environmental auditing

CHAPTER. 1INTRODUCTIONThe objective of this study is to investigate how different environmental auditingtechniques are being used in practice in different countries. The study also examines how sustainable development is taken into account in various countries. A framework of principles of best practice environmental auditing will be developed based on academic literature and existing guidelines. This will be used to compare guidelines on environmental auditing in both developed and developing countries.

This objective will be achieved by three aims:

Develop a framework of environmental auditing for regularity perspectiveswith the overall context/goal of sustainable development Test developing and developed countries environmental auditingguidelines against the framework to demonstrate how environmentalauditing can be used as a proxy for broader sustainability auditing; and Recommend practical measures to raise performance of auditing in asustainable development context.

The research mainly focuses on environmental auditing by governments with the aimthat this will benefit the Supreme Audit Institutions (SAIs) of developing countries,which are mostly in the stage of introducing environmental auditing. Morespecifically, this study will provide a basis for the development of guidelines forenvironmental auditing in Bhutan which is in the process of developing theenvironmental auditing guidelines/manuals in the SAI of Bhutan, although manyenvironmental laws, rules and regulations are already enforced.This study explores how to move towards sustainability auditing by focusing onestablishing methods and tools by which progress can be measured. Furthermore, the research is focused on studying the difference in the level of environmental auditing standards between the SAIs of developed and developing countries.

The project was designed to achieve the objectives and aims discussed above. Aqualitative research approach developed by Bryan (2001) has been implemented.Since there is a limited literature available on government environmental auditing,standards and guidelines developed by International Organization of Supreme Audit Institutions (INTOSAI) Working Groups on Environmental Auditing (WGEA) and other groups were used. A checklist was used to look for the data and mostly information downloaded from websites.

LITERATURE REVIEWIn this section the development of environmental auditing is discussed, followed by the definitions developed in the environmental auditing literature. Good practiceenvironmental audit procedures and aims and objectives are explained. Next thedifferent levels of environmental auditing techniques and most importantly, auditing for sustainability are also discussed. The relationships between environmental auditing and sustainable development are then explored in the context of government environmental auditing. The final section assesses how improvements in environmental audits in a sustainability context could be potentially measured with SAIs.

CHAPTER .2WHAT IS ENVIRONMENTAL AUDIT?

Environmental auditing is not a particularly new discipline; however its popularity as a means of assessing environmental performance has recently increased dramatically (Welford, 2002). The first compliance audits can be traced back to the United States. Corporations adopted this methodology during the early 1970s in response to their domestic liability laws. The importance of environmental audits has gained momentum greatly during the last few years, with the launch of Eco-Management and Audit Scheme (EMAS) in 1993 and the publication of ISO 14001 in 1996. More and more companies are finding it valuable to audit their environmental impacts (Welford, 2002). The United States Environmental Protection Agency (EPA) defined environmentalaudit as a systematic, documented, periodic, and objective review by regulatedentities of facility operations and practices related to meeting environmentalrequirements (EPA, 2003 cited in Anthony et al., 2003, p.36).The term environmental audit was defined by Confederation of British Industry as: the systematic examination of the interactions between any business operationand its surroundings. This includes all emissions to air; land and water; legalconstraints; the effects on the neighbouring community; landscape and ecology;the publics perception of the operating company in the local area.Environmental audit does not stop all compliance with legislation. Nor is it agreen-washing public relations exercise. Rather it is a total strategicapproach to the organisations activities (CBI, 1990 cited in Paramasivan2002, p. 149)

The most commonly used definition was given by the International Chamber ofCommerce (ICC, 1989 p.117), which defined environmental auditing:as a management tool comprising a systematic, documented, periodic, andobjective evaluation of how well environmental organisation, management andequipment are performing with the aim of helping to safeguard the environmentby: (i) facilitating management and control of environmental practices; and (ii)assessing compliance with company policies, which include meeting regulatoryrequirement.

Many authors have provided a number of definitions on environmental auditing.Hayes et al., (1999) outlined the following features of environmental auditing:

Audit is a systematic approach. Audit is conducted objectively. Auditor obtains and evaluates evidence. Evidence obtained and evaluated by the auditor concerns assertions about economic actions and events. Auditor ascertains the degree of correspondence between assertions and established criteria. Goal, or objective, of the audit is communicating the results to interested users. Mc Donagh et al. (1997) defined environmental auditing as a process for checking, on a regular basis, the environmental performance of an existing organisation or activity. In the context of an environmental management system, Thompson (1995) described environmental auditing as the regular, systematic review of the environmental management system, compliance with laws and regulations, conformance to policies, and the development of an action plan to deal with deficiencies. Based on the ICC definition, Humphrey and Hadley (2000) highlighted a number of features as follows:

Audits should be systematic and comprehensive. Audits should be fully documented and where possible, substantiated with physical evidence. Audits should be periodic rather than one off procedure. Audits should be objective, providing a true and fair view of the situation at a site or within company. Millichamp (1996) provided the same meaning as the definition of ICC.

