CAQ reports on climate risks and audited financial statements

The Center for Audit Quality released a report Thursday on the current requirements for public company auditors regarding climate-related disclosures and where they may be heading.

The report, Audited Financial Statements and Climate-Related Risk Considerations, discusses the items that public companies are currently reporting and how that information is material to their financial statements.The documentaims to give investors and other stakeholders a better understanding of the current climate-related reporting and auditing requirements in the U.S. and how they are applied.

The CAQ at a time when the Securities and Exchange Commission is considering requiring public companies to disclose more information about the climate risks their organizations are facing, as catastrophic disasters across the U.S. and other parts of the world demonstrate the increasing urgency of the climate change crisis. Investors and other stakeholders are also increasingly asking for more detailed climate-related disclosures and environmental, social and governance reporting with the growth in popularity of ESG funds.

Climate-related risks are often considered and assessed by management and auditors during the preparation and auditing of financial statements. Under current U.S. GAAP, climate-related risks can have a direct impact on the financial statements, an indirect impact, or in some cases no impact at all. Understanding the current financial statement requirements can be a good starting point for investors and others as they weigh how and where to get the climate-related information they need to make capital allocation decisions and bridge any information gap that may lie ahead in any future rulemaking by the SEC or others.

“Investors are increasingly using climate-related information to inform their investment decisions,” said Dennis McGowan, vice president of professional practice at the CAQ, in a statement. “The current disclosure system is market-driven rather than based on regulatory action, so it is important for investors to both consider what public companies voluntarily report as well as to understand what they are required to report in the financial statements under US GAAP.”

In June, the CAQ hosted a roundtable discussion with investors, board members, auditors and public companies to talk about the SEC’s request for public input on climate change disclosures. The majority of participants supported greater climate disclosure requirements.