Green Audit: FTSE 100 audit reports on climate change raise alarm

Not everyone gets climate change and all the issues that flow from it. There are some who even continue to deny its significance. But there is no excuse for anyone in accounting doing so because it is the biggest issue facing every company now, bar surviving the coming economic meltdown resulting from inflation. 

In that case, assuming, as the IFRS Foundation suggests being the case, that the primary users of general purpose financial statements (or accounts, as I prefer to call them) are those who provide the capital used by companies then knowing which companies are most threatened by climate change and which companies are best able to manage the resulting threats to their well-being is absolutely fundamental to those users. This is most especially true if an investor is looking for a long-term return given that the 2050 net-zero deadline is just over 27 years away now, which is but a blink of an eye.

In that case you would expect the audited accounts of the FTSE 100 companies to reflect this issue (which many of them do) and for their auditors to have much to say about how their clients are managing the consequent risks, not least as this looks to be a going concern issue. But in this last regard, anyone looking for anything close to an informed comment from any of the Big 4 firms that dominate this audit market, would be hopelessly optimistic.

New research on the audit reports on the FTSE 100’s accounts that I directed at Sheffield University Management School, working with Queen Mary, University of London, shows in those accounts ending in 2021 no auditor engaged with this issue in any significant way. In fact, just 61% of those auditors mentioned the issue as being within the scope of their work. Fewer still – just 36% – offered any opinion relating to the matter, and even in the case of those very few audit reports where the issue received any significant comment (such as the oil companies) the approach of management was endorsed, or (much more commonly) the issue was dismissed as immaterial. That was either because auditors suggested that the carrying value of assets was apparently more than sufficient to cover the impact of any future value diminutions, or that such adjustments might be so far in the future that they were of inconsequence now.

I admit that as a chartered accountant who has engaged on climate related issues since the 1980s, I find this a remarkably small-minded approach. To presume that ‘going concern’ only relates to issues arising in the next 12 months, as many of these auditors do, seems like a simple cop-out from responsibility that does not bode well for future compliance with the standards to be issued by the International Sustainability Standards Board, which despite all the claims implicit in calling them Standards are largely voluntary in nature.

Worse though is something more significant. The reality is that every single FTSE 100 company (and most others as well, come to that) will have to, over the next few years, close down their carbon-based businesses and reopen new ones that are net zero-carbon compliant. The demand upon them is as radical as that, in which case the suppliers of capital to these companies want to know two key pieces of information from them.

The first of these is what provision is required to close down the existing carbon producing business.

The second is how much capital is required to create the new net-zero carbon business.

It is my suggestion that separate provisions are required on the face of all accounts of public interest entities that show both those figures, and that the entities in question should then make clear where the capital will come from to fund this transition. Despite this obvious need, anticipated in IAS 37 on provisions in very large part, I suggest that not a single set of accounts of a FTSE 100 based company are remotely true and fair.

It would, however, seem that the accounting and audit professions do not agree. Not only is there no hint of any accosting standards requiring any such thing, but it looks like auditors want to pretend this issue into the long grass. Consequently, they are doing three things.

First, they are failing the financial markets and all who do in turn depend on them for their future well-being.

Second, they are failing their clients who need to face up to the reality of this.

And, third, they are failing generations to come.

I hope those responsible can both live with their consciences and look their children in the eye. I could not.

Richard Murphy is Professor of Accounting Practice, Sheffield University Management School, a chartered accountant and economic justice campaigner.