However, he made some notes on this definition: It is seen as a management tool but might also be used a tool of regulatory agencies and any contact groups in assessing environmental performance. It should be systematic, documented, periodic, and objective. It is of performance. The objective is to contribute to safeguarding the environment. It is part of a management system. It is concerned with assessing company policies connected with regulatory requirements but also with appropriate standards as perceived by management.

From comparing and analysing the definitions, it was found that they have thefollowing commonalities: Systematic and comprehensive; Documented; Periodic; Objective; Independent; and Evaluation.

According to Donald (2004), environmental auditing is a catch-all term used todescribe a range of audit activities focussed on the environment. SAIs are normallycarrying out three basic types of auditing with an environmental perspective: financial (attest), compliance, and performance (value-for-money). At XV INCOSAI in Cairo, INTOSAI adopted a framework definition of environmental auditing. Basic principles underlying this definition are: Environmental auditing is not significantly different from normal auditing as practised by SAIs; Environmental auditing may be included in financial, compliance, or performance audits; and The concept is based on government environmental auditing. The main focus of this research is based on this definition.

Types and purpose of environmental auditing

There are numerous types and purpose of audits. Humphrey and Hadley (2000)basically divided environmental auditing into three types of corporate audit:

* Compliance audits e.g. regulatory, EMS and internal standards; * Single issue audits e.g. waste minimisation, transport; and * Liability audits e.g. pre-acquisition, divestment and insurance.

Paramasivan (2002) categorised environmental auditing as cyclical auditingprogrammes and single audits. He also divided objectives into three broad groups:

Compliance with regulatory codes, for example legal conformity; Assistance in acquisition and disposal valuations, for example sale and acquisition of facility; and Corporate development towards green missions, for example monitoring of corporate environmental policy and procedures Welford (2002) discussed more detailed objectives of an environmental audit, including:

1. Verifying complianceVerifying compliance with standards or best available techniques.

2. Identifying problemsDetecting any leakage, spills or other such problems with the operations andprocesses.

3. Formulating environmental policyFormulating the organisations environmental policy if there is no existing policy.4. Measuring environmental impactMeasuring the environmental impact of each and every process and operation on the air, water, soil, worker health and safety and society at large.

5. Measuring performanceMeasuring the environmental performance of an organisation against best practices. 6. Confirming environmental management system effectivenessGiving an indication of the effectiveness of the system and suggestions forImprovement.

7. Providing a databaseProviding a database for corrective action and future plans.

8. Developing the companys environmental strategyEnabling management to develop its environmental strategy for moving towards agreener corporate and performance culture.

9. CommunicationCommunicating its environmental performance to its stakeholders though reportingwill enhance the image of the company.

Five levels of environmental auditing techniques

Welford (2002) has suggested five levels of environmental auditing techniques based on the central focus of the approach. This hierarchy proceeds from a static base of compliance audits at the first level to a dynamic audit for sustainability at the fifth level (Welford, 2002).

The different levels of audit techniques are shows as follows: Environmental auditing techniquesSource: Adapted from Welford 2002.Level oneThe most basic auditing approach is compliance auditing where performance ismeasured as conformance with legislation, regulation and codes of conduct.According to Welford (2002) until the early 1990s the majority of environmentalaudits were usually little more than compliance audits.

Level twoEnvironmental Management Systems (EMS) emerged during the 1990s withinternational standards such as ISO 14001 and EMAS. This has extended the auditing process to systems audits where the focus is whether the EMS has been effectively implemented. An EMS should be reviewed regularly in order to have continuous improvement in environmental performance. The targets and objectives at this level are largely self-determined (Welford 2002). This auditing is a crucial component of an EMS.

Level threeThis describes the traditional approach to environmental auditing which takes asnapshot of the environmental performance of a company at one point in time, usually on one particular site. The main focus is on the direct impact of an organisation, site or process on water, land and the air, and therefore concentrates on direct pollution effects, contingency planning and health and safety (Welford, 2002). In addition, it is important to note that for these three levels the mode of assessment is essentially static, focusing on direct, easily measurable impacts and conformity to the law and management system in place, all at one particular point in time (Welford,2002)

Level fourAt level four auditing goes beyond traditional environmental auditing techniqueswhich require a change in emphasis in a number of ways. The concept of ecological auditing has three key features:

1. The mode of assessment must be dynamic;2. There needs to be an increased emphasis put on life cycle impacts; and3. A wider set of ecological issues need to be addressed (Welford, 2002).A product life cycle should consider the impact of raw material procurement onbiodiversity, endangered habitats, human and animal rights and non-renewableresources. Wheeler, 1993 argues these issues must not be ignored from an ecological perspective although it may sound good especially to the agrochemical,petrochemical, chemical and mining industries

Level fiveWelford (2002) states that we need to widen the scope of auditing if our ultimate aim is to move towards sustainability. This (level 5) is a holistic approach predicated on a clear world view. There should be an understanding of the need for further paradigm shift in business culture (Commoner 1990; Welford 1995; Wheeler 1993 cited in Welford, 2002).

