Burning fossil fuels generates greenhouse gas emissions that act like a blanket wrapped around the earth, trapping the sun’s heat and raising temperatures. Examples of greenhouse gas emissions that are causing climate change include carbon dioxide and methane which mostly come from using gasoline for driving a car or coal for heating buildings in countries with very low temperatures. As fossil fuels are used to generate electricity for organizational and individual consumers, carbon emissions are released and trapped in the Earth’s atmosphere.

Climate change challenges present organizations (e.g., companies, corporations, nongovernmental organizations (NGOs), communities, and citizens) with the need to redefine current views and reporting on corporate social responsibility (CSR) from voluntary to an act of necessity.

The Changing Global conversation

Awareness of impending climate change challenges and the need to limit our use of fossil fuels and other forms of carbon emissions were discussed in 2009 at the United Nations Conference on Climate Change in Copenhagen. These discussions set the scene for a historic meeting in Paris in 2015 (i.e., COP 21). Prior to December 12, 2015, 186 countries published action plans for how they intend to reduce their greenhouse gas emissions. Fast forward to 2021 during the 26th Conference of Parties (COP26) held in Scotland Glasgow between Oct. 31 and Nov. 12, the US and EU leaders emphasised that tackling the potent greenhouse gas is crucial to keeping warming limited to 1.5 °C which will require a renewed commitment from countries and organizational actors to engage in meaningful sustainability and corporate responsiveness initiatives.

Another major contributor to global warming is tree cutting. Falling of trees contribute to climate change because it depletes forest that absorb vast amount of the warming Gas CO2. More than 100 world leaders promised to end and reverse deforestation by 2030 during the COP26 climate summit's first major deal. Notable signatory to the pledge was Brazil where stretch of the Amazon rainforest have been cut down. Among other countries who have signed the pledge include Canada, Russia, China, Indonesia, the Democratic Republic of the Congo, Ghana, the US and the UK covering about 85% of the worlds forest.

Corporate Social Responsibility

Corporate social responsibility (CSR) is based on the assumption that, at any given point in time, there is a social contract between an organization and society in which the organization has not only economic and legal responsibilities but also ethical and philanthropic responsibilities.

During the COP 26 summit more than 30 of the world's biggest financial companies - including Aviva, Schroders and Axa promised to end investment in activities linked to deforestation. Sustainable, ethical, environmental organisations who are showcasing social value are rising to the top of their industries as customers become more conscious of their purchasing power.

It appears that any actions which an organisation undertakes will have an effect not just upon itself but also upon the external environment within which the organisation resides. In considering the effect of the organisation upon its external environment it must be recognised that this environment includes both the business environment in which the firm is operating, the local societal environment in which the organisation is located and the wider global environment. It is worth noting that more and more consumers are spending based on a company’s values, and when those companies can authentically care for their communities, that will undoubtedly encourage loyalty and business engagement.

Corporate Social Responsibility

The accounting profession emerged in the late 19th century to provide reporting and auditing services and to serve the public interest. As the profession has grown, it has brought trust, transparency and confidence to capital markets all over the world. Today more organisations are expanding the information they report and disclose to stakeholders about climate commitments and the impact. In light of this, questions are expected to increase regarding the depth of disclosures being made in financial statements, risk exposure and resilience. Companies may want or be requested to provide verification regarding their disclosures as a way of maintaining stakeholder confidence to ensure what has been disclosed in the financial statement regarding its CSR is accurate. In this circumstance, an independent assurance over climate reporting and disclosures can increase the credibility of reporting business resiliency and trust in the financial markets and add value to the financial statement report. This process can ensure a robust audit trail related to climate and broader environmental, social and corporate governance reporting including through the examination and testing of management reporting, models and disclosures such as underlying assumptions used, the sensitivity of models and the internal controls underpinning the information.

Conclusion

People around the world are already feeling the numerous social, economic and environmental impacts of climate change. At a time of unprecedented global awareness of the importance of climate change, there is the need for heightened focus on achieving sustainable development by taking urgent action to combat climate change and its impact with the hope that together we can build effective partnerships to confront what is a common concern of mankind.

We can all make positive contributions to a safer environment in our own small way to ensure planet earth is still habitable to us and the new generations to come.

Written by Ekow Dickson 15th November 2021

The assessment is performed by employees involved in the area or process being assessed rather than an independent party. The objective is to assist management and/ or persons responsible for monitoring or identifying control weaknesses and risk they might not have thought of. This ensures employees are aware of risk to the business and conduct periodic, proactive reviews of control and risk.

The CSA process offers management or work teams directly responsible for their individual business functions been assessed to;

- Participate in the assessment of their Internal Controls and to develop a sense of ownership of the controls, this in most instances reduces their resistance to control improvement initiatives.
- Detect risk in the early stages and develop an action Plan to address any identified weaknesses and to increase communication between operational and top Management.
- Evaluate the likelihood of achieving the business objectives and increasing awareness of risk and Internal Controls.

