The CAQ on the Auditor’s Role in Climate Disclosure

The Center for Audit Quality has released The Role of the Auditor in Climate-Related Information.  This paper provides insight into the demand for climate-related information and highlights how auditors are involved in a public company’s climate-related reporting. While auditors are the target audience for this publication, it may also be of interest to managements and audit committees that are considering the scope of their company’s climate disclosures and whether to obtain third-party assurance over climate-related information. 

The new CAQ publication addresses seven questions:

1. What is driving demand for climate-related information?

Investors, creditors, customers, employees, and other stakeholders increasingly use climate-related data to assess risk, guide decisions, and shape business strategies.  Companies may also be subject to regulatory climate disclosure requirements, such as the European Union’s Corporate Sustainability Reporting Directive and California’s climate disclosure laws.  See E.U. is Dialing Back Sustainability Reporting and Due Diligence, March-April 2025 Update, California Tweaks its Climate Disclosure Law But Reporting Deadlines are Unchanged, November 2024 Update, and What Backlash? ESG Reporting Continues to Grow, September-October 2024 Update.

2. Where is climate-related information reported?

More than ninety percent of S&P 500 companies voluntarily publish standalone sustainability reports containing climate-related information.  Many companies also report climate-related information in their SEC filings in either financial statements or under such disclosure items as risk factors, description of the business, and management’s discussion and analysis.

3. What types of climate-related information are companies disclosing?

Common types of climate-related disclosure include:

• Climate-related financial disclosures in accordance with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD).  The TCFD recommendations are incorporated into the International Sustainability Standards Board’s disclosure standards. The TCFD recommendations address four thematic areas: governance, strategy, risk management, and metrics and targets. The TCFD also recommends that organizations use scenario analysis to assess potential business, strategic, and financial implications of climate-related risks and opportunities and to disclose them.

• Financial statement impacts.  Climate-related risks and opportunities can impact financial statements in a variety of ways. The CAQ provides this example: “[I]f a company decides to replace existing assets with more energy efficient assets earlier than expected this could result in possible impairment of those assets due to changes in the assumptions used to assess recoverable amounts; any replacement assets purchased could result in higher depreciation expense; certain climate-related commitments could result in liabilities; shifting consumer demand for products could result in inventory obsolescence; or changing sales terms could influence revenue recognition.”

• Greenhouse gas (GHG) emissions. Many companies report their GHG emissions.  This reporting is often based on the Greenhouse Gas (GHG) Protocol standards. Those standards categorize GHG emissions as Scope 1, Scope 2, or Scope 3.  (Scope 1 emissions are direct emissions from sources owned or controlled by the organization; Scope 2 emissions are indirect emissions from the production of purchased electricity, steam, heating, or cooling; and Scope 3 emissions are all other indirect emissions that occur in the organization’s upstream and downstream value chain.)

• Climate-related commitments.  Many companies disclose commitments to achieve net-zero emissions or to be carbon-neutral by a specified future date.  The CAQ refers to these and other types of similar commitments as “climate-related commitments,” noting that each company may define its specific climate-related commitments differently than other companies.

4. Why do companies seek assurance over climate-related information?

Companies seek third-party assurance for their climate-related disclosures for several reasons.  These may include compliance with regulatory assurance requirements; to assist the board in assessing the company’s disclosures; to enhance investor confidence in the reliability of the disclosures; to enhance management’s confidence in the integrity of the disclosures; to meet the needs of other stakeholders, such as customers, suppliers and prospective employees; and to improve the company’s score or ranking on sustainability indices.

5. What is the role of public company auditors in climate-related information?

The auditor has certain responsibilities for climate-related information in the context of the financial statement audit.  If the auditor is also engaged separately to provide assurance on climate disclosures, his or her responsibilities depend on the nature of the engagement.

• Auditor’s responsibility for assessing climate-related information in an audit of the financial statements and ICFR.  In a financial statement audit, the auditor assesses management’s con-sideration of climate-related risks and their potential impact on the financial statements. If the auditor identifies risks that could lead to material misstatements, he or she develops audit responses to address them. ​ In an ICFR audit, the auditor evaluates whether controls are designed and operating effectively to prevent or detect climate risk-related material misstate-ments. ​ In addition, the auditor must read other information in documents containing audited financial statements, such as climate-related disclosures in Form 10-K, and assess whether that information is materially inconsistent with the audited financial statements. ​ ​

• Auditor’s responsibility in a separate attest engagement.  Auditors may be engaged to perform an examination or review engagement to provide assurance over climate-related information in sustainability reports or regulatory filings.  In an examination engagement, the auditor expresses an opinion on whether climate-related information presented is in accordance with relevant criteria, such as a reporting standard. An examination engagement provides assurance comparable to the reasonable assurance provided in a financial statement audit.  In a review engagement, the auditor expresses a conclusion on whether material modifications are needed for climate-related information to align with the relevant criteria. ​ Review engagements involve less extensive procedures than examination engagements and provide only limited assurance.

6. What factors and skillsets enable auditors to perform attestation engagements over climate-related information?

Auditors have experience in independently gathering evidence to assess the reliability and accuracy of information.  In addition, auditors have access to specialists in climate-related areas such as GHG emissions, are required to be independent of the companies they audit, and are required to maintain a system of quality control designed to promote compliance with applicable standards.  Auditors must also adhere to continuing professional education, ethics, and experience requirements.

7. Can a public company use the same independent accounting firm for its financial statement audit and attestation over its climate-related information?

Performing an attest examination or review engagement over climate-related information is a permissible service for the financial statement auditor.  The audit committee must preapprove such services.  It may be beneficial to use the same accounting firm for both the financial statement audit and attestation over climate-related information because the financial statement auditor already understands the company, including its cycles, processes, systems, and data.

Audit Committee Takeaway

For audit committees, The Role of the Auditor in Climate-Related Information is a good source of basic information concerning the current state of public company climate disclosure.  Although the SEC will likely drop its proposed climate disclosure requirements (see SEC Takes Another Step Away From Climate Disclosure, March-April 2025 Update), many U.S. companies will, as noted above, be subject to the European Union’s sustainability disclosure regime, California’s climate disclosure rules, or other regulatory climate disclosure requirements.  In addition, investor interest in climate information drives many companies to disclose GHG emissions, climate-related commitments, or other climate information.  As a result, climate disclosure will continue to be an audit committee agenda item.

For much climate-related disclosure, third-party attestation is either required or desirable.  Audit committees with an interest specifically in attestation may also want to review a 2023 CAQ paper, Corporate decision-making: Why choose a CPA for your ESG assurance needs? That paper is summarized in If You Want Assurance Over Your ESG Disclosures, Hire a CPA, May-June 2023 Update.