More specifically, waste minimisation, re-use and recycling should be driven by the need to conserve the use of non-renewable resources. Sourcing of raw materialsshould not have negative impacts on global biodiversity, endangered habitats orhuman and animal rights. Overall corporate policies should examine the businessimpact on both the developed and developing world, both now and into the future (Welford, 2002).

The audit process

There are a number of different environmental auditing procedures advocated in the auditing literature. A model of the audit procedure which is universally accepted was first developed by Arthur D Little. This was later adopted by the International Chamber of Commerce (ICC) in 1989. Based on this approach, Humphrey and Hadley (2000) divided the environmental auditing process into three main areas of activity:

Pre-audit; On-site audit; and Post-audit.

Each of these phases comprises a number of clearly defined objectives, with eachObjective to be achieved through specific actions. These actions produce results in the form of outputs at the end of each phase.

Pre-audit activities

Once a commitment to auditing has been made a number of activities need to becompleted before the on-site activities commence. This is done to reduce the amount of time spent in on-site activities which is expensive for both the auditee and audit team. The pre-audit activities usually include the following:

The sites that are to be audited need to be determined and selected. The auditee should be informed of the date of the audit as soon as possible, enabling them to adjust and become used to the concept. The audit scope should be identified. The audit should usually be consulted when establishing the scope. The audit plan should be designed in such a way that it can accommodate changes based on information gathered during the audit and effective use of resources. Audit team and assignment of responsibility should be established. The chosen working papers should be collected. This will facilitate the auditors investigations on the sites. The background information on the facility including the facilitys organisation, layout and processes, and the relevant regulations and standards, should be collected. The background information on the sites historical uses, and the location of soil and groundwater contamination should be collected. The pre-audit questionnaire should be sent to auditee (Humphrey and Hadley, (2000). On-site audit activities

The on-site audit is the most important step of the audit procedure. This includes:

The opening meeting is the first step between the audit team and auditee. In this meeting the purpose of audit, the procedure and the time schedule are discussed. Site inspection is the second step for on-site activity. In this step the audit team may discover matters which are important to the audit but which are not identified at the planning stage. The on-site phase requires the audit team to develop a working understanding of how the facility manages the activities that influence the environment and how any EMS, if there is one, works. Assessing strengths and weaknesses of the auditees management controls and risks associated with their failure need to be established. Gathering audit evidence involves collecting data and information using audit protocol. Communicating with the staff of the auditee to obtain most information. Evaluating the audit evidence against the objectives established for the audit and an agreed protocol. An exit meeting takes place once all of audit findings have been finalised with facility personnel (Humphrey and Hadley, 2000).

Post-audit activities

Post-audit activities begin with the preparation of a draft report. The draft reportshould be reviewed by the facility personnel directly involved in the audit. The final report should be derived from it and it should then be distributed to all interested parties within the organization. Humphrey and Hadley (2000) confirm that it is important for management to follow-up the report and develop an action plan to implement those audit findings.The ICC (1991) (cited in Humphrey and Hadley, 2000) identifies five elements of a successful follow-up programme. These include: * A standard action plan format;* Established procedures for approving the action plan and communicating its contents;* Regular reporting of the action plans status;* Special reporting and chasing up of overdue action; and* Independent auditing of the action plan to verify that all actions sanctioned have been completed.The formal audit procedure is complete as soon as the action plan has been completed.

Elements and principles

The ICC (1989) defines essential elements of an environmental audit that areconsidered within the three formal stages of an audit. These include:

Management commitment; Objectivity; Professionalism; Systematic procedures; Written reports; Quality assurance of the auditing system and audit findings; and Follow-up and implementation (Metcalf, 2003). An environmental audit is effective if it considers all aspects that are essential for good environmental performance. In interpreting this, Welford (2002) states some success factors for environmental audit include:(i) Top management commitment;(ii) Staff involvement and participation;(iii) Recognition of an integrated approach to environmental auditing;(iv) Third party verification;(v) Well-qualified audit team; and(vi) Established audit frequency.Barton et al. (1995) set out the main elements of environmental auditing including:

