About the Author
Mr. Sammer Ahmed, Additional Director Program, Civil Service Academy, Lahore, Pakistan, is an officer of the Pakistan Audit and Accounts Service (PA&AS) and possesses multidisciplinary academic and professional qualifications from world renowned institutions - CISM, CISA, SAP-FI, CRISC, PIPFA, BSC in Chemical Engineering UET Lahore and Master in Public Policy from National Graduate Institute of Policy Studies, Tokyo. He has conducted and supervised various audits and trainings.
All member countries of United Nations(UN), in 2015, devised a master plan for striving towards peace and prosperity of the people and the planet and this plan resulted in 17 Sustainable Development Goals (SDGs)1 . These SDGs are urgently required to be followed by all the member countries in a global partnership irrespective of whether those are developed or developing countries. Among the 17 SDGs, 13th goal pertains to climate change and it is stated as ‘take urgent action to combat climate change and its impacts’. More or less, every country is facing the negative effects of climate change. Estimated globally, the annual loss due to tsunamis, earthquakes, flooding, and tropical cyclones is about hundreds of billions of dollars. By political will and by using technological measures, it is still possible to limit the rise in average temperature of the world at pre-industrial level to avoid the future catastrophic consequences of climate change.
Environment is degraded for different reasons, mainly due to increasing spread towards social and economic development which fosters urbanization, dumping of wastes, cutting down of forests, and over-cultivation of crops etc. One outcome of decadence of the environment is global warming and climate change. According to the Intergovernmental Panel on Climate Change (IPCC)2 , the term ‘climate change’ refers to a change in the climatic state that can be associated by the changes that persist for an extended period of time, usually decades or longer. Climate change also relates to any change in climate over time, whether it is the result of human activity or by virtue of natural variability.
Greenhouse gases, for instance carbon dioxide (CO2 ), absorb heat in the form of infrared radiations released from the earth’s surface. Accumulation of these gases in the atmosphere causes it to warm by trapping the heat. Human activities such as burning fossil fuels since the industrial revolution have increased the concentration of CO2 in the atmosphere by around 40% and half of this 40% concentration of CO2 has increased since 1970. In this way, global average surface temperature of earth has increased by about 10C which has resulted in warming of oceans, rise in the sea level, decrease in arctic sea ice, increase in intensity and frequency of heat waves and many other climatic impacts. Much of this global warming has occurred in the last 50 years and the basic reason for this warming is the increase in the concentration of CO2 and related greenhouse gases (GHGs). Continued emission of greenhouse gases will further increase the global temperature and climatic changes will also be on the rise. Long term climatic changes, however, will depend upon the concentration of CO2 and other greenhouse gases in the air emitted by human activities.3
Composition of GHGs
The usual composition of GHG emissions consists of following percentages:4 Carbon dioxide (CO 2 ): 80%; Methane (CH4): 10%; Nitrous Oxide (N2O): 7%; and Fluorinated gases: 3%. The major sources of emission of these GHGs are very briefly mentioned in the following lines. Majorly, CO2 is released by the burning of fossil fuels e.g. oil, natural gas and coal. Moreover, it is also emitted if certain chemical reactions occur e.g. CO2 is emitted during the production of cement. CH4 is emitted during the process of production and transport of oil, natural gas and coal. N2O is emitted during land use, agricultural and industrial activities, during the combustion of solid waste and treatment of wastewater. And fluorinated gases are emitted during various industrial processes.5
Companies use carbon credits to offset their carbon emissions, either by sticking to emission allowances or by contributing to some sustainable projects. This process is performed through an exchange (or carbon financing) and it is in the form of annual fee to a project partner. This partner may be from private, public, or from any NGO sector for the emission reductions arising once the project is working. The measurement of emission reductions is done by CO2 equivalent and it is written as ‘tCO2e’. In other words, ‘1 carbon credit = 1 ton of CO2 not emitted’. 6
Audit of climate change
For performing any audit (financial, compliance or performance audit) ‘audit criteria’ is necessary and it helps an auditor to assess the performance of the auditee/entity/project/program/process/function with reference to some standards and performance benchmarks. Audit criteria for climate change can be national if there are some laws or policies in the country and these criteria can also be international if a country has signed some international accords e.g. United Nations Framework Convention on Climate Change (UNFCCC)/Kyoto Protocol. Moreover, audit criteria can also be in the domain of governance as climate change policies, activities need to be undertaken by central, provincial and local governments and lack of coordination and transparency can be damaging to the implementation of policies and activities in the field of climate change.
Some international agreements like UNFCCC is the major international response to confront the climate change issues. UNFCCC and its Kyoto Protocol (KP) clarify some commitments to various Parties7 and it is where the audit criteria can be looked for. UNFCCC is primarily based on the principle of ‘common but differentiated responsibilities’. Developed/industrialized nations should ‘take the lead’ in modifying the anthropogenic discharge in the course of time. In other words, Annex-I parties have to be more responsible than that of Non-Annex-I. Firstly, Annex-I parties will help in fulfilling the commitments of developing countries and secondly they shall take practical steps in reducing the emission of GHGs.
