Section 5400: Applying the Conceptual Framework to Independence for Sustainability Assurance Engagements

Section 5400: Applying the Conceptual Framework to Independence for Sustainability Assurance Engagements · Complied AI

(b)

(i)

Required to be provided in accordance with law or regulation; or

(ii)

Publicly disclosed to support decision-making by investors or other users. 5400.3c Law or regulation might also require the application of the Independence Standards in Part 4C to sustainability assurance engagements other than those described in paragraph 5400.3b. 5400.3d An assurance engagement might be either an attestation engagement or a direct engagement. The Independence Standards in this Part cover only sustainability assurance engagements that are attestation engagements. 5400.3e Part 4B of the Code sets out Independence Standards for other sustainability assurance engagements that are not within the scope of the Independence Standards in this Part. These include, for example: • A sustainability assurance engagement where the sustainability information on which the sustainability assurance provider expresses an opinion is reported solely in accordance with: o A framework designed to meet the information needs of specified users; or o Entity-developed criteria. • A sustainability assurance engagement for which the sustainability assurance report is a restricted use and distribution report.

Quality Management

5400.3f Quality management within firms that perform sustainability assurance engagements is an integral part of high-quality sustainability assurance engagements.

Sustainability

assurance standards are based on an expectation that the sustainability assurance provider has a system of quality management designed, implemented and operated in accordance with applicable quality management standards. 5400.4 Legal, regulatory or professional requirements that deal with the firm’s responsibilities to establish policies and procedures designed to provide it with reasonable assurance that the firm, its personnel and, where applicable, others subject to independence requirements (including network firm personnel), maintain independence where required by relevant ethics requirements. SAs and SREs establish responsibilities for engagement partners and engagement teams at the level of the engagement for audits and reviews, respectively. The allocation of responsibilities within a firm will depend on its size, structure and organization. Many of the provisions of the Independence Standards in this Part do not prescribe the specific responsibilities of individuals within the firm for actions related to independence, instead referring to “firm” for ease of reference. 5400.5 Independence is linked to the principles of objectivity and integrity. It comprises:

(c)

Some situations where the threats cannot be eliminated or there can be no safeguards to reduce them to an acceptable level.

Engagement Team and Sustainability Assurance Team

5400.8 The Independence Standards in this Part apply to all sustainability assurance team members, including engagement team members. 5400.9 An engagement team for a sustainability assurance engagement includes all leaders and staff in the firm who perform assurance procedures on the engagement, and any other individuals who perform such procedures who are from within or outside the firm’s network. 5400.10a If the firm intends to use the assurance work of another sustainability assurance provider and the firm is able to be sufficiently and appropriately involved in the practitioner’s work, that practitioner is a member of the engagement team. 5400.11 Sustainability assurance engagements might be performed on a wide range of sustainability matters that require specialized skills and knowledge beyond those possessed by the engagement team. A sustainability assurance engagement might therefore involve experts within, or engaged by, the firm, or a network firm who assist in the engagement.

Depending on the role of the individuals, they might be

engagement team or sustainability assurance team members. For example: • Individuals with expertise in a specialized area of sustainability reporting or assurance who perform assurance procedures are engagement team members.

These include, for example, individuals with expertise

in the measurement of specific sustainability matters or in analyzing complex information produced by automated tools and techniques for the purpose of identifying unusual or unexpected relationships. • Individuals within, or engaged by, the firm who have direct influence over the outcome of the sustainability assurance engagement through consultation regarding technical or industry- specific issues, transactions or events for the engagement are sustainability assurance team members but not engagement team members.

However, individuals who are external experts are neither

engagement team nor sustainability assurance team members. 5400.12 If the sustainability assurance engagement is subject to an engagement quality control review, those who provide quality control for the engagement, including those who perform the engagement quality control review for the engagement are sustainability assurance team members but not engagement team members.

Public Interest Entities

5400.13 Some of the requirements and application material set out in this Part are applicable only to the sustainability assurance engagements of public interest entities. An entity is a public interest entity in this Part if it has been determined as such for the purposes of the audit of its financial statements in accordance with the relevant provisions in Part 4A. 5400.13a A firm performing the audit of an entity’s financial statements might decide to voluntarily treat the entity as a public interest entity. In such circumstances, this does not mean that another firm performing a sustainability assurance engagement for that entity is required to treat that entity as a public interest entity for the purposes of the sustainability assurance engagement. 5400.13b Laws and regulations might also determine an entity to be a public interest entity for the purposes of a sustainability assurance engagement. 5400.15 Stakeholders have heightened expectations regarding the independence of a firm performing a sustainability assurance engagement for a public interest entity. The purpose of the requirements and application material for public interest entities is to meet these expectations, thereby enhancing stakeholders’ confidence in the entity’s sustainability information that can be used for their decision- making purposes.

