Impact of climate-change financial disclosures on accounting numbers and assurance practices

This summary report is part of ongoing research examining the credibility and value relevance of climate-related financial disclosures authored by John Campbell (University of Georgia), Anita Foerster (Monash University), Mukesh Garg (Monash University), and Luisa Langer (University of Mannheim). Climate change refers to the long-term alteration of temperature and weather patterns on a global scale, primarily caused by human activities such as burning fossil fuels and deforestation. Studies examining the impact of climate change on financial and economic issues argue that corporations face adverse shocks in terms of productivity, profitability, financing, and valuation due to the physical, transitional, and regulatory risks associated with climate change (Chava, 2014; Bernstein et al., 2019; Huynh and Xia, 2021). Organisations should, therefore, provide accurate and reliable information regarding their efforts to address climate change. Climate change can impact an entity’s business and elevate both inherent risk and audit risk. Consequently, the verifiability and assurance of climate change and sustainability disclosures are essential to ensure credibility. This is because stakeholders, including auditors, investors, customers, regulators, and the general public, rely on these disclosures to make informed decisions. To ensure high-quality audits, auditors should respond to increased climate, sustainability, and other related risks by increasing audit efforts (i.e., decreasing detection risk) and/or charging a fee premium (e.g., Niemi et al., 2018). It is important to note that investors and other stakeholders continue to raise concerns about the quality and usefulness of climate disclosures provided by Australian companies. Many companies now provide climate risk disclosures in the annual report or dedicated climate change reports, and there is ostensibly high uptake of TCFD standards. However, the majority of companies only partly implement the TCFD recommendations, and there is considerable variation in reporting.