15 May 2022

Sustainability disclosures increasingly on North American internal auditors' radars

North America's internal auditors are increasingly considering sustainability and non-financial reporting as a risk, but that has not yet translated into their audit plans, according to a survey by the Institute of Internal Auditors (IIA).

The IIA's annual North American Pulse of Internal Audit report found that 12% of respondents to its 2021 survey see sustainability and non-financial reporting as a high or very high risk, compared to just 4% in 2020.

Yet, the budgets allocated to conduct internal audits on this risk remained flat, at 1%.

Jim Pelletier, vice president portfolio strategy at the IIA, told Corporate Disclosures: "We are seeing the early stages of development in a risk that's quickly evolving all around the world. A lot of organisations are waiting on clear guidance and standards and you'll see internal auditors start to shift into doing more work in that space."

Brad Monterio, executive vice president and member competency and learning at the IAA, expects the percentage of respondents including sustainability and non-financial reporting in their audit plan allocation to "shoot up".

The perception of non-financial risk was more acute among publicly-listed companies' internal auditors, where 22% of respondents identified it as a high or very high risk, from 6% in 2020. Yet, here also it hardly impacted actual audit plans, with just 3% of respondents having it in their risk budget, up only 1pp than in the previous year.

Pelletier said this was hardly surprising considering that any piece of regulation in the US hits public companies first, before trickling down to other organisations.

"ESG requirements and ESG disclosures know no boundaries. All organisations, I believe, have an obligation to understand their ESG risks and report on and disclose that, to some set of stakeholders," Monterio added. "It gives a clear understanding of how they operate, what value they create, and how they contribute or detract from society."