The New Rational Purpose Requirement

The New Rational Purpose

The purpose of this article is to inform sustainability assurance practitioners (SAPs) of the impact that the new rational purpose requirement could have on assurance practices in South Africa. It also explains the process that SAICA will follow to assist SAPs to prepare them for this impact.

Many researchers believe that sustainability reporting could have the potential to transform the role of business in society if it succeeds in making organisations more accountable for the negative social and environmental impacts. The unfortunate reality is that a lot of these reports tell a very one-sided story about the impacts of organisations. It is contended that this information could mislead stakeholders and that it could ultimately be counterproductive to sustainability development.
Researchers have also considered the role and impact of the practice of assuring information in sustainability reports. The general role of assurance (or audit) is to add credibility to reported information. The reality of sustainability assurance practices is that the scope of assurance engagements is determined by management. Many academics lament the fact that, in their perception, assurance providers become complicit in the counterproductive momentum of the sustainability reporting practice as they add credibility to these reports that, in many cases, can be seen as being very ‘one-sided’.

Assurance providers making use of ISAE 3000 were of course completely within their rights to accept assurance engagements where the scope was determined by management, as long as the scope was explicitly delineated in the assurance report. Even though assurance providers were acting within their rights when accepting these types of engagements, many assurance practitioners were uncomfortable doing so as they believed they were not acting in the public interest in accepting these engagements.

Academic research has however indicated that assurance providers are very sensitive to encourage clients to broaden the assurance scope to a more representative scope of the phenomenon under investigation. The main reason for these concerns was of course the fact that clients may take their business to practitioners that are less scrupulous about accepting non-representative scopes of assurance.

It could be argued that the introduction of ISAE 3000 (revised) should have put an end to these practices. The revised standard has many new requirements, and one of these requirements is that during the pre-engagement phase of the engagement the practitioner should determine whether an engagement has a rational purpose. The rational purpose itself has a number of requirements, but the most important requirement for the purpose of this article is the following: ‘Whether aspects of the subject matter information are expected to be excluded from the assurance engagement, and the reason for their exclusion.’

In short, this means that the assurance provider cannot accept an assurance engagement if they suspect that relevant information is excluded from the assurance scope.

Given the fact that this standard became effective in December 2015, one would have expected that practitioners around the world would have altered their practices to incorporate these requirements, but this has not been the case. The IAASB, in their recent discussion paper that considered Emerging Forms of External Reporting, does mention a rational purpose. It speaks about the fact that assurance providers may find it difficult to ascertain whether lesser scope assurance engagements have a rational purpose, but it does not elaborate any further.

The IRBA recognised the fact that practitioners might need assistance to operationalise the requirements of ISAE 3000 (revised) and hence embarked on the process of developing the South African Assurance Engagement Practice Statement 1, Sustainability Assurance Engagements: Rational Purpose, Appropriateness of Underlying Subject Matter and Suitability of Criteria (SAAEPS 1). The SAAEPS addresses a number of important issues that are raised in ISAE 3000 (revised), among others the rational purpose requirement. The IRBA also recognised that the requirements of the SAAEPS 1 may have a material impact on the assurance practices of South African assurance practitioners, and hence it provided a two-year period to allow practitioners to prepare themselves for a 31 December 2020 effective date.

SAICA was then approached to developed training interventions to assist practitioners to ready themselves for the impact of SAAEPS 1. SAICA then proceeded to assemble a project team to this effect. The team identified technical as well as conceptual areas that the training should focus on. It was thus decided to tackle the conceptual challenges first as an understanding of the conceptual thinking underlying SAAEPS 1 would facilitate an easier understanding of the technical issues.
Among others, a challenging aspect of implementing SAAEPS 1 will be that the consideration of the rational purpose requirement is a pre-engagement activity. The fact that the practitioner will most likely be able to commit only limited time and resources to this issue is a concern that will receive a lot of attention at the workshops. However, a potentially more challenging concern will lie with the fact that an assurance practitioner will be required to apply considerable professional judgement in an area where they may have no prior experience.

For the purposes of this article, I will reflect on some of the potential concerns that the assurance practitioner may experience during the consideration of the rational purpose requirement, and more specifically on whether the reported information (and by implication the assurance scope) meets the information needs of the intended users. ISAE 3000 (revised) specifically states that the intended users may be a broader group than those stakeholders to whom the assurance report is addressed.
The implication is that the assurance practitioner will (1) have to identify all the potential users and then (2) view the reported information (and assurance scope) from the perspective of these groups to determine whether it meets their information needs. At this point, it becomes relevant to consider the notion of rationality.

According to the ‘reason’, or rationality of a specific user group, certain pieces of subject matter information (and a certain assurance scope) may appear reasonable. However, the reason (or rationality) of the assurance practitioner may be different to that of the user group and to hence come to the conclusion that the reported information (and assurance scope) meets a user group’s information needs may become very challenging.

What further complicates this challenge for the assurance provider is the concept of bounded rationality. A Wikipedia search of the concept reveals the following: ‘Bounded rationality is the idea that when individuals make decisions, their rationality is limited by the tractability of the decision problem, the cognitive limitations of their minds, and the time available to make the decision.’

In simpler terms, this means that what an individual thinks is rational depends on (or is limited by):

  • The complexity of the thing they are thinking about
  • Their intellectual capability
  • The time they have to think about it

I will not dwell on the intellectual capability of specific user groups nor the time that they have to think about a specific problem. What concerns me most is the complexity of the thing that they are thinking about.

Even though many organisations have been practising sustainability reporting for many years, it is of concern to academic researchers that there is no consensus around the meaning of the concept of sustainability nor about what the underlying phenomenon is that sustainability reporting is supposed to represent. Hence, for an assurance provider to be able to use their professional judgement on whether a sustainability report (and an assurance scope) fulfils the information needs of the intended users, the assurance provider would first have to understand how the user groups understand the concept of sustainability, how this concept should be represented in a sustainability report, and what they wish to know about it.

The SAICA training programme will thus firstly aim to provide assurance providers with views around the way that the different user groups’ views sustainability, and the way that this should be represented in the sustainability report. This will be the primary focus of the first workshop in May and will be of fundamental importance for any assurance provider who wishes to apply their professional judgement effectively in an ISAE 3000 (revised) assurance engagement.

The second workshop will be specifically for assurance practitioners and will focus on the technical intricacies of applying the SAAEPS 1. This workshop will be repeated to enable practitioners to attend that may have missed the first workshop. (Iteration 1 of the workshop will be in August and iteration 2 in October.)

SAICA will document the outcomes of the different workshops in a report that will be in the public domain. The dates and venues will be communicated to relevant stakeholders in due course. Contact Loshni Naidoo at loshnin@saica. in case of any queries.

AUTHOR l Pieter Conradie CA(SA) MPhil (Responsible Leadership), Programme Director: Integrated Reporting, Albert Luthuli Centre for Responsible Leadership, Faculty of Economic and Management Sciences, University of Pretoria

This article was first published in the May 2019 edition of ASA Accountancy South Africa.

ASA Accountancy South Africa