Non-financial-information must be as reliable as its financial counterpart for investors to make informed decisions, according to ICAEW. The latest report published by the body, The journey milestone 4: materiality in assuring narrative reporting, highlights the importance of assurance of non-financial information and shares tips on how to establish what is relevant.
Assurance providers are used to working out “materiality” (ie. what matters) with regards to financial information – now many are testing non-financial narrative as well. Establishing “materiality” is the first concern of the preparer of the report – who needs to ensure that the content is relevant to investors’ needs and expectations. Assurance providers then establish which items are “material” and how to test them, to ensure that there are no errors or omissions that could influence the decision of an investor.
As annual reports are becoming overloaded with information, assurance providers and prepares must disregard items that are irrelevant to investors. The same assurance principles apply to both financial and non-financial information and so assertions are tested for their; completeness, occurrence and accuracy as well as presentation and understandability.
Henry Irving, Head of Audit and Assurance Faculty at ICAEW said: “As important as financial statements are, business accountability is not based entirely on the balance sheet. Investors, and others also want to know about company’s corporate social responsibility, carbon emissions, diversity or ethics. The diesel car emissions scandal is one perfect example that shows how important these non-financial aspects are. When establishing materiality levels preparers and assurance providers should focus on both qualitative and quantitative aspects. With regards to the former both should ask themselves; is this information decision-critical? When do non-financial issues become qualitatively critical in terms of materiality? For example, are there qualitative thresholds (such as the difference between ‘an area for improvement’, or a ‘significant deficiency’) at which regulatory action kicks in?
“Assurance providers should consider materiality when testing and evaluating five key factors for assertions; fair representation of facts and trends (i.e. making sweeping claims about progress compared to others without any objective reference), bias (i.e. is the bad news excluded) and unsubstantiated claims The practitioner should also ensure that any required practices and guidance in defined areas have been applied.. It is clear that professional judgment is necessary in reaching a conclusion and that there can never be a definitively correct answer.”
The journey milestone 4: materiality in assuring narrative reporting was published in Q1 2016. It highlights the key areas that assurance providers should focus on when establishing materiality levels especially with regards to non-financial information.
Announced by ICAEW 18 February 2016 – see the ICAEWs annual report here