CSA can be implemented by facilitated workshops within a structured environment where functional management and control professionals can come together to discuss how best to develop the control structure for the business function been assessed.

The facilitator must have some basic skills such as the ability to ask good questions that probe the topic and not be in a threatening manner, but rather support the decision making process, the facilitator must also be able to manage the dynamics of the group and exhibit the ability to manage various personalities and resolve conflicts to ensure the ultimate goal of the assessment is achieved.

CSA is participatory in nature and the benefits to organisations are the opportunities for participants to learn more about controls and enhance their awareness and responsibilities regarding risk management. Staff members also become involved in implementing controls and maintaining an effective control environment to help generate useful information to management and auditors to understand the quality of the internal control procedures and related risk, which will ultimately contribute to meeting the organisations strategic goals and objectives.

In conclusion, Control self assessment is an important aspect of Internal control and risk management procedures but it is important to sound a word of caution that this should not be mistaken as an audit function replacement and It is not intended to remove audit responsibilities but rather to enhance their understanding of the internal control environment and risk assessment program.

Written by Ekow Dickson 1st February 2021

Good corporate governance is also about having a good system of governance in place by which the board of directors, shareholders and top management team can interact with one another in order to make the company sustainable in the long term. The board of directors are responsible for the governance of the company, the shareholders role in governance is to appoint the directors and auditors and to satisfy themselves that an appropriate governance structure is in place.

Bad things happen when corporate governance is ignored, we read many of them in newspapers and other media outlets with problems that has to do with chief executives fighting against the board of directors, and with board of directors fighting against shareholders and shareholders fighting against each other, this can be as a result of conflict of interest when a controlling member of the company has other financial interest that could influence his decision-making or conflict with the objective of the company.

A good system of corporate governance must create a framework with goals, objectives and shared values that most stakeholders agree with, a framework that can help the top management team, and board of directors develop strategic and action plans. There should be an integrated vision where both the objective of shareholders, the board of directors and top management team can be aligned one way or the other. From these aligned objectives, the company can actually develop a mechanism for designing strategic plans, a compensation system, control system and develop a mechanism system to ensure smooth flow of information between shareholders and the board of directors or between the board of directors and the top management team.

This integration ensures that in governing a company, the top management team would not only consider their own preference but consider the preferences and the objectives agreed with the board of directors, the board of directors must consider what both the shareholders and top management team expect from them.

A policy of corporate governance needs a clear enforcement mechanism which is applied consistently as a check and balance against the actions of executive staff. Any system of corporate governance involves several important factors. To begin with, the quality and professionalism of people forming the board of directors and top management team are Important. Sometimes we don’t take professionalism very seriously, we assume some problems can just be solved by setting up some incentive systems. Even though Incentive systems are important, you must design a corporate governance model in which all the ingredients are not just efficient by themselves, but they are also coherent with one another. The next dimension of a very good governance system is to have a project for the company. A project that is more than a strategic plan, a project that helps to explain why the company exist and why the company operates the way it does, a project that can also be shared again with the shareholders, the board of directors and top management team.

It is important to note that no matter how good the corporate governance system is, the company needs the value of trust. Without trust it is not possible to build up to develop a system of corporate governance that could successfully project the company or help the company into the long term. We need people with strong sense of professionalism but at the end of the day we also need trust that builds and help develop these relationships so the company or organisation can develop itself for the long-term and achieve its objectives.

Written by Ekow Dickson 26th October 2020

Companies in highly exposed sectors particularly travel & tourism, entertainment, hospitality and retail sectors are experiencing high decline in demands resulting in falling sales margins.Whether your business operations are already greatly affected or the impact are yet to be felt, a business continuity plan is essential to ensure you can be as resilient as possible in this global health crisis.

When preparing accounts, management must assess whether the business is a "going concern". The concept of “going concern” is an underlying assumption in the preparation of financial statements, it is assumed that the entity has neither the intention, nor the need to liquidate or curtail materially its operations. This “going concern” concept is particularly relevant in times of these economic difficulties.

Management assessment will typically involve looking at projections such as sales and costs and the timing of cash flows. Typically, management are expected to disclose where the account has not been prepared under the “going concern” assumption. The period considered must be at least I2 Months after the financial year end. In these unprecedented times, the audit of “going concern” uncertainties is key to accountants and something management need to consider greatly.

COVID-19 has caused significant market upheaval and uncertainty for businesses and has affected the global economy with adverse impact on cash flows and business operations.Due to the wide-ranging impact of the pandemic on the global economy, many businesses will be facing material uncertainties regarding their ability to continue as a “going concern”.