Review of Internal Practices (RIP) Evaluation of the environmental impact of the agencys own operations and practices. Management Audit (MA) Assess the effectiveness of the agencys organisation and procedures in tackling environmental problems. Policy Impact Assessment (PIA) Evaluates an environmental impact of the agencys regulatory, policy and service activities. Statement of the Environmental report (SoE)Statement covers authoritys environmental aims and commitment. International Organisation of Supreme Audit Institutions (INTOSAI) and Environmental Auditing The INTOSAI is an international body for government auditors in member countries of the United Nations. It was founded in 1953 in Havana and consists of over 170 Supreme Audit Institutions (SAIs). The INTOSAI sets the standards and guidelines for public sector auditing (INTOSAI WGEA, 2003). SAIs play a major role in auditing government accounts and operations and inpromoting sound financial management and accountability in their governments.INTOSAI supports its members in this task by providing opportunities to shareinformation, ideas and experiences in the field of government auditing amonglegislative auditors of national governments (INTOSAI WGEA, 2003).

Every three years INTOSAI organises an International Congress for Supreme Audit Institutions (INCOSAI), in which representatives of organisations such as the United Nations and the World Bank also participate. The XVIII INTOSAI was held in Budapest, Hungary in October 2004 and the next Congress will be hosted by Mexico in 2007.

Within INTOSAI there are seven regional organisations of SAIs: South America(OLACEFS), Central America and the Caribbean (CAROSAI), Europe (EUROSAI),Africa (AFROSAI), the Arabic countries (ARABOSAI), Asia (ASOSAI) and thePacific (SPASAI).The INTOSAI WGEA was established during the 14th INCOSAI in Washington in 1992. The main aims of the Working Group are to assist SAIs in acquiring a betterunderstanding of the specific issues involved in environmental auditing, to facilitate exchange of information and experience among SAIs, and to publish guidelines and other informative material for use by the SAIs. The WGEA is currently the biggest21 INTOSAI Working Group. It started with 12 members, and there are now 40 members from countries all over the world.

Environmental Auditing with Regularity Auditing Practices

The INTOSAI had issued Guidance on Conducting Audits of Activities with anEnvironmental Perspective at XVII INCOSAI in Seoul, Republic of Korea inOctober 2001. According to this guidance, environmental auditing encompasses alltypes of audit: regularity (financial and compliance) and performance audits(INTOSAI WGEA, 2003).

What is Regularity Auditing?

Regularity auditing is the periodic preparation of accounts and conduct of an audit. It is one of the common elements of best practice based around eight key principles of Social and Ethical Accounting, Auditing, and Reporting (Gonella et al., 1998).

As an evolution of these processes, the International Auditing Practices Committee(IPAC) defines environmental matters in a regularity audit as:

Initiatives to prevent, abate or remedy damage to the environment or todeal with the conservation of renewable and non-renewable resources; Consequences of violating environmental laws and regulations; Consequences of environmental damage done to others or to naturalresources; and Consequences of vicarious liability imposed by law (for example, liability for damages caused by previous owners) (INTOSAI WGEA, 2003). The International Federation of Accountants (IFAC) has issued an International Auditing Practice Statement (IAPS) on environmental matters and relates to guidance on various International Standards on Auditing (ISAs). The IAPS concentrates on: the consideration of relevant environmental laws and regulations; obtaining and maintaining a sufficient knowledge of the business in relation to relevant environmental matters; risk assessments; substantive procedures to detect any material misstatement of the financial statements as result of environmental matters; using the work of others; management representations; and reporting (Hayes et al., 1999).

Financial auditing approach to environmental issues

Governments are increasingly recognising that the costs arising from theimplementation of environmental policies and obligations may be significant. These environmental costs, liabilities and impacts on asset values affect both the preparation and audit of financial statements. The treatment of costs, assets and liabilities in financial statements which would apply to the treatment of environmental costs and liabilities are based on the established national and international accounting standards (INTOSAI WGEA, 2003).

Compliance auditing approach to environmental issues Compliance auditing with regard to environmental issues will make sure thatgovernmental activities are conducted in accordance with relevant environmentallaws, standards, and policies. This is applicable both at national and (where relevant) international levels (INTOSAI WGEA, 2003).

Performance auditing approach to environmental issues

The INTOSAI Auditing Standards defined a performance audit as audit of theeconomy, efficiency and effectiveness with which the audited entity uses its resources in carrying out its responsibilities. The three Es are briefly explained below:

* The economy is minimising the cost of resources used for an activity, having the appropriate quality;* The efficiency is the relationship between the outputs, in terms of goods, services or other results and the resources used to produce them; and * The effectiveness is the extent to which objectives are achieved and the relationship between the intended impact and the actual impact of an activity. Performance auditing is also referred to as Value for Money auditing.