Firms

Performing

Both

Audit

and Sustainability Assurance Engagements 5400.16a Independence standards for audit and review engagements are set out in Part 4A – Independence for Audit and Review Engagements. If a firm performs both a sustainability assurance engagement and an audit or review engagement for the same client, the provisions in the Code applicable to audit and review engagements, including Part 4A, and this Part apply to the firm, a network firm and the audit team members.

Requirements and Application Material

General

R5400.18

A firm performing a sustainability assurance engagement shall

be independent.

R5400.19

A firm shall apply the conceptual framework set out in Section 5120 to identify, evaluate and address threats to independence in relation to a sustainability assurance engagement.

Prohibition on Assuming Management Responsibilities

R5400.20

A firm or a network firm shall not assume a management responsibility for a sustainability assurance client. 5400.20 A1 Management responsibilities involve controlling, leading and directing an entity, including making decisions regarding the acquisition, deployment and control of human, financial, technological, physical and intangible resources. 5400.20 A2 When a firm or a network firm assumes a management responsibility for a sustainability assurance client, self-review, self-interest and familiarity threats are created. Assuming a management responsibility might also create an advocacy threat because the firm or network firm becomes too closely aligned with the views and interests of management. 5400.20 A3 Determining whether an activity is a management responsibility depends on the circumstances and requires the exercise of professional judgment. Examples of activities that would be considered a management responsibility include: • Setting policies and strategic direction, for example, setting sustainability policies and goals. • Hiring or dismissing employees. • Directing and taking responsibility for the actions of employees in relation to the employees’ work for the entity. • Authorizing transactions. • Deciding which recommendations of the firm or network firm or other third parties to implement. • Reporting to those charged with governance on behalf of management. • Taking responsibility for: o Developing criteria used by the client for reporting sustainability information. o The preparation and presentation of the sustainability information in accordance with the applicable sustainability reporting framework, including identifying material sustainability matters to be reported. o Designing, implementing, monitoring or maintaining internal control. o Supply chain management. o Designing or implementing software to collect or produce sustainability data for the client. o Reporting on environmental credits or offsets. o Resource allocation for sustainability initiatives. • Controlling or managing bank accounts or investments. 5400.20 A4 Subject to compliance with paragraph R5400.21, providing advice and recommendations to assist the management of a sustainability assurance client in discharging its responsibilities is not assuming a management responsibility.

The provision of advice and recommendations to a

sustainability assurance client might create a self-review threat and is addressed in Section 5600.

R5400.21

When performing a professional activity for a sustainability

assurance client, the firm shall be satisfied that client management makes all judgments and decisions that are the proper responsibility of management. This includes ensuring that the client’s management:

Notes, amendments & references (128)

assurance report is issued. When the engagement is of a recurring nature, it ends at the later of the notification by either party that the professional relationship has ended or the issuance of the final sustainability assurance report. 5400.30 A2 The reporting period for the engagement might be the same as the period covered by the financial statements. The reporting period for the engagement does not refer to the period covered by the sustainability information from the start of historical information to the end of any forward-looking information.

R5400.31

If an entity becomes a sustainability assurance client during

or after the reporting period for the engagement, the firm shall determine whether any threats to independence are created by:

(a) Financial or business relationships with the sustainability assurance client during or after the reporting period for the engagement but before accepting the sustainability assurance engagement; or

(b) Previous services provided to the sustainability assurance client by the firm or a network firm. 5400.31 A1 Threats to independence are created if a non-assurance service was provided to a sustainability assurance client during, or after the reporting period for the engagement, but before the engagement team begins to perform the sustainability assurance engagement, and the service would not be permitted during the engagement period. 5400.31 A2 A factor to be considered in such circumstances is whether the results of the service provided might form part of or affect the sustainability information on which the firm will express an opinion, the records underlying that information, or the internal controls over sustainability reporting. 5400.31 A3 Examples of actions that might be safeguards to address threats to independence include: • Not assigning professionals who performed the non- assurance service to be members of the engagement team. • Having an appropriate reviewer review the sustainability assurance work or non-assurance service as appropriate. • Engaging another firm outside of the network to evaluate the results of the non-assurance service or having another firm outside of the network re-perform the non-assurance service to the extent necessary to enable the other firm to take responsibility for the service. 5400.31 A4 A threat to independence created by the provision of a non- assurance service by a firm or a network firm prior to the sustainability assurance engagement period or prior to the reporting period for the engagement is eliminated or reduced to an acceptable level if the results of such service have been used or implemented in a period for which a sustainability assurance engagement has been undertaken by another firm.