UNFCCC asked all parties to make such measures to reduce the GHG emissions and improve and maintain sinks. The developed countries have made commitments to lead proactively in modifying trends of GHG emissions. The objective of UNFCCC is focused on long-term goals while the target of Kyoto Protocol is short term and measureable. For instance, in the Kyoto Protocol (KP) there are legally binding emission targets for industrialized nations. For Annex-I Parties, the Protocol established mandatory and computable reduction targets. For the sake of achieving the desired reduced targets, KP carries out Annexure-I Parties to rely on various national policies including enhanced energy efficiency, advancement of viable forms of agriculture, preservation and improvement of sinks of GHGs, advancement of new technologies, weeding out market imperfections in GHG emitting sectors and bar of such emissions from transport sector. There are usually flexible mechanisms and include ‘Joint Implementation’ (JI), ‘Clean Development Mechanism’ (CDM), and ‘Emission Trading System’ (ETS).8
The flexible mechanisms convey that GHG emissions have economic value and usually this economic value is measured as value of tons of CO2 or its equivalents. Market determines the cost of one ton of CO2. These mechanisms are used voluntarily but if a country chooses to use them, then there will be certain rules and procedures and those can be used as audit criteria. The CDM is a system in which the Annex-I parties invest in such projects in the developing country parties that reduce the GHG emissions. As a return for these investments, Annex-I parties get credits in the shape of ‘Certified Emission Reductions’ (CERs)9. The recipient and financing parties decide how to share these credits from such projects. They can utilize these credits to compensate for their own GHG emissions, or save them for future utilization or sell them. As far as the recipient party is concerned, the purpose is that it should also benefit from such investments in sustainable development.
Emission Trading System
The ‘Emission Trading System’ (ETS)10 is a market based mechanism for trading GHG emission credits. The unit of this trade is actually one ton of CO2-equivalents, i.e. ton(s) of CO2 emission right is tradable. This trading can take place among the counties, companies, or among the companies and countries. Companies receive, free or through auction, emission allowances based in such manner of a ceiling on emissions. Companies can then sell or buy these emission allowances. The companies that release lesser GHGs than their ceilings can sell the remaining/saved allowances. In the same way, the companies that release more than their limit of GHG emissions can buy such allowances.
So, in a nutshell, the audit criteria for any country while performing the review could be:
- CO2 emission (or emission of GHGs in general) reduction targets in that country.
- Any program, project or plan made by the Government of that country in the area of climate change
Conducting the climate change audit
At the start of performing the audit, a walk-through procedure may be helpful for the auditor. Walk-through consists of inquiry, observation, inspection of documents and reperformance of controls. Walk-through procedures are actually used to get anunderstanding of the entity, process, function or a system as a whole. While performing walk-through procedures, auditors check each and every risk points/locations in the process or procedure and check whether some controls are present to counter that particular risk or not. If the control is not present, it shows risk more than the tolerable risk; and if the control is present, then effectiveness of control is checked whether the control is keeping the risk within the level of controllable risk (i.e. within the risk appetite).
While performing the audit it is a well-known fact that there are two major steps in conducting any audit whether it is financial, compliance or performance audit. These two major steps are done in a sequence. First step is compliance testing and the second is substantive testing. The result of compliance testing will determine the extent and nature of substantive testing. In compliance testing, various attributes or characteristics are checked in the way whether such and such attribute is present or not. In other words, compliance testing will result in either ‘yes’ or ‘no’ with respect to the existence of specific attributes or characteristics during audit. For example, if an auditor wants to know the compliance of specific law, policy, rule or regulation he will perform the attribute sampling of the population and will check whether that specific law, policy, rule or regulation has been complied with or not by the auditee.
If (s)he finds non-compliance of that particular instruction (law, policy, rule or regulation) in that sample, he will check the details of all such instances of non-compliance and this process is called substantive testing (test of details to substantiate the detection of non-compliance). If (s)he finds very few instances (or no such instances) of non-compliance, then he will reduce the substantive testing and the chance of finding major errors/irregularities/frauds becomes minimum. However, (s)he will always use professional judgment and act with due diligence in finding out the major error, irregularities or fraud. But if (s)he finds some instances of non-compliance from that sample, then (s)he will increase the sample size on one hand and increase the substantive testing too. In this way many irregularities or fraud can be found out. The result of compliance testing will determine the extent and nature of substantive testing and this is the broader picture of audit testing.
Similarly, for auditing climate change, the above mentioned two steps will be employed. In other words, if a Government administration or an entity has done some actions to counter the negative effects of climate change, the first step is to check whether that administration has performed those steps or not. For this purpose, a general questionnaire is used or it can be tailor made as well keeping in view the objective or scope of audit. These questions will be answered in the form of ‘yes’ or ‘no’ and this is the compliance testing. If the answer is ‘no’ then it will be the audit observation (audit para) or point of concern in itself. And if the answer is ‘yes’ (‘Yes’ means the presence of the specific control mechanism) then it is checked in detail to find out the effectiveness (i.e. integrity and accuracy of control mechanism).