Performance auditing of environmental activities may include the following:

Ensuring that indicators of environment-related performance (where contained in public accountability reports) fairly reflect the performance of the audited entity; and Ensuring that environmental programs are conducted in an economical, efficient and effective manner (INTOSAI Working Group on Guidance on Conducting Audits of Activities with an Environmental Perspective, 2003 pp.124-127).A performance auditing on environmental issues can be classified in the followingfive types:

Auditing government monitoring of compliance with environmental laws

In most countries, an environmental department or other agency of the executivegovernment has responsibility for ensuring that environmental laws and regulationsare implemented and enforced. More specifically they are responsible for:

issuing permits that limit the quantity or concentration of pollutants discharged; monitoring the compliance with conditions stipulated in the permits issued; monitoring the quality of the environment to help identify other potential breaches of laws and regulations;

helping in the interpretation of regulations, and providing other assistance to regulated entities to assist in their compliance efforts; and taking enforcement actions when violations occur (INTOSAI Guidance on Conducting Audits of Activities with an Environmental Perspective,2003).

Auditing the performance of government environmental programmes

A government may also carry out a series of programs and activities to protect orimprove the environment. For example, in implementing those programs Department of Agriculture help farmers to adopt new farming techniques with the main aim of minimising pollution. Such environmental programs can be verified from the government development plans and its annual reports.In addition, it is the duty of the government auditor to identify the list of international agreements on environmental matters to which government has agreed. The auditors then examine the programs that have been implemented to achieve them (INTOSAI Working Group on Guidance on Conducting Audits of Activities with an Environmental Perspective, 2003).

Auditing the environmental impacts of the other government programs

The impact of all government programs on the environment may not be good. Some of its development programs may give rise to detrimental effects on the environment in some way through their use of resources or their consequences for the area in which they are implemented. For example, the primary objective of infrastructure projects is to facilitate movement of people and goods on the positive side. The building of roads, runways and railways have negative impacts on the ecology of the area, the landscape and the air and the noise pollution (INTOSAI Working Group on Guidance on Conducting Audits of Activities with an Environmental Perspective, 2003). Auditing environmental management systems

Various public organisations have environmental management systems and many are introducing them. This helps to ensure that they are systematically setting policies for continuous improvement in environmental performance and are achieving the policy objectives and targets. This has been further strengthened with the launch of accreditation schemes (e.g. ISO 14001 and EMAS) nationally and internationally which enable organisations to obtain confirmation of the adequacy of their environmental management systems and recognition that they are operating such systems (INTOSAI Working Group on Guidance on Conducting Audits of Activities with an Environmental Perspective, 2003).

Evaluating proposed policies and program on environment

Many countries do not grant a mandate for the government auditors to audit policies. Their works are just confined to auditing the implementation of government policies (INTOSAI WGEA, 2003). However, the government auditors may be asked to give input on any proposed environmental policies or programs. The results of the Third Survey on Environmental Auditing showed that one third of the SAIs actively help government departments in one or more of the following areas:

developing environmental indicators, performance measures, Monitoring systems or other kinds of policy-information; developing environmental management systems; producing environmental reports; and other types of assistance, for example SAI participated in workshops and seminars, reviewed workshops organized by the environmental council of the country and exchanged information (INTOSAI WGEA, 2000).

Authority of SAIs with regard to environmental auditing

The INTOSAI WGEA (2003) revealed that environmental audits are eitherperformance audits or a combination of a regularity and performance audits. The types of environmental audits conducted by SAIs for three survey periods are as

Type of environmental audits

Source: INTOSAI WGEA on Fourth Survey, 2003According to the survey report, during the last three years the most common issues in environmental audits include-internal environmental management by publicauthorities or departments (148 reports), fresh water (130 reports) and waste (116reports). Other areas of concern are: agriculture, pesticides, local development andforestry (56%), air pollution (45%), marine pollution (37%), problems related to ecosystems (36%) and traffic (33%) (INTOSAI WGEA, 2003).

Mandate

In 2004, 94 per cent of SAIs had a legislative mandate to conduct environmentalaudits and 82% per cent also had the mandate to carry out a performance audit.Though the majority of SAIs carries out financial and performance audits, only 17 per cent of SAIs have a legislative mandate referring specifically to environmental auditing (INTOSAI WGEA, 2003).

Range of bodies audited Almost all SAIs are entitled to conduct the audit of environmental activities of their national government. The third survey (2000) showed that 57 per cent of theresponding SAIs had taken up one or more audits with environmental issues. ManySAIs can also audit activities of local, regional, provincial, or federal stategovernments as well as state-owned enterprises. In addition, less than half the SAIsare entitled to audit the activities of non-governmental public bodies (INTOSAIWGEA, 2000).