Sustainability Assurance Clients that are Public Interest Entities

R5400.32

A firm shall not accept appointment to perform a sustainability

assurance engagement for a public interest entity to which the firm or the network firm has provided a non-assurance service prior to such appointment that might create a self-review threat in relation to the sustainability information on which the firm will express an opinion unless:

(a) The provision of such service ceases before the commencement of the sustainability assurance engagement period;

(b) The firm takes action to address any threats to its independence; and

(c) The firm determines that, in the view of a reasonable and informed third party, any threats to the firm’s independence have been or will be eliminated or reduced to an acceptable level. 5400.32 A1 Actions that might be regarded by a reasonable and informed third party as eliminating or reducing to an acceptable level any threats to independence created by the provision of non- assurance services to a public interest entity prior to appointment to perform a sustainability assurance engagement to that entity include: • The results of the service had been subject to sustainability assurance procedures in the course of the sustainability assurance engagement of the prior period’s sustainability information by a predecessor firm. • The firm engages a practitioner, who is not a member of the firm expressing the opinion on the sustainability information, to perform a review of the first sustainability assurance engagement affected by the self-review threat that is equivalent to an engagement quality control review. • The public interest entity engages another firm outside of the network to:

(i) Evaluate the results of the non-assurance service; or

(ii) Re-perform the service, to the extent necessary to enable the other firm to take responsibility for the result of the service.

Communication with those Charged with Governance

5400.40 A1 Paragraphs R5300.9 and R5300.10 set out requirements with respect to communicating with those charged with governance. 5400.40 A2 Even when not required by the Code, applicable professional standards, laws or regulations, regular communication is encouraged between a firm and those charged with governance of the client regarding relationships and other matters that might, in the firm’s opinion, reasonably bear on independence. Such communication enables those charged with governance to:

(a) Consider the firm’s judgments in identifying and evaluating threats;

(b) Consider how threats have been addressed including the appropriateness of safeguards when they are available and capable of being applied; and

Such an approach can be particularly helpful with respect to

intimidation and familiarity threats.

Network Firms

5400.50 A1 Firms frequently form larger structures with other firms and entities to enhance their ability to provide professional services. Whether these larger structures create a network depends on the particular facts and circumstances. It does not depend on whether the firms and entities are legally separate and distinct. Reference may be made to the Guidelines of Network issued by the Institute from time to time in this regard.

R5400.51

A network firm shall be independent of the sustainability

assurance clients of the other firms within the network as required by this Part. 5400.51 A1 The independence requirements in this Part that apply to a network firm apply to any entity that meets the definition of a network firm.

General Documentation of Independence for Sustainability Assurance

Engagements

R5400.60

A firm shall document conclusions regarding compliance with

the Independence Standards in this Part, and the substance of any relevant discussions that support those conclusions. In particular:

(a) When safeguards are applied to address a threat, the firm shall document the nature of the threat and the safeguards in place or applied; and

(b) When a threat required significant analysis and the firm concluded that the threat was already at an acceptable level, the firm shall document the nature of the threat and the rationale for the conclusion. 5400.60 A1 Documentation provides evidence of the firm’s judgments in forming conclusions regarding compliance with the Independence Standards in this Part. However, a lack of documentation does not determine whether a firm considered a particular matter or whether the firm is independent.

Mergers and Acquisitions

When a Client Merger Creates a Threat

5400.70 A1 An entity might become a related entity of a sustainability assurance client because of a merger or acquisition. A threat to independence and, therefore, to the ability of a firm to continue a sustainability assurance engagement might be created by previous or current interests or relationships between a firm or network firm and such a related entity.

R5400.71

In the circumstances set out in paragraph 5400.70 A1,

(a) The firm shall identify and evaluate previous and current interests and relationships with the related entity that, taking into account any actions taken to address the threat, might affect its independence and therefore its ability to continue the sustainability assurance engagement after the effective date of the merger or acquisition; and

(b) Subject to paragraph R5400.72, the firm shall take steps to end any interests or relationships that are not permitted by the Code by the effective date of the merger or acquisition.

