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Environmental Audit

The Role of Financial Auditor in Effective Implementation of Environmental Protection and suistainable development in China

ALLY Abdul Mussa, ISSA, Zubeir Saleh, NGOMUO Sarah Isaac, SUN Xiaonan

Department of Accounting, Dongbei University of Finance and Economics, Dalian, China, 116025

Abstract: This paper analyzes the role of financial auditors in effective implementation of environmental protection and sustainable development in china. Currently china is a prime location for making products which consumed most by all the people in the world. Weng (2005) assert that more than 50% of the world’s cameras 30% of its air conditioners and televisions, 25% of its washing machines, and almost 20% of its refrigerators are manufactured in china and the products list continued to grow. This development causes a serious environmental problem and has reflected a great damage on the economy and quality of life and therefore a need for proper measures to be in place to prevent environmental protection. The findings of this study indicate that financial auditors have a great role to play in this handover through effective implementation of environmental audit.

Keywords: Environmental Protection; Environmental Audit; Financial Auditors; Financial Reporting; Financial statements

1 Introduction

In recent years environmental issues has become an international agenda and it has now draw attention in the mind of different groups; In the past, people have demanded traditional information to make their economic choice in areas such as, value, price, quality, and service but now they have new values such as, the impact of products on the environment, environmental protection, etc. and they need information about those values to express their choice and make the market work effectively (Adams, 1990, pp. 81-83). All these raise the need for proper environmental audit.

According to the historical records, auditing in China originated as early as Western Zhou Dynasty, more than 3,000

years from now. Zaifu was the official position with the audit function at that time. A royal audit court was set up in Song Dynasty in 992 A.D, and after the revolution of 1911, the national government established its Chamber of Audit and issued Audit Law. The Ministry of Finance controlled the practice of audit since China adopted the reform and open policy in late 1970s’. In December 1982 the resolution to practice an independent auditing and supervisory system in China was adopted, which was included in the amended Constitution. With the explicit stipulation of auditing in the Constitution of 1982, in this year Chinese government entered a brand new phase of historical development in auditing.

On September 15, 1983, the National Audit Office was inaugurated. since then, five Auditor Generals were appointed in succession. They are Mr. Yu Mingtao, Mr. Lu Peijian, Mr. GuoZhenqian, Mr. Li Jinhua and Mr. Liu Jiayi, as the supreme audit institution of China. As of January 1, 1995, a special law regulating government auditing entered into force and later on October, 1997, the Implementation rules were promulgated and taken effect.

The development history of China's environmental audit has undergone three major stages namely; Nascent stage: where Chinese government issued "China's Agenda 21" in September 1994, The agenda marking the beginning of Chinese government's emphasis on environmental audit: Initial stage, In 1995 CNAO discussed at great length technique and method of environmental audit at the Cairo Conference held by INTOSAI. In the seminar held by CAS in Huairou district, Peking in 2002 to

Proceedings of the 4th (2012) International Conference on Financial Risk and Corporate Finance Management

enrich the theory and system of China's environmental auditing: Deepening stage: In 2005 ASOSAI held two seminars on environmental audit where water and biopersity issues were paid more attention and relevant proposals were offered. In 2009, Wen jiabao, China's Premier, emphasized that governments at various levels should consciously accept supervision of the NPC and the CPPCC, and the special supervision such as audit supervision should be enhanced and should follow the trail of financial fund.

of preparing and auditing of financial statements. Collison et al., 1996; Elkington& Jennings, 1991; Gray, 1990; Shields & Boer, 1997, Gray, 1990, pp. 65-69, Collison, Gray, and Innes (1996), Collison and Slornp (2000), ICAEW (2000, p. 1).

Herremans, Akathaporn and Mecinnes (1993) supported by arguing that investors prefer not to deal with companies, which have a bad reputation or do not have social responsibility attitude towards the environment. The professionals inpiduals and accountancy bodies like CICA, ICAEW, 2009, 1993, 1997; Collison, Gray and Innes, 1996; FEE, 1995, 1999; Gray et.al 1998; Gray, Collison, French, McPhail and Stevenson, 2001; Maeve & Carey, 1992 also raise awareness of the issues amongst accountants and auditors. Sylph, (2005, p. 1) asserting that accountants and auditors have a role in making corporations and governments sensitive to the environmental results of their actions. Similarly, Lickiss (1991), the ex-president of ICAEW asserts that accountants and auditors must measure up to the environmental challenge if they are to fulfill their duty to promote public interest. ICAEW (2000) describes the important implications of environmental matters for businesses, and cautions auditors and accountants not to ignore them.