Barriers to environmental auditing

According to the results of the INTOSAI WGEA (2003), 26 percent of the 114 SAIs did not experience any barriers to conducting environmental audits. The previous surveys have identified the following barriers:* Inadequate SAI mandates;* Insufficient established environmental auditing norms and standards;* Lack of skills or expertise within the SAI;* Insufficient data on the state of the environment;* Insufficient national monitoring and reporting systems; and* Insufficient formulation of governmental environmental policy (Donald,2004).

Environmental audit status

A theoretical approach for environmental auditing has been identified in a range ofliterature, for instance those techniques such as compliance, systems, environmental, ecological and sustainability audits (Welford, 2002). The development and practice of environmental auditing varies between different regions. The attention given to sustainable development issues is likely to vary widely between SAIs (INTOSAI Working Group on Sustainable Development, 2003). The SAIs in developing countries are in the initial stages of introducing environmental auditing, for example the SAIs of Sri Lanka and South Africa reported to INTOSAI that environmental auditing and reporting is still in their infancy (Ananda, 2004; Louis, 2004). In this context, this project aims to ascertain to what extent the theoretical techniques of auditing for sustainability are being followed in SAIs of developing and developed countries. This will be done by developing a framework to test current practice against best practice principles. Furthermore, this will include an examination on the key challenges and/or problems faced at the present juncture by the SAIs of developing countries and how they overcome them.

CHAPTER.3METHODOLOGY

Introduction

The objective of this research is to assess and measure environmental auditing withregularity and performance perspectives. This section discusses the various steps used in the methodology for carrying out this research. In the first place it discusses choosing the sample of SAIs from developing and developed countries for this study. The reasons for focussing on those SAIs are explained. The methodological approach such as desk-top study is also discussed. Finally, the establishment of best practice framework and how this was used isexplained.

CHAPTER.4CASE STUDY

In this section the status of environmental auditing in the four SAIs is discussed. Italso describes the documents of various SAIs examined for the study. It also explains the evaluation of each SAI standard against the established best practice framework.

Case 1: Sri Lanka

The Supreme Audit Institution (SAI) of Sri Lanka follows the Sri Lanka AuditingPractice Standard (SLAPS 15), the Consideration of Environmental Matters in theAudit of Financial Statements. The Statement does not establish any new basicprinciples or essential procedures. Its purpose is to assist auditors, and thedevelopment of good practice, by providing guidance on the application of the SriLanka Auditing Standards (SLAuSs) in cases when environmental matters aresignificant to the financial statements of the entity (Auditor Generals Department, Sri Lanka).The study showed that out of thirty three sub-criteria established in the framework the standard has 9 Yes, 15 No and 9 Yes/No. This demonstrated that the Sri Lankan standard met only few general principles include: systematic, objectivity,documentation and independent that 54 per cent (Yes-27% plus Yes/No-27%) issues were fully or partially referenced in the standard.In contrast, the study demonstrated that the SAI had 15 No which comprised corecriteria such as quality assurance, effective training, human rights, and futurity. showed that 46 per cent of issues were not at all referenced in the standard orrelated documents.

Case 2: Indonesia

Environmental Auditing in Indonesia has been carried out as by the Principles andGeneral Guidelines regarding Implementation of Environmental Audits (Minister of State for Environment, 1994). The principles and general guidelines are intended to be used as guide for implementation of environmental audits for an organisation or activity. The environmental audit is a voluntary action which can be undertaken by the manager of an organisation or activity. This serves as an instrument for managing and monitoring the environment (Minister of State for Environment, 1994). The evaluation of these guidelines against the best practice framework showed that the principles such as systematic, documentation, objectivity, independent, and reporting are well referenced in the guidelines. indicated that the Indonesian guidelines had 13 Yes, 13 No and 7 Yes/No out of 33 specific criteria. Demonstrated that the guidelines did not meet 40 per cent of the criteria at all. Quality assurance, effective training, human rights and futurity were amongst the criteria lacking in Indonesian guideline.

Case 3: The Netherlands

The Netherlands Court of Audit has developed a Code of Conduct for the organization on 26 June 2000. The mission of The Netherlands Court of Audit is to audit and improve the performance of the State and its associated bodies. Objectivity, reliability and practicability are the principle characteristics of the Court of Audits products. Besides there are other principles such as professionalism, respect, openness, social responsibility, due care, independence and objectiveness (The Netherlands Court of Audit, 2000).The Netherlands Court of Audit was the Chair of INTOSAI WGEA. The evaluation found that out of 33 best practice criteria the SAI of The Netherlands met 27 criteria resulting in non conformance with 6 criteria only (Table 1.4). The six issues which were not addressed include: Existence of an explicit ethical framework; Internal review; Peer review; External review; Introductory training; and Research into alternatives for non-renewable resources (Table 1.4).It was also shown in Table 1.5 that the SAI had 82 percent of issues referenced in the standard.