R5400.72

As an exception to paragraph R5400.71(b), if the interest or

relationship cannot reasonably be ended by the effective date of the merger or acquisition, the firm shall:

(a) Evaluate the threat that is created by the interest or relationship; and

(b) Discuss with those charged with governance the reasons why the interest or relationship cannot reasonably be ended by the effective date and the evaluation of the level of the threat. 5400.72 A1 In some circumstances, it might not be reasonably possible to end an interest or relationship creating a threat by the effective date of the merger or acquisition. This might be because the firm provides a non-assurance service to the related entity, which the entity is not able to transition in an orderly manner to another provider by that date. 5400.72 A2 Factors that are relevant in evaluating the level of a threat created by mergers and acquisitions when there are interests and relationships that cannot reasonably be ended include: • The nature and significance of the interest or relationship. • The nature and significance of the related entity relationship (for example, whether the related entity is a subsidiary or parent). • The length of time until the interest or relationship can reasonably be ended.

R5400.73

If, following the discussion set out in paragraph R5400.72(b), those charged with governance request the firm to continue the sustainability assurance engagement, the firm shall do so only if:

(a) The interest or relationship will be ended as soon as reasonably possible but no later than six months after the effective date of the merger or acquisition;

(b) Any individual who has such an interest or relationship, including one that has arisen through performing a non- assurance service that would not be permitted by Section 5600 and its subsections, will not be a member of the engagement team for the sustainability assurance engagement or the individual responsible for the engagement quality control review; and

(c) Transitional measures will be applied, as necessary, and discussed with those charged with governance. 5400.73 A1 Examples of such transitional measures include: • Having a sustainability assurance provider review the sustainability assurance or non- assurance work as appropriate. • Having a sustainability assurance provider, who is not a member of the firm expressing the opinion on the sustainability information, perform a review that is equivalent to an engagement quality control review. • Engaging another firm to evaluate the results of the non-assurance service or having another firm re- perform the non-assurance service to the extent necessary to enable the other firm to take responsibility for the service.

R5400.74

The firm might have completed a significant amount of work

on the sustainability assurance engagement prior to the effective date of the merger or acquisition and might be able to complete the remaining assurance procedures within a short period of time. In such circumstances, if those charged with governance request the firm to complete the sustainability assurance engagement while continuing with an interest or relationship identified in paragraph 5400.70 A1, the firm shall only do so if it:

(a) Has evaluated the level of the threat and discussed the results with those charged with governance;

(b) Complies with the requirements of paragraph R5400.73(b) to (c); and

(c) Ceases to perform the sustainability assurance engagement no later than the date that the sustainability assurance report is issued.

If Objectivity Remains Compromised

R5400.75

Even if all the requirements of paragraphs R5400.71 to

R5400.74 could be met, the firm shall determine whether the

circumstances identified in paragraph 5400.70 A1 create a threat that cannot be addressed such that objectivity would be compromised. If so, the firm shall cease to perform the sustainability assurance engagement.

Documentation

R5400.76

The firm shall document:

(a) Any interests or relationships identified in paragraph 5400.70 A1 that will not be ended by the effective date of the merger or acquisition and the reasons why they will not be ended;

(b) The transitional measures applied;

(d) The reasons why the previous and current interests and relationships do not create a threat such that objectivity would be compromised.

Breach of an Independence Provision for Sustainability Assurance

When a Firm Identifies a Breach

R5400.80

If a firm concludes that a breach of an independence

requirement in this Part has occurred, the firm shall:

(a) End, suspend or eliminate the interest or relationship that created the breach and address the consequences of the breach;

(b) Consider whether any legal or regulatory requirements apply to the breach and, if so:

(i) Comply with those requirements;

(i) The engagement leader;

(ii) Those with responsibility for the policies and procedures relating to independence;

(iii) Other relevant personnel in the firm and, where appropriate, the network; and

(iv) Those subject to the independence requirements in this Part who need to take appropriate action;

(d) Evaluate the significance of the breach and its impact on the firm’s objectivity and ability to issue a sustainability assurance report; and

(e) Depending on the significance of the breach, determine:

(i) Whether to end the sustainability assurance engagement; or

(ii) Whether it is possible to take action that satisfactorily addresses the consequences of the breach and whether such action can be taken and is appropriate in the circumstances.