In 1983 the State Council of China announced environmental protection as one of the two basic state policies (with the other being family planning) of China, and emphasized that environmental issues were as urgent as population problems (Kun-min Zhang and Zong-guo Wen 2007).

Given these evidences; conducting an environmental audit is no longer an option but a sound precaution and a proactive measure in today's heavily regulated environment. A number of arguments have addressed the need for widening the scope of the financial auditing profession to encapsulate environmental issues. The same have been supported by Robert Dixon et al 2004.

2 Consideration of

Environmental Matters in the Audit of Financial Statements

IAPS 1010 emphasized that the magnitude of environmental matter differs from one firm to another and its effect in financial statements also differs. Thus, the magnitude and effect of environmental matters have great impact to financial reports of some entities. Arising from such matters is a potential risk of material misstatement (including inadequate disclosure) in the financial report and when this happened the auditor is required to give consideration to environmental matters in the audit of the financial report.

A typical sequence of the audit process is as follows. Having acquired sufficient knowledge of the audit environment, the auditor assesses the risk of a material misstatement in the financial statement. This assessment includes consideration of environmental laws and regulations that may pertain to the entity. It also provides a basis for the auditor to assess the magnitude of environmental matters for the company and then to decide whether there is a need to pay more attention to them in the course of the audit of the financial statement. This sequence has been clearly provided in the practical assistance given by IAPS 1010 to auditors.

Currently Accountants and financial auditors are involved to make sure that the information of environmental matters are properly given consideration in both process

Environmental Audit — The Role of Financial Auditor in Effective Implementation of Environmental Protection and suistainable development in China

3 Financial Auditor and Environmental Audit 3.1 Argument in favor of

using financial auditors

Those who are in favor of using financial auditors in effective implementing of environmental audit argued that the financial auditors are competent and capable of doing environment audit and they should apply scientific expertise according to their professional qualifications the same way as they normally apply to auditing of other field. ICAEW, (1992, p.106) indicates that the environment is not different from any other specialist areas such as property valuation or interpretation of legal agreements. The environment is one area which can be inte-grated into the audit process by involve discussion with environmental specialists. Furthermore, ICAEW (1992, p. 108) states that it is more likely that a relevant physical scientist or engineer would be the appropriate person to provide such verification because of the technical of such disclosure. Hence therefore the financial auditors in this situation have a broad field in which to work, while using the specialist to cover technical problems B, Dixon 2004, Bebbington, Gray, Thomson &Walterws, 1994; Black, 1998; Canadian Institute of Chartered Accountants (CICA), 1992 and 1997; Collison, 1996; Collison& Gray, 1997; Collison&Slomp, 2000; Collison et al., 1996; Federation des Experts Comptables Europeans (FEE), 1993; Gray &Symon, 1992; Greeno, Hedestrom, &Diberto, 1989; Huizing& Dekker, 1992; ICAEW, 1992,2000; IFAC, 1995; Power, 1997). ICAEW (1992) argued that companies tend to trust the financial auditors or CPAs more than any other specialists to ask them advice in business situations. The same have supported by Grecn, &Zimmerer, (1995) .

FEE (1993), also pointed out that the financial auditor has a long standing tradition of investigating and evaluating systems as well as reporting well to the findings. Collison et al. (1996) argue that on the basis of evidence from European countries the

potential role for financial auditing, related to environmental audits, clearly exists. ICAEW (1992, p. 3) points out that "independent audit can provide important assurance on the reliability of environmental disclosure.

The audit work required to give an opinion on published environmental reports in that case it will be similar in nature to that performed in auditing financial statements and in verifying information contained in. CICA (1992), Power (1997) seeks to determine the relationship between financial and environmental audits and evaluate the expertise of accountants and argues that accountants have begun to compete for work in the environmental auditing field, Collison et al. (1996) conducted a survey concerning financial auditors' responses to environmental issues; the results indicate that there is a majority desire for guidance from professional accountancy bodies related to environmental matters and also majority view that many auditors have potentially useful role to play in attesting environmental reports. Furthermore, accountants and financial auditors are now excel well in performing environmental audit and they managed to build confidence to public what they only need is to improve their work further and expand their knowledge of environmental issues CICA (1997).