Case 4: Canada

The Canadian document A Sustainable Development Strategy for the Office of theAuditor General-2003-2006 has been used in this study. The amendment of Auditor General Act in 1995 established within the Office of the Auditor General of Canada, the position of Commissioner of the Environment and Sustainable development (Office of the Auditor General of Canada, 2004). The main business of the office is to audit the governments activities on behalf of Parliament. After the 1995 amendments to the Auditor General Act, the environment formally joined the other three Es. In conducting an audit, the auditor asks questions such as these:

Has money been spent with due regard to economy? Has money been spent with due regard to efficiency? Are procedures in place to measure and report on the effectiveness of programs? Has money been spent with due regard to the environmental effects of thoseexpenditures? (Office of the Auditor General of Canada, 2004).Out of 33 sub-criteria established in the framework, the SAI of Canada satisfied 29.

The criteria which were not referenced in the standard/related document include:* Existence of an explicit ethical framework;* Peer review;* Introductory training; and* Research into alternatives for non-renewable .The SAI of Canada is the present Chair of INTOSAI WGEA. Comparison of actual audit practice against established criteria

The guidelines and principles of the four SAIs were compared against the eleven main criteria. The result of the comparison is briefly described below:

Systematic :The best practice criteria systematic was further divided into three sub-criteria such as audit protocols, well defined methodology, and based on systematic plans and procedures. The study showed that the two SAIs of developed countries Canada and The Netherlands met these three criteria whereas the standards of Sri Lanka and Indonesia referenced two criteria in full and one criterion partially .

Objectivity:Objectivity has three specific issues such as true and fair view, impartial report, and audit objective. The analysis revealed that the SAIs of Sri Lanka and Indonesiareferenced two criteria in their standards and partial referenced one criterion, theimpartial report. The Netherlands and Canada satisfied all three criteria.

Documentation:Documentation is divided into three specific issues, fully documented, physicalevidence, and working papers. The finding demonstrated that the SAIs of Indonesia, Canada and The Netherlands met all criteria whereas the Sri Lankan standard did satisfy one criterion and two criteria partially, i.e. fully documented and physical evidence (Table 1.4). Table 1.4 indicated that working papers were well referenced in all the standards of four SAIs.

IndependenceThe best practice framework demonstrated that auditor and SAI independence was an essential criteria. It was found that the Canadian and The Netherlands guidelinessatisfied all these criteria whereas the Sri Lankan and Indonesian standards addressed two criteria and one issue partially (Table 1.4).

TransparencyTransparency is further broken down into three issues, freedom of access toinformation, participation arrangement, and existence of an explicit ethicalframework. The study demonstrated that the SAIs of Sri Lanka and Indonesiareferenced one issue only. Similarly, two issues were referenced in the Canadian and The Netherlands standards but did not meet the third criteria, existence of an explicit ethical framework (Table 1.4).

Audit capacityThe environmental audit capacity of SAIs includes auditors competence, SAIscompetence, and specific personnel. Only two SAIs, Canada and The Netherlands,had met all three criteria. The SAI of Sri Lanka did not meet two criteria and partially satisfied one, specific personnel. The Indonesian standard had partially met specific personnel and SAIs competence, but not auditors competence .

ReportingThe study demonstrated that three SAIs, Canada, The Netherlands and Indonesia,have good reporting, satisfying all three criteria such as regular and timely, concise, and documented evidence. Sri Lanka did not meet one of the three criteria, concise, and met partially the third criterion; regular and timely (Table 1.4).

Quality assuranceQuality assurance is further divided into three sub criteria, internal review, peerreview and external review. The three SAIs, Sri Lanka, Indonesia and TheNetherlands had not addressed this in the standards. Canada satisfied two criteria,internal review and external review .

Effective trainingThe study showed that introductory training was lacking in all SAIs guidelines. The other two training issues-technical and continuing education were included in the standards of Canada and The Netherlands. The Indonesian standard did not meet anyof criteria whereas Sri Lankan standard met one criterion, continuing education .

Human rightsHuman rights are further divided into three sub-criteria such as health and safetylegislation, dissatisfaction, and fair wage policies. The study showed that the SAIs of Canada and The Netherlands satisfied these three criteria. The Sri Lankan andIndonesian standards did not meet two criteria, dissatisfaction and fair wage policies.

FuturityThe study demonstrated that out of three sub-criteria under futurity principle the SAIs of Sri Lanka and Indonesia did not meet any issues. The guidelines of Canada and The Netherlands satisfied two criteria such as phase out of non-renewable; andreduce, repair, reuse and recycling. None of the standards included one criterionresearch into alternatives for non-renewable (Table 1.4).