In making this determination, the firm shall exercise

professional judgment and take into account whether a reasonable and informed third party would be likely to conclude that the firm’s objectivity would be compromised, and therefore, the firm would be unable to issue a sustainability assurance report. 5400.80 A1 A breach of an independence provision of this Part might occur despite the firm having policies and procedures designed to provide it with reasonable assurance that independence is maintained.. It might be necessary to end the sustainability assurance engagement because of the breach. 5400.80 A2 The significance and impact of a breach on the firm’s objectivity and ability to issue a sustainability assurance report will depend on factors such as: • The nature and duration of the breach. • The number and nature of any previous breaches with respect to the current sustainability assurance engagement. • Whether a sustainability assurance team member had knowledge of the interest or relationship that created the breach. • Whether the individual who created the breach is a sustainability assurance team member or another individual for whom there are independence requirements. • If the breach relates to a sustainability assurance team member, the role of that individual. • If the breach was created by providing a professional service, the impact of that service, if any, on the records underlying, or data comprising, the sustainability information on which the firm will express an opinion. • The extent of the self-interest, advocacy, intimidation or other threats created by the breach. 5400.80 A3 Depending upon the significance of the breach, examples of actions that the firm might consider to address the breach satisfactorily include: • Removing the relevant individual from the sustainability assurance team. • Using different individuals to conduct an additional review of the affected assurance work or to re-perform that work to the extent necessary. • Recommending that the sustainability assurance client engage another firm to review or re- perform the affected assurance work to the extent necessary. • If the breach relates to a non-assurance service that affects the records underlying, or data comprising, the sustainability information on which the firm will express an opinion, engaging another firm to evaluate the results of the non-assurance service or having another firm re- perform the non-assurance service to the extent necessary to enable the other firm to take responsibility for the service.

R5400.81

If the firm determines that action cannot be taken to address the consequences of the breach satisfactorily, the firm shall inform those charged with governance as soon as possible and take the steps necessary to end the sustainability assurance engagement in compliance with any applicable legal or regulatory requirements. Where ending the engagement is not permitted by laws or regulations, the firm shall comply with any reporting or disclosure requirements.

R5400.82

If the firm determines that action can be taken to address the consequences of the breach satisfactorily, the firm shall discuss with those charged with governance:

(a) The significance of the breach, including its nature and duration;

(b) How the breach occurred and how it was identified;

(c) The action proposed or taken and why the action will satisfactorily address the consequences of the breach and enable the firm to issue a sustainability assurance report;

(d) The conclusion that, in the firm’s professional judgment, objectivity has not been compromised and the rationale for that conclusion; and

(e) Any steps proposed or taken by the firm to reduce or avoid the risk of further breaches occurring.

Such discussion shall take place as soon as possible unless

an alternative timing is specified by those charged with governance for reporting less significant breaches.

Communication of Breaches to Those Charged with Governance

5400.83 A1 Paragraphs R5300.9 and R5300.10 set out requirements with respect to communicating with those charged with governance.

R5400.84

With respect to breaches, the firm shall communicate in

writing to those charged with governance:

(a) All matters discussed in accordance with paragraph R5400.82 and obtain the concurrence of those charged with governance that action can be, or has been, taken to satisfactorily address the consequences of the breach; and

(b) A description of:

(i) The firm’s policies and procedures relevant to the breach designed to provide it with reasonable assurance that independence is maintained; and

(ii) Any steps that the firm has taken, or proposes to take, to reduce or avoid the risk of further breaches occurring.

R5400.85

If those charged with governance do not concur that the

action proposed by the firm in accordance with paragraph R5400.80(e)(ii) satisfactorily addresses the consequences of the breach, the firm shall take the steps necessary to end the sustainability assurance engagement in accordance with paragraph R5400.81. Breaches Before the Previous Sustainability Assurance Report Was Issued R5400.86 If the breach occurred prior to the issuance of the previous sustainability assurance report, the firm shall comply with the independence provisions of this Part in evaluating the significance of the breach and its impact on the firm’s objectivity and its ability to issue a sustainability assurance report in the current period.

R5400.87

The firm shall also:

(a) Consider the impact of the breach, if any, on the firm’s objectivity in relation to any previously issued sustainability assurance reports, and the possibility of withdrawing such reports; and

(b) Discuss the matter with those charged with governance.

R5400.88

In complying with the requirements in paragraphs R5400.80 to

R5400.87, the firm shall document:

(a) The breach;

(b) The actions taken;

(d) All the matters discussed with those charged with governance; and

(e) Any discussions with a professional or regulatory body or oversight authority.

R5400.89

If the firm continues with the sustainability assurance

engagement, it shall document:

(a) The conclusion that, in the firm’s professional judgment, objectivity has not been compromised; and

(b) The rationale for why the action taken satisfactorily addressed the consequences of the breach so that the firm could issue a sustainability assurance report.