Audited financial statements and climate-related risk considerations
FINANCIAL REPORTING INSIGHTS |
Authored by RSM US LLP
The Center for Audit Quality recently issued a publication, Audited Financial Statements and Climate-Related Risk Considerations, which is intended to provide a foundational understanding of how key elements of current U.S. accounting and auditing standards are required to be applied with respect to climate-related risks and audited financial statements.
Although current U.S. generally accepted accounting principles do not include explicit references to climate-related risks, management is required to consider such risks when their effects could reasonably be material to the financial statements. To the extent climate-related risks become risks of material misstatement such that there could be accounting or disclosure impacts, management also would be responsible for modifying its internal controls over financial reporting to properly identify and consider such risks.
The financial-reporting requirements for climate-related risks depend on several factors, including the nature of the entity’s business, its industry, geographic footprint, types of underlying transactions and the significance of the climate-related risk to the entity’s business, among others. The time horizon for which climate-related risks come to fruition also will vary by entity and industry; therefore, while risks may exist, the impact on the current-period financial statements may not be material. Forward-looking climate-related risks that potentially could impact an entity’s financial statements typically fall into one of two categories:
- Physical risks, for example, the risk that an entity’s facilities will be damaged by a severe weather event
- The risks associated with the transition to a low-carbon economy, for example, regulatory risk associated with required changes to a company’s business
Financial statement auditors have a responsibility to consider the appropriateness of management’s consideration of the financial statement implications of potential risks of material misstatement, which encompasses climate-related risks. When assessing the potential impact of climate-related risks, the auditor might consider it necessary to conduct inquiries of management, including personnel outside the finance department, to understand how and when management expects climate-related risks could impact the entity and how management plans to consider such risks in the preparation of the financial statements. The auditor also would consider information outside of the financial statements, including press releases, sustainability reports, board minutes and industry-specific publications, among others.
Further, auditors have a responsibility to read other information included in documents that contain audited financial statements, such as climate-related disclosures included in the description of the business, discussion of legal proceedings, risk factors, and MD&A, and consider whether such information, or the manner of its presentation, is materially inconsistent with information appearing in the audited financial statements.
Call us or fill out the form below and we'll contact you to discuss your specific situation.
This article was written by RSM US LLP and originally appeared on 2021-09-13.
2021 RSM US LLP. All rights reserved.
RSM US Alliance provides its members with access to resources of RSM US LLP. RSM US Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each is separate and independent from RSM US LLP. RSM US LLP is the U.S. member firm of RSM International, a global network of independent audit, tax, and consulting firms. Members of RSM US Alliance have access to RSM International resources through RSM US LLP but are not member firms of RSM International. Visit rsmus.com/about us for more information regarding RSM US LLP and RSM International. The RSM logo is used under license by RSM US LLP. RSM US Alliance products and services are proprietary to RSM US LLP.
Perry & Associates CPAs, A.C. is a proud member of the RSM US Alliance, a premier affiliation of independent accounting and consulting firms in the United States. RSM US Alliance provides our firm with access to resources of RSM US LLP, the leading provider of audit, tax and consulting services focused on the middle market. RSM US LLP is a licensed CPA firm and the U.S. member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.
Our membership in RSM US Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise and technical resources.
For more information on how Perry & Associates CPAs, A.C. can assist you, please contact us.