Principles not included in Sri Lankan and Indonesian GuidelinesOut of thirty three issues discussed in the best practice framework, Sri Lanka satisfiedeighteen criteria either fully or partially and not met fifteen criteria at all .

The issues not addressed by Sri Lankan standard include:(i) Audit protocols;(ii) Audit objective;(iii) Participation arrangements;(iv) Existence of an explicit ethical framework;(v) Auditors competence;(vi) SAIs competence;(vii) Concise;(viii) Internal review;(ix) Peer review;(x) External review;(xi) Introductory training;(xii) Technical training;(xiii) Dissatisfaction;(xiv) Fair wages; and(xv) Research into alternatives for non-renewable resources (Table 1.4).Similarly, the standard of Indonesia referenced twenty criteria either fully or partiallyand thirteen criteria not addressed at all

The criteria not referenced by Indonesian standard include:(i) Audit objective;(ii) Participation arrangements;(iii) Existence of an explicit ethical framework;(iv) Auditors competence;(v) Internal review;(vi) Peer review;(vii) External review;(viii) Introductory training;(ix) Technical training;(x) Continuing education;(xi) Dissatisfaction;(xii) Fair wage policies; and(xiii) Research into alternatives for non-renewable resources (Table 1.4).

The analysis showed that out of 33 best practice criteria, Sri Lanka had not satisfied 15 criteria and the Indonesian standard had not met 13 criteria (Table 1.4). The result demonstrated that these two SAIs follow almost the same principles of environmental auditing. This can be therefore concluded that two SAIs of developing countries are still in the introductory stage of environmental auditing. This finding is consistent with previous study by Ananda (2004).

Principles not included in The Netherlands and Canadian GuidelinesThe Netherlands SAI has satisfied twenty seven criteria and not referenced six criteria whereas the SAI of Canada met twenty nine criteria and four not referenced

The six criteria not referenced in the SAI of The Netherlands include:(i) Existence of an explicit ethical framework;(ii) Internal review;(iii) Peer review;(iv) External review;(v) Introductory training; and(vi) Research into alternatives for non-renewable resources (Table 1.4).Similarly, the four issues not addressed by the Canadian standard include:(i) Existence of an explicit ethical framework;(ii) Peer review;(iii) Introductory training; and(iv) Research into alternatives for non-renewable resources (Table 1.4).From the above finding it is apparent that the standards of SAIs of Canada and TheNetherlands do not address only a few principles (as shown above). Furthermore, this can be substantiated that Canada and The Netherlands satisfied 88 per cent and 82 per cent of criteria respectively (Table 1.5). We can therefore say that the SAIs of this two countries have well developed standards or principles in auditing.

Principles included in all SAIs GuidelinesThe results of the study indicate that there are eight principles which are welladdressed in the SAIs standards. These include:(i) Based on systematic plans and procedures;(ii) True and fair view;(iii) Working papers;(iv) Auditors independence;(v) SAIs independence;(vi) Freedom of access to information;(vii) Documented evidence; and(viii) Health and Safety legislation (Table 1.4).These are best practice principles of auditing. Of 33 criteria, 8 are followed in allSAIs. The result demonstrated that the SAIs of developing and developed countrieshave less principles in common practice. Lack of common principles between SAIs is an indication that there is no uniform and international standard in practice.

Principles not included in all SAIs GuidelinesIn contrast, the analysis showed that there are four principles which are not followed in all four SAIs. These include:(i) Existence of an explicit ethical framework;(ii) Peer review;(iii) Introductory training; and(iv) Research into alternatives for non-renewable resources (Table 1.4).The finding shows that some basic elements of environmental auditing such asexistence of an explicit ethical framework, and introductory training are currently not included in SAIs standards.

The comparison of SAIs standards against the best practice framework raisesfollowing significant issues:1. Transparency is an important principle of environmental auditing but mostSAIs had not referenced it in the standards or documents (Table 1.4). Furthermore,the finding showed that the SAIs of developing countries i.e. Sri Lanka and Indonesiahad less transparency as compared to Canada and The Netherlands. Table 1.4demonstrated that out of three sub-criteria under transparency the SAIs of developing countries met one criterion, freedom of access to information whereas the SAIs of developed countries Canada and The Netherlands, met two criteria, freedom of access to information and participation arrangements. It is evident from the finding that standards of various SAIs vary from one country to another.2. The research evaluated the environmental audit capacity of SAIs whichincluded auditors competence, SAIs competence, and specific personnel. Only two SAIs Canada and The Netherlands had met all three criteria. The two SAIs, Sri Lanka and