Internal Audit Plays Critical, Collaborative Role in ESG Reporting

Half of Companies with ESG Disclosures Receive Internal Audit Function Assurance

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Feb 10, 2022, 08:30 ET

LAKE MARY, Fla., Feb. 10, 2022 /PRNewswire/ -- The Internal Audit Foundation and The IIA, in collaboration with Ernst & Young LLP (EY), have released a white paper, "Prioritizing Environmental, Social, and Governance (ESG) – Exploring Internal Audit's Role as a Critical Collaborator." The report summarizes findings from a survey that examined how organizations are using their internal audit functions to support ESG initiatives and build confidence in these increasingly relied upon disclosures.

The survey found that two-thirds of organizations have an ESG program in place and another 24% have plans to implement one. This shows companies are listening to investors and other stakeholders, who've been sounding the ESG alarm thanks to climate change, diversity, equity, and inclusion (DEI) issues, and other emerging challenges. Increasingly, boards, employees, and investors want to know how companies are driving long-term value through ESG management in the organization's strategy, performance, and value creation.

"Internal audit functions are a critical pillar supporting an organization's processes and data for ESG performance and reporting," said Brad J. Monterio, The IIA's executive vice president of member competency and learning and also a sustainability expert and member of the International Integrated Reporting Council. "Internal auditors provide the independent internal assurance needed for trustworthy ESG disclosures, and help ensure the effectiveness of continuous monitoring processes and internal controls across the organization. Their role complements that of the external auditors and builds confidence among users of ESG information for investment or other decision making."

Impending regulation and market shifts are also driving greater focus on ESG. The U.S. Securities and Exchange Commission (SEC) indicated it is on the path toward regulating climate and ESG disclosures. The SEC also created a Climate and ESG Task Force to identify ESG-related misconduct, and shared example letters regarding climate change disclosures. At the 26^th United Nations (UN) Climate Change Conference (COP26), the International Financial Reporting Standards Foundation (IFRS) announced the new International Sustainability Standards Board (ISSB), which will set recommendations for ESG reporting.

"As the ESG market and regulatory landscape continues to rapidly accelerate, internal audit functions have a key role to play in supporting its organization's risk management and performance with controls assurance," said Shannon Sullivan Roberts, principal for climate change and sustainability services at EY. "This report begins to investigate the current state of internal audit's role and how it may advance in years to come as ESG becomes an integrated part of business to drive long-term value."

The internal audit function's contribution to ESG efforts is influenced by, and dependent on, the organization's ambition, strategy, programs, and reporting in ESG:

51% of organizations that report on ESG obtain some level of assurance from their internal audit functions.
62% of chief audit executives (CAEs) said boards of directors are driving the organization's focus and integration of ESG strategy and reporting.
65% of CAEs indicated their internal audit functions have some involvement.

The survey also identified barriers to internal audit involvement in ESG efforts, including a lack of available data to support ESG engagements and the need to make ESG part of an organization's culture.

For their part, CAEs outlined two steps that would help address these issues:

More than half of CAEs said their organizations need greater focus on ESG-related risks on the enterprise-wide risk assessment and that boards and C-suites should mandate that their internal audit function participate in ESG efforts.
44% stated that regulations and regulatory compliance requirements are needed.

This report builds on The IIA's well-established focus on ESG, including advocacy efforts and previous thought leadership.

Click here to download the report.

About the Internal Audit Foundation
The Internal Audit Foundation, supported by the generosity of its donors, advances the practice of the profession by executing global research to explore issues impacting the profession and funding academic initiatives that support the pursuit and promotion of internal audit education within institutions of higher education.

About The Institute of Internal Auditors
The Institute of Internal Auditors (IIA) is an international professional association that serves more than 210,000 members and has awarded 180,000 Certified Internal Auditors (CIA) worldwide. The IIA is recognized as the internal audit profession's leader in standards, certification, education, research, and technical guidance throughout the world.

About EY
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Enabled by data and technology, diverse EY teams in over 150 countries provide trust through assurance and help clients grow, transform and operate.

Working across assurance, consulting, law, strategy, tax and transactions, EY teams ask better questions to find new answers for the complex issues facing our world today.

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SOURCE The Institute of Internal Auditors