In auditing the financial statements, the auditor will need to determine whether management use of the “going concern” basis continues to be appropriate in accordance with ISA 570 the dedicated standard for applying "going concern" assumptions. To access the Impact of “going concern” on business, the accountant and management can consider how the business has been impacted by COVID-19 and how this might have impacted on the supply chains, staff contracts, bad debts and cash flow issues. What should also be considered is the liquidity of the business and what finances are available

Evidence regarding “going concern” is often provided in the form of cash flow models and/or budget forecast models, as well as details of future sales pipeline projections, this is usually for a period of not less than 12 months. Given the increased likelihood of material uncertainties and the possibility that some accounts will be prepared on a basis other than going concern, auditors are likely to view “going concern” as a heightened and significant risk area.

Management should describe the material uncertainties in their business as clearly and transparently as possible for users. Where management determine that there are no such material uncertainties, it may still be helpful to users for management to set out how this conclusion has been reached, given the current circumstances of the COVID 19 Pandemic.

In conclusion, companies will have to assess events or conditions that are likely to cause significant doubt on the business ability to continue as a “going concern” considering the impact of the lockdown and the social distancing rules or any other relevant factors.

Auditors and accountants on the other hand will also need to ensure they obtain enough, appropriate evidence when testing management’s assumptions and forecasts to ensure they are realistic and appropriate.

Written by Ekow Dickson 6th July 2020

The International Accounting Standard Board (IASB) and the Financial Accounting Standard Board (FASB) the US standard setter worked together to have a combined standard referred to now as IFRS 15. This standard was applicable from I Jan 2018, however early adoption was permitted.

Within the scope of the old standards, IAS 18 covered goods and services as well as royalties, dividends and interest, while IAS 11 covered construction contracts, in contrast IFRS 15 does not distinguish between sale of goods, services and construction contracts, instead, it defines transactions based on performance obligations satisfied overtime or at a point in time. It is important to note that other type of income like leasing; government grant, Investment properties etc are covered by other standards.

IFRS 15 contains specific and more precise guidance to be applied, and for many entities the timing and profile of revenue recognition will change. The Key changes worth noting is that IFRS 15 does not distinguish between sales of goods, services and construction contracts; instead it defines transactions based on performance obligation satisfied overtime or at a point in time.

Revenue is now recognised by a vendor when control of goods or services is transferred to a customer, replacing but not eliminating the concept of risk and rewards in the existing guidance. The transfer of risk and rewards is one of the five (5) key indicators to determine when control transfers at a point in time. The other four (4) indicators are having a right to payment for the asset, the transfer of legal title, the transfer of physical possession and the customers’ acceptance.

IAS 18 provided very limited guidance on key practice issues. One of the most significant changes is IFRS 15 providing a lot more guidance than the previous guidance on issues such as separating elements, allocating the transaction price, licenses, contract modifications and much more. Providing this additional guidance was one of the key reasons for this standard.

Revenue recognition model under IFRS 15

The core principles of the model is that an entity recognises revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in an exchange for those goods or services. To meet this principle, an entity needs to apply a five-step model to determine when to recognise revenue and at what amount, these are;

1. Indentifying the contract with the customer.
2. Identifying the performance obligations in the contract.
3. Determine the transaction price.
4. Allocate the transaction price to meet the performance obligation.
5. Recognise revenue when (or as) a performance obligation is satisfied.

Step 1: To identify the contract with customer

The first thing we need to do is look at the definition of a customer and the definition of a contract.

A customer is a party that contracts with an entity to purchase goods or services that are for the output of the entity’s ordinary activities in exchange for consideration. Contracts that are not with customers are outside the scope of IFRS 15.

A contract is an agreement between two or more parties that creates enforceable rights and obligations. It can be written, oral or implied by an entities customary business practices and needs to meet all of the following criteria;

1. It should be approved by the parties.
2. It should identify the rights of each party and
3. The payment terms.
4. It should have commercial substance and
5. It should be probable that the entity will collect the consideration when it falls due.

Step 2: Identify the performance obligation in the contract

The performance obligation is a promise transfer of goods and services that are distinct. A promise can be in various forms. It can be implicit, explicit, written or verbal. The key in step 2 is to identify those distinct promises; these are the basic units of accounts for recognising revenue.

The basic question to ask now is “What makes a promise to transfer of goods or service distinct”?

A promise is distinct if the customer is able to benefit from the goods or services either on their own or together with other resources that are readily available to the customer and this promise is separately identifiable from other promises in the contract.

Step 3: Determine the transaction price.

Management determine the transaction price. The transaction price is the amount to which the entity is entitled in an exchange for transferring the price of goods or services. In many cases, this is simply the fixed consideration specified in the contract, although it can be more complex. For example the contract price can be variable, such as discounts, rebates, refunds, credits, price concessions, performance bonuses and others. It can also be subject to certain contingent events. A variable consideration is included in the transaction price only if it is highly probable that there will not be a significant reversal of revenue in the future. This principle is based on the notion that significant downward adjustments to revenue do not provide useful information.

