AUDITORS should proactively consider the implications of climate-related risks on companies and assess whether a misstatement or omission of such disclosures could be financially material, the Institute of Singapore Chartered Accountants (ISCA) said.

Issuing a technical guidance on Friday (Oct 28), the national accountancy body also called for auditors to check if the management’s assessment of climate-related risks in financial reporting are consistent with those used in sustainability reporting.

This comes as climate-related risks – which include both physical risks and transition risks associated with the transition to a lower-carbon economy – are expected to have a material impact on entities’ business model, cash flows, financial position and financial performance.

But a Carbon Tracker Initiative study last year found little evidence to suggest that auditors considered the effects of material climate-related financial risks or companies’ announced climate strategies, ISCA pointed out.

The same study also found that, even in the face of considerable inconsistencies between a company’s financial statements and other forms of communication to stakeholders, auditors rarely commented on the discrepancies.

These need to change in order for financial statements to remain “useful and relevant”, as the focus of stakeholders is shifting more towards climate-related issues, said KPMG Singapore partner Reinhard Klemmer.

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PwC Singapore partner Hans Koopmans, meanwhile, stated that auditors should not forget about climate-related risks, since risk assessment is an important part of audit.

Klemmer and Koopmans co-chair an environmental, social and governance working group jointly formed by ISCA’s auditing and assurance standards and financial reporting committees.

The technical guidance also covered the responsibilities of financial statement preparers. It called for them to consider the adequacy of disclosures in the financial statements according to materiality, and convey the financial impact of climate-related commitments that have been publicly announced.

ISCA gave an illustrative example to show how a transportation company with a plan to phase out all internal combustion engine vehicles (ICE) by 2030 to reduce emissions, may present proper information relating to critical accounting estimates and judgement related to the change in the vehicles’ useful lives, from 10 to eight years.

The company may state that the change in accounting estimate has been made prospectively, and the net effect of the change in the financial year was an increase in depreciation expense of $0.25 million, for example, ISCA said.

To further account for uncertainties associated with climate transition risks, the company may state that if the vehicles’ actual useful lives are shorter than the management’s estimate by a year on average, the annual depreciation charge would increase by S$0.18 million. This was the calculation if the initial cost of the ICE vehicles was S$10 million, and the annual depreciation charge for the financial year was S$1 million.