Towards Integrated Auditing?

Recently, the Ministry of Finance, Calmasters and the NBA appointed an ‘Expert Committee’ to come up with a new professional profile (or profiles). That will lead to its ‘working copy’ sometime in the third quarter. Naturally, the accountant’s contribution to ‘trust in society’ is also central to this.

In the United Kingdom, Donald Bryden discusses the future of accounting in 2019. In his ‘Bryden Report’ he says: “The purpose of an audit is to help a company establish and maintain reasonable confidence in the information it is required to report, including its directors and financial statements.Although this report seems to have already disappeared into a drawer in the UK, it contains some interesting points. Extending the concept of auditing to areas beyond financial statements. In other words: an introduction Integrated audit.

Without jumping in, I think it’s best to pay close attention to Bryden’s advice. For me, the case of the energy company RWE provides a good starting point. In my previous job as Director of Corporate Engagement at Morningstar, I spoke to RWE many times, particularly about the necessary energy transition. In 2015, RWE opened a power plant in Emshaven, Groningen. A law was passed in 2019 that required power plants to no longer burn coal to meet climate targets by 2030. RWE sought 1.4 billion euros in compensation because the decision to build them was made in consultation with the government at the time and the power plants could have produced energy overtime. At the end of 2022, the court ruled that the Dutch government does not have to compensate RWE (and Uniper) for the future closure of their coal-fired power plants.

What makes this case so interesting? The amount of damages claimed by RWE of 1.4 billion euros shows that it covers material risk financially. When the decision was made to build these power plants, it was already clear that coal-fired power plants would eventually have to come to an end. After all, the Netherlands signed the Kyoto Protocol (later the Paris Agreement), in which countries declared their support for reducing CO2 emissions. Is there an anticipated compliance risk? Has RWE adequately considered the strategic and sustainability risks of building such plants? Should other agreements have been made with the government regarding the future (and early phase-out) of these plants, as was done in Germany? Should RWE have used a different, shorter depreciation period? Should RWE have thanked for the ‘honour’?

The NBA, together with VNO/NCW, VEUO, Eumedion, VEB, FNV and CNV (Subsidiaries of the Corporate Governance Code), is currently working on adding a ‘Risk Management Report’ (VOR) to the Code. RWE’s example shows that linking a label to a specific risk is not always straightforward. Is it a (material) financial risk, accounting risk (depreciation period), strategic risk, sustainability risk or compliance risk? Maybe all of them! Then the logical follow-up question is: What kind of assurance, audit, is desirable or required in such a situation?

With Brayden’s statement in mind: Will we move towards integrated auditing in the Netherlands in the future, with a combined focus on strategy, finance, sustainability, IT, compliance? Not a definitive answer, but a compelling question.