Below are some thematic areas (taken from the audit universe - it is all possible audit areas) and the relevant audit objectives and corresponding questions are also drafted for understanding purposes.
Theme-I: Presence of data of climate change and identification of related risk
Possible audit objective: To review and evaluate whether the Government administration identified the sources of CO2 emissions and assessed its effect on climate change.
Possible questions to cater for the above audit objective:
- Has the Government administration identified the sources of CO2 emissions in the country?
- Has the administration assessed or calculated CO2 emissions from sources of transport, energy production, or industry etc.?
- Has the administration appraised the major vulnerabilities (i.e. localities or sectors most likely to be affected) to climate change?
- Has the administration appraised the risks to public health due to climate change?
Theme-II: Government administration’s response to climate change
Possible audit objective: To evaluate whether the Government administration responded essentially to the challenges brought about by climate change.
Possible questions to cater for the above audit objective:
- If the Government administration does not have any transnational mitigation commitments? or has it set any national level commitment?
- Has the Government administration formulated any policy for climate change on one hand and for controlling CO2 emissions on the other?
- Have any national targets for emission reduction been set? And are they practical, realistic, and effective?
- Has the Government administration formulated policy instruments or tools for CO2 emissions reduction?
- Has responsibility and accountability been assigned to different ministries/agencies of the Government in the climate change process?
Theme-III: Implementation of plans for mitigation
Possible audit objective: To appraise the effectiveness of the Government administration’s mitigation programs in the area of climate change.
Possible questions to cater for the above audit objective:
- Has comprehensive consultation with all the stakeholders and agencies in the climate change completed before introduction of the mitigation plan?
- Have the sectors that contribute most to climate change been identified and have these been added in the national plan?
- Have distinctly defined targets and schedule for implementation been written in the plan?
- Whether CO2 emission trends and extensions are in agreement with targets set for the plan?
- Whether coordination of the ministries concerned being done as conceived?
- Have research activities appeared as considered in the plan?
- Whether sufficient financial resources are brought about for the implementation of the plan and are those resources being spent judiciously?
- Whether the mitigation plan has caused the achievement of targets and objectives?
Theme-IV: Monitoring of national plans
Possible audit objective: To evaluate whether effective monitoring was taking place.
Possible audit questions to cater for the above audit objective:
- Whether assignment of responsibility for the overall monitoring of the plan was done?
- Was monitoring taking place as considered?
- Were global commitments on reporting the results met by the Government?
Theme-V: Impact analysis
Possible audit objective: To evaluate whether the Government’s plans actually led to CO2 emissions reduction.
Possible audit questions to cater for the above audit objective:
- Did the plan of emissions reduction meet the mitigation commitments of the country?
- Did the plan of emissions reduction actually lead to reduction of CO2 emissions?
All of the discussion mentioned above under thematic areas are called compliance testing. The other name of compliance testing is called control testing. If the answers to the questions (all or few) mentioned above are ‘no’ then it is the audit observation (non-compliance) in itself and these observations will be reported to the concerned authorities for proper action against the auditee. However, if the answers to the question are ‘yes’, it means controls are in place. Now the next step is to check the audit evidence on the completeness, accuracy or existence of activities or controls during the audit period and that is done through test of details i.e. substantive testing procedure. After substantive testing all the ins and outs of control mechanisms will appear and it will be easy to check any gaps.
In the journey towards attaining the 13th goal of SDGs regarding climate change through guidance of UNFCCC and Kyoto protocols, climate change audit can be conducted with reference to the emission of CO2 and its financing. Criteria for such audits can be international and/or national commitments. However, if a criteria does not exist then the auditor will discuss with the auditee and arrive at the agreed upon criteria. Such criteria are used in compliance and substantive testing of climate change audit. For compliance testing, various questions are drafted usually with the help of brain storming of auditors. After getting the results of compliance testing, substantive procedures are conducted. Finally, audit report is communicated to the relevant authorities with the recommendations on how to cope with the issue of CO2 emissions and these recommendations will be aligned with the audit evidence.
2 IPCC was established in 1988 by ‘United Nations Environment Program’ (UNEP) &‘World Meteorological Organization’ (WMO) to provide fair information of climate change to various stakeholders. There are thousands of scientists and experts forming IPCC and has submitted a lot of assessment reports on climate change so far.
7https://unfccc.int/gcse?q=Annex%20I%20parties Annex-I Parties consist of industrialized countries that were members of the OECD in 1992, plus those countries with economies in transition (the EIT Parties). Annex II Parties consist of the OECD members of Annex I, but not the EIT Parties. They are necessarily to provide financial resources to facilitate the developing countries to commence emissions reduction actions under the Convention & to help them adapt to negative consequences of climate change. Moreover, they have to "take all practicable steps" to encourage the development & transfer of environmentally friendly technologies to EIT Parties and developing countries. Add to this, funding given by Annex II Parties is routed largely by means of the Convention’s financial mechanism. Non-Annex-I Parties are mainly the developing countries. The 49 Parties categorized as ‘least developed countries’ (LDCs) by UN are provided special consideration by the Convention because of their restricted capacity to reciprocate to climate change and accustom to its injurious effects.