with the fundamental principles. Examples of such conditions, policies and procedures include: • Corporate governance requirements. • Educational, training and experience requirements. • Effective complaint systems which enable the sustainability assurance provider and the general public to draw attention to unethical behavior. • An explicitly stated duty to report breaches of ethics requirements. • Professional or regulatory monitoring and disciplinary procedures.

Consideration of New Information or Changes in Facts and Circumstances

R5120.9

If the sustainability assurance provider becomes aware of new information or changes in facts and circumstances that might impact whether a threat has been eliminated or reduced to an acceptable level, the practitioner shall re-evaluate and address that threat accordingly. 5120.9 A1 Remaining alert throughout the professional activity assists the sustainability assurance provider in determining whether new information has emerged or changes in facts and circumstances have occurred that:

(a)

Impact the level of a threat; or

(b)

Affect the practitioner’s conclusions about whether safeguards applied continue to be appropriate to address identified threats. 5120.9 A2 If new information results in the identification of a new threat, the sustainability assurance provider is required to evaluate and, as appropriate, address this threat. (Ref: Paras. R5120.7 and R5120.10).

Addressing Threats

R5120.10

If the sustainability assurance provider determines that the identified threats to compliance with the fundamental principles are not at an acceptable level, the practitioner shall address the threats by eliminating them or reducing them to an acceptable level. The practitioner shall do so by:

(a)

Eliminating the circumstances, including interests or relationships, that are creating the threats;

(b)

Applying safeguards, where available and capable of being applied, to reduce the threats to an acceptable level; or

(c)

Declining or ending the specific professional activity.

Actions to Eliminate Threats

5120.10 A1 Depending on the facts and circumstances, a threat might be addressed by eliminating the circumstance creating the threat.

However, there are some situations in which threats can only be addressed by declining or ending the specific professional activity. This is because the circumstances that created the threats cannot be eliminated and safeguards are not capable of being applied to reduce the threat to an acceptable level.

Safeguards

5120.10 A2 Safeguards are actions, individually or in combination, that the sustainability assurance provider takes that effectively reduce threats to compliance with the fundamental principles to an acceptable level.

Consideration of Significant Judgments Made and Overall Conclusions

Reached

R5120.11

The sustainability assurance provider shall form an overall conclusion about whether the actions that the practitioner takes, or intends to take, to address the threats created will eliminate those threats or reduce them to an acceptable level. In forming the overall conclusion, the practitioner shall:

(a)

Review any significant judgments made or conclusions reached; and

(b)

Use the reasonable and informed third party test.

Other Considerations when Applying the Conceptual Framework

Bias

5120.12 A1 Conscious or unconscious bias affects the exercise of professional judgment when identifying, evaluating and addressing threats to compliance with the fundamental principles. 5120.12 A2 Examples of potential bias to be aware of when exercising professional judgment include: • Anchoring bias, which is a tendency to use an initial piece of information as an anchor against which subsequent information is inadequately assessed. • Automation bias, which is a tendency to favor output generated from automated systems, even when human reasoning or contradictory information raises questions as to whether such output is reliable or fit for purpose. • Availability bias, which is a tendency to place more weight on events or experiences that immediately come to mind or are readily available than on those that are not. • Confirmation bias, which is a tendency to place more weight on information that corroborates an existing belief than information that contradicts or casts doubt on that belief. • Groupthink, which is a tendency for a group of individuals to discourage individual creativity and responsibility and as a result reach a decision without critical reasoning or consideration of alternatives. • Overconfidence bias, which is a tendency to overestimate one’s own ability to make accurate assessments of risk or other judgments or decisions. • Representation bias, which is a tendency to base an understanding on a pattern of experiences, events or beliefs that is assumed to be representative. • Selective perception, which is a tendency for a person’s expectations to influence how the person views a particular matter or person. 5120.12 A3 Actions that might mitigate the effect of bias include: • Seeking advice from experts to obtain additional input. • Consulting with others to ensure appropriate challenge as part of the evaluation process. • Receiving training related to the identification of bias as part of professional development.