Other things that might add complexity to the transaction price include for example the consideration including a significant financing component, if this is the case, the time value has to be recognised, there might be non cash consideration needed to be recognised at fair value. Management is also required to assess the impact of any consideration that might be payable to the customer which were not paid to a distinct good or service.

Step 4: Allocate the transaction price to the performance obligation in the contracts

IFRS 15 provides more guidance on allocation than the previous guidance in IAS 18 or IAS 11. Allocation is based on the relative standalone selling price of each performance obligation, and there is detailed guidance on how to determine the stand alone selling price. Management should start with observable prices. Goods or services that are priced and sold separately always provided the best evidence of the stand alone selling price.

Management should estimate the stand alone selling price when there is no observable price. The standard describes various different methods and also permits the use of other methods that arrive at the allocation consistent with the principle, for examples adjusted market assessment approach and the expected cost plus margin approach. The standard also describes the residual approach, but this may only be used in very limited circumstances, when the stand alone selling price is either highly variable or uncertain.

Step 5 Recognise Revenue when (or as) the entity satisfies a performance obligation

Revenue is recognised when the performance obligations are satisfied by transferring the goods or service to the customer. There are two significant changes in this area. Firstly, revenue is recognised when control of goods or services is transferred rather than when the risk and rewards transferred. Secondly, the same model is applied to both goods and services. Revenue is recognised either overtime or at a point in time depending on when control transfers. IFRS 15 provides criteria to determine whether revenue is recognised overtime, however it is recognised at a point in time if these criteria are not met.

The question now is “how does the new model work”?

An entity first considers whether the customer simultaneously receives and consumes the benefit provided by the entities performance as it performs, for example a cleaning service. If this criterion is not met, the entity considers whether its performance creates or enhances an asset that the customer controls as it is created or enhanced, for example building a house on a customer’s land. If the first two criteria are not met, management should then consider the nature of any asset been created and its right to be paid.

Revenue is recognised overtime if an entity’s performance does not create an asset with an alternative use to the entity and it has the enforceable right to payment for performance completed to date if the customer cancels the contract.

If all 3 of these criteria are not met, revenue is recognised at a point in time.

Transition and disclosures

To get from the previous standards to IFRS 15, the standard provided two transition methods.

1. Full Retrospective Approach

An entity needs to apply IFRS 15 retrospectively to all the periods presented, therefore present the information as if the standard had always been in place.

2. Modified retrospective Approach

An entity needs to apply IFRS 15 retrospectively with the cumulative effect recognised at the date of initial application. The date of the initial application is the start of the reporting period in which an entity first applies the IFRS 15. For entities with calendar year that do not early adopt IFRS 15 the date of the initial application is 1 Jan 2018.

Lastly, we need to consider the disclosures which have increased significantly. IFRS 15 requires the entity to disclose qualitative and quantitative information about all of the following;

- its contract with customers;
- the significant judgements, and changes in the judgement, made in applying the guidance to those contracts ; and
- any assets recognised from the costs to obtain or fulfil a contract with a customer.

For many organisations, IFRS 15 will or would have had a broad impact and if you have not yet engaged with IFRS 15 it’s advisable to carry out an impact analysis to assess the wider business implication to your operations. Failing to implement IFRS 15 adequately may result in profit warnings, loss of investors’ confidence and qualified audit reports. It is advisable to seek appropriate guidance in applying the standard.

Written by Ekow Dickson 11th April 2020

A management letter may cover a broad range of internal control deficiencies, such as a lack of segregation of duties, no account reconciliations undertaken for significant balances and failure to consistently maintain proper supporting documentation for transactions. It is important for management and the Board to take on board the issues raised in the letter and to understand the auditors are there to help them to succeed and improve. The management letter is a value-added service in conjunction with the audit of the financial statement. The letter is to help management and the Board to strengthen its internal control as it generally contains identified deficiencies in the system and it also provides suggested solutions or alternative approaches to resolve these identified deficiencies.

If the Board wish to investigate further a specify area of their internal control and financial systems, the auditor would be happy to assist, in addition to their audit of the financial statements. The auditor is not required to perform specific audit procedures to identify all deficiencies in internal control or to express an opinion on the effectiveness of the entity’s internal control in the audit of the financial statements. The auditor’s key objective for the audit is to focus on the key risk areas of the business, which will in turn sets out the nature and extent of their audit work.

A traffic light system is often used to monitor the progress of the improvements to the company’s internal and financial controls and to help to track the results. It is fundamental for those businesses who want to succeed, to embrace change and stay ahead of their competitors in this fast-ever-changing environment. If you would like to discuss this further, please speak to our audit team or contact me:ekow.dickson@edd.com

Written by Ekow Dickson 6th January 2020