… as expert proposes comprehensive natural capital framework
A recent analysis of corporate Environmental, Social, and Governance (ESG) accounting and auditing practices has raised concerns about the inadequate valuation of natural resources in financial reporting and audit procedures, with chartered accountant Ojetunde Elias proposing innovative frameworks to address these critical gaps.
The findings have garnered immediate attention from accounting and auditing professionals, who highlighted the urgent need for standardized natural capital accounting and audit verification systems.
According to professional accounting bodies, natural capital accounting refers to the systematic approach of quantifying and valuing environmental assets, dependencies, and impacts in monetary terms that can be integrated into traditional financial reporting and auditing frameworks.
It noted that methods of natural capital accounting include ecosystem service valuation, environmental cost accounting, integrated environmental-economic reporting frameworks, and specialized audit procedures for environmental liabilities.
While traditional financial accounting and auditing have dominated corporate reporting, the new research highlighted significant blind spots in measuring environmental contributions to economic value and verifying environmental claims through audit procedures.
The analysis revealed that businesses and their auditors currently lack standardized methods to quantify their interactions with natural resources, leading to systematic undervaluation of environmental assets and inadequate audit verification of environmental liabilities.
The expert found that companies using traditional accounting and auditing methods miss up to 60 per cent of environmental risks and dependencies compared to those implementing comprehensive natural capital accounting frameworks with specialized audit procedures.
In developing his comprehensive accounting and auditing framework, Elias reviewed extensive information from corporate sustainability reports, financial statements, and audit opinions from companies across various sectors, analyzing gaps in environmental accounting practices and audit verification procedures.
The analysis included roughly equal representation across sectors, with about three-quarters being manufacturing companies, 15 per cent service companies, 10 per cent technology firms and the rest from other industry categories.
Companies reported varying levels of environmental data quality and standardization across different reporting periods, with auditors expressing concerns about the verifiability of environmental claims. Researchers followed reporting and auditing trends for an average of four years.
In addition to finding general gaps between traditional financial reporting and environmental impact measurement, researchers also found that companies with existing environmental management systems who adopted natural capital accounting frameworks with enhanced audit procedures had a 45 per cent improvement in sustainability performance metrics and audit quality ratings.
Organizations with established ESG programs and robust internal audit functions also showed higher success rates in implementing comprehensive environmental accounting and audit verification systems.
The study found strong associations between natural capital accounting adoption, enhanced audit procedures, and improved environmental decision-making capabilities.
Reacting to the analysis findings, a net-zero energy expert, Michael Emezirinwune emphasized that while traditional financial reporting and auditing provide important business insights, the observed gaps in environmental valuation and audit verification warrant immediate attention.
Speaking on the subject, the chartered accountant explained that financial decisions made without considering natural capital dependencies and proper audit verification, including reliance on clean water, stable climate, and biodiversity, could negatively impact long-term business sustainability and expose companies to unaudited environmental liabilities.
Michael emphasised the need for urgent adoption of comprehensive environmental accounting and auditing systems, stressing the concerning disconnect between economic growth measurement and environmental asset depletion verification.
The audit specialist pointed out that businesses may experience unexpected operational disruptions when environmental dependencies are not properly accounted for and audited in strategic planning processes.
He explained that the absence of standardized environmental valuation methods and audit procedures during business operations could have adverse effects on risk management and complicate the relationship between financial performance and environmental stewardship verification.
While expressing concern over the possibility of companies continuing unsustainable practices without proper environmental cost accounting and audit oversight, Michael cautioned against the potential for “greenwashing” and subsequent increased environmental degradation due to inadequate measurement and verification systems.
The expert also raised concerns about resource depletion and ecosystem degradation, which could strain business operations, particularly among organizations that fail to adequately assess and audit their environmental dependencies.
He suggested immediate implementation of natural capital accounting and auditing frameworks, particularly for businesses with significant environmental footprints or resource dependencies.
Acknowledging the potential operational benefits and improved sustainability outcomes of environmental accounting and enhanced audit procedures, Elias emphasized the need for standardized implementation guidelines and audit protocols before widespread adoption can be effective.
He further said, “The results of this analysis should be given immediate attention as they reveal critical gaps in how businesses account for and audit environmental assets. The study shows that companies using traditional accounting and auditing methods are missing crucial environmental risks and dependencies that should be verified through proper audit procedures.
“Although implementing comprehensive environmental accounting and auditing systems requires significant organizational change and auditor training, the benefits are substantial and necessary for long-term business sustainability and financial statement reliability.
“Businesses that continue operating without proper environmental accounting and audit verification may face unexpected risks, including resource scarcity, regulatory changes, and ecosystem disruptions that could significantly impact operations and result in material misstatements.
“Furthermore, investors and stakeholders increasingly demand transparent environmental reporting with independent audit verification, which traditional accounting and auditing systems cannot adequately provide.
“Companies that fail to adopt comprehensive environmental accounting with proper audit oversight may find themselves at competitive disadvantages, missing opportunities for sustainable innovation and efficient resource management while facing potential audit qualifications.
“There are concerns that without proper environmental accounting and audit verification, businesses may inadvertently contribute to ecosystem degradation while failing to capture the economic value of environmental stewardship in audited financial statements.
“This analysis strongly suggests that natural capital accounting with enhanced audit procedures should be prioritized as fundamental business and audit practices. While some companies and audit firms have shown interest in sustainability reporting, this study indicates that comprehensive environmental accounting and audit systems are essential for informed decision-making and reliable financial reporting.
“Though implementation requires careful planning, auditor training, and potentially significant investment in audit procedures, businesses and audit firms can benefit tremendously from understanding and verifying true environmental dependencies and impacts.
“Before we can achieve widespread sustainable business practices with reliable audit assurance, we need standardized environmental accounting frameworks and audit protocols. Companies with significant environmental footprints and their auditors should exercise particular diligence in adopting these systems.”
When asked about the impact of environmental accounting and auditing on business operations, the audit specialist said, “We should accelerate the adoption of comprehensive environmental accounting and auditing systems for informed business decision-making and reliable financial reporting. The demonstrated benefits of natural capital accounting with proper audit verification must be balanced against the risks of continuing with inadequate environmental measurement and audit procedures.
“Particularly since environmental challenges are among the leading risks to business continuity globally, any improvement in environmental accounting and audit capabilities is significant from both business and public interest perspectives. This analysis suggests that comprehensive environmental accounting with enhanced audit procedures provide substantial advantages for strategic planning, risk management, and financial statement reliability.
“Companies considering environmental accounting implementation should preferably start with materiality assessments and stakeholder engagement rather than attempting comprehensive systems immediately, ensuring adequate training for both accounting staff and auditors during implementation phases.
“Businesses should focus on identifying key environmental dependencies and impacts while working with auditors to develop verification procedures that avoid overwhelming existing reporting and audit systems.
Organizations should monitor implementation progress and environmental performance improvements, seeking expert guidance from qualified accountants and auditors when challenges arise. Companies with significant environmental impacts or resource dependencies should prioritize comprehensive environmental accounting adoption with appropriate audit oversight.
“We definitely need additional research on the effectiveness of various environmental accounting and auditing frameworks, particularly studies comparing different implementation approaches, audit procedures, and their business outcomes.
“Future research should examine environmental accounting and audit impacts across diverse industries and organizational sizes, analyzing both financial performance and environmental stewardship improvements with audit quality enhancements. More comprehensive studies should include businesses and audit firms from various sectors because implementation challenges and benefits may differ according to industry, size, location, environmental footprint, and audit complexity.”
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