An Exploration of Sustainability Reporting Requirements under International Financial Reporting Sustainability Standards S1 and S2, and the Impacts and Challenges for External Auditors

Abstract

This research investigates the complexities external auditors encounter when providing assurance on sustainability reports under IFRS S1 and IFRS S2. As the global sustainability agenda intensifies, driven by increasing awareness of the risks associated with unsustainable business practices, companies face growing pressure to enhance the transparency and accountability of their actions. In response, new reporting obligations, including IFRS S1 and S2 standards, have been introduced to standardise sustainability disclosures and hold businesses accountable for their environmental and social impacts. The study explores the challenges associated with sustainability reporting and assurance, by examining the requirements of IFRS S1 and S2, alongside the practical difficulties associated with auditing sustainability disclosures. While sustainability reporting has been extensively studied from various perspectives, the specific audit challenges that arise with the introduction of these standards have been relatively little explored. This subject is still emerging but is anticipated to grow in importance as IFRS S1 and S2 become mandatory. To investigate these challenges, this study adopts an exploratory qualitative approach, employing an inductive method. The research is grounded in a comprehensive literature review and empirical data collected through semi-structured interviews with audit practitioners in the field. The findings reveal critical issues relating to gaps in auditor skills and knowledge, a gap between sustainability report users' expectations and audit purpose, and challenges posed by the standards’ requirements and client practices that adversely affect audit performance. The study positively indicates the credibility that assurance reports on the sustainability disclosures can provide, while additionally identifying potential ethical and independence threats inherent in the assurance process. To address these issues, the study proposes recommendations such as investing in auditor training, increasing reliance on the use of sustainability experts, developing audit firm capabilities, and leveraging technology to enhance audit effectiveness. This research contributes to the field of sustainability reporting and auditing, by providing empirical evidence on IFRS S1 and IFRS S2 and the challenges when auditing compliance with these standards, helping to fill a critical gap in the literature and enrich the understanding of the challenges auditors face.