Environmental matters in financial reporting: a question of audit materiality??
This paper examines the issue of audit materiality in regard to the disclosure of environmental matters in financial reports. Its purpose is to reveal auditors’ views and practices when judging the materiality of environmental matters. It also highlights implications for how environmental matters are audited and for the reliability of financial reporting by firms whose activities may generate adverse environmental effects. In-depth, semi-structured interviews were conducted with twenty-seven senior public and private sector financial auditors in New Zealand. The findings reveal that auditors’ interpretations of materiality criteria tend to preclude them from considering environmental matters in their audits. This contributes to a ‘type II audit expectation gap’ – i.e. a gap between the expectations of standards setters and the practices of auditors (Specht and Waldron, 1992) – which impedes the achievement of appropriate, independent assurance on environmental matters in financial reports. This paper is the first to draw on interview evidence from auditors to examine how they deal with the issue of materiality in regard to this important, emerging aspect of audit practice. This study was conducted in a New Zealand context only. However, since auditors’ duties are similar the world over, the findings point to general avenues for promoting improved practice in regard to the audit of environmental matters.