3.2 Argument against using

financial auditors

Those who are against using financial auditors in effective implementing of environmental audit argued that the financial auditors are unable to translate their personal views on environmental issues to their professional practice. Their personal beliefs did not seem to impact their professional practice and they did not feel they had the technical knowledge required to audit environmental matters (Chiang 2006). Gray (2000, p. 248) comments that although "accountants are well trained in auditing (as in accounting), universities need to produce "independent critical thinkers", and particularly, "in the field of social, environmental, accounting, reporting and

Proceedings of the 4th (2012) International Conference on Financial Risk and Corporate Finance Management

auditing". Hence, for auditors to become more concerned with environmental matters, as inpiduals and as a group, their attitude needs to shift to where their boundaries of consideration extend (Bebbington, Gray, Thomson, & Walters, 1994; Deegan, Geddes, & Staunton, 1996).

Chiang (2006, p. 23) also indicates that "the mechanism for translating the consideration of environmental issues into audit practice needs improvement before auditors can become confident and fully engaged in their consideration of environmental matters in financial audits". Salter (1992, p. 21) states that "if accountants fail to grasp this opportunity (i.e. performing environmental audits) there are many other types of organization that will take up the challenge. Maltby (1995, p. 19) points out that accounting firms are not the only organization offering an environmental auditing service, for example the consultants listed in the UK Enviromnental Data Service (ENDS) Directory (1991) exhibit a wide variety of specialists.

prevailing increase in industrial development following opening and deregulation of the economy China has a long way to go in order to be in a better position in environmental protection and sustainable development agenda and therefore a need for the formulation of new national strategy which will be implemented strategically by the CNAO to overcome this problem. This trigger the need to have legal frame work which will empower and mandate financial auditor to conduct environmental audit as they have a great role to play in this handover through effective implementation of environmental audit.

The authors also observed that there is interplay between financial auditors and environmental specialist and that financial auditors can perform well environmental audits with the help of other specialists not only environmental specialist but also other specialist like engineers. Lawyers etc. when deemed necessary. However, the situation is opposite in many countries including China whereby the role of financial auditors in promoting environmental protection through environmental audits is not practically significant. The most important reason to this effect is lack of environmental information disclosure standard which will obligate all auditors to conduct environment audit and report it as stand-alone report or as party of audit of financial statement.

4 Conclusion and Recommendations 4.1 Conclusion

This paper analyzed environmental audit focusing on the competence, relevance, importance and the role of financial auditor in effective implementation of environmental protections and sustainable development in china. The findings of this paper revealed that for many years since 1970s China has been confronted with the dual task of developing its national economy and protecting its environment. Chinese government implemented a good number of polices, reforms, and actions on environmental protection. Although there are significant achievement which has been achieved since then as regards to environmental protections and sustainable development still environmental protection in China have continued to be one of the very serious problem and has reflected a great damage on the economy and quality of life and given this

4.2 Recommendations

It is recommended that Chinese government should put in place strictly legal frame work and issue environmental information disclosure standard which will obligate all auditors to conduct environment audit and report it as stand-alone report or as party of audit of financial statement. Such a standard should emphases the need for disclosure of environmental issues in the financial statements, the disclosure mode, and contents etc.

The legal frame work should require all other relevant and competent authorities to act negatively and imposing severe punishment to all companies which their financial reports are disqualified by the Auditor general or any

Environmental Audit — The Role of Financial Auditor in Effective Implementation of Environmental Protection and suistainable development in China

other competent authority on the ground of non-compliance in environmental issue. This will not only redirect the concerns of environmental matters to the companies but also it will speed up the need to make changes in accounting and auditing education and professional to qualify accountants and auditors to deal with environmental issues.

Acknowledgment

The authors are the students at Dongbei University of Finance and Economics. The first three are doing PhD in Financial Managementand the fourth one she is doing Master in professional accounting so we are grateful to all our course instructors and supervisors especially Prof. Chen Yen; Prof. Wan Shouyi; Prof. Wang Man and Prof. Fu Sheng We are also grateful to all students who are doing PhD in FM and MPAcc at DUFE for their very helpful discussions, comments and constructive criticisms. We are also indebted to Robert Msigwa and Dickson Pastory. The usual disclaimer applies and the views expressed are the authors’ own and do not necessarily reflect those mentioned here above.

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