Firm Culture

5120.13 A1 The effective application of the conceptual framework by a sustainability assurance provider is enhanced when the importance of ethical values that align with the fundamental principles and other provisions set out in this Part is promoted through the internal culture of the firm. 5120.13 A2 The promotion of an ethical culture within a firm is most effective when:

(a)

Leaders and those in managerial roles promote the importance of, and hold themselves and others accountable for demonstrating, the ethical values of the firm;

(b)

Appropriate education and training programs, management processes, and performance evaluation and reward criteria that promote an ethical culture are in place;

(c)

Effective policies and procedures are in place to encourage and protect those who report actual or suspected illegal or unethical behavior, including whistle-blowers; and

(d)

The firm adheres to ethical values in its dealings with third parties. 5120.13 A3 Sustainability assurance provider are expected to:

(a)

Encourage and promote an ethics-based culture in their firm, taking into account their position and seniority; and

(b)

Exhibit ethical behavior in dealings with individuals with whom, and entities with which, the practitioners or the firm has a professional or business relationship.

Considerations for Sustainability Assurance Engagements

Independence

5120.15 A1 Sustainability assurance provider are required by Sections 5400Sections 5400 to 5600 and Part 4B, as applicable, to be independent when performing sustainability assurance engagements.

Independence is linked to the fundamental principles of objectivity and integrity. It comprises:

(a)

Independence of mind – the state of mind that permits the expression of a conclusion without being affected by influences that compromise professional judgment, thereby allowing an individual to act with integrity, and exercise objectivity and professional skepticism.

(b)

Independence in appearance – the avoidance of facts and circumstances that are so significant that a reasonable and informed third party would be likely to conclude that a firm’s, or a sustainability assurance team member’s, integrity, objectivity or professional skepticism has been compromised. 5120.15 A2 Sections 5400Sections 5400 to 5600 and Part 4B set out requirements and application material on how to apply the conceptual framework to maintain independence when performing sustainability assurance engagements.

Sustainability assurance provider and firms are required to comply with these requirements and application material in order to be independent when conducting such engagements. The conceptual framework to identify, evaluate and address threats to compliance with the fundamental principles applies in the same way to compliance with independence requirements. The categories of threats to compliance with the fundamental principles described in paragraph 5120.6 A3 are also the categories of threats to compliance with independence requirements.

Professional Skepticism

5120.16 A1 Under sustainability assurance standards, including those issued by the AASB, sustainability assurance provider are required to exercise professional skepticism when planning and performing sustainability assurance engagements.

Professional skepticism and the fundamental principles that are described in Section 5110Section 5110 are inter-related concepts. 5120.16 A2 In a sustainability assurance engagement that is within the scope of the Independence Standards in this Part, compliance with the fundamental principles, individually and collectively, supports the exercise of professional skepticism, as shown in the following examples: • Integrity requires the sustainability assurance provider to be straightforward and honest. For example, the practitioner complies with the principle of integrity by: o Being straightforward and honest when raising concerns about a position taken by a sustainability assurance client. o Pursuing inquiries about inconsistent information and seeking further evidence to address concerns about statements that might be materially false or misleading in order to make informed decisions about the appropriate course of action in the circumstances. o Having the strength of character to act appropriately, even when facing pressure to do otherwise or when doing so might create potential adverse personal or organizational consequences. Acting appropriately involves:

(a)

Standing one’s ground when confronted by dilemmas and difficult situations; or

(b)

Challenging others as and when circumstances warrant, in a manner appropriate to the circumstances.

In doing so, the practitioner demonstrates the critical assessment of evidence that contributes to the exercise of professional skepticism. • Objectivity requires the sustainability assurance provider to exercise professional or business judgment without being compromised by:

(a)

Bias;

(b)

Conflict of interest; or

(c)

Undue influence of, or undue reliance on, individuals, organizations, technology or other factors.

For example, the practitioner complies with the principle of objectivity by:

(a)

Recognizing circumstances or relationships such as familiarity with the sustainability assurance client, that might compromise the practitioner’s professional or business judgment; and

(b)

Considering the impact of such circumstances and relationships on the practitioner’s judgment when evaluating the sufficiency and appropriateness of evidence related to a matter material to the client’s sustainability information.

In doing so, the practitioner behaves in a manner that contributes to the exercise of professional skepticism. • Professional competence and due care requires the sustainability assurance provider to have professional knowledge and skill at the level required to ensure the provision of competent professional service, and to act diligently in accordance with applicable standards, laws and regulations. For example, the practitioner complies with the principle of professional competence and due care by:

(a)

Applying knowledge that is relevant to a particular sustainability assurance client’s industry and business activities in order to properly identify risks of material misstatement;

(b)

Designing and performing appropriate assurance procedures; and

(c)

Applying relevant knowledge when critically assessing whether evidence is sufficient and appropriate in the circumstances.

In doing so, the practitioner behaves in a manner that contributes to the exercise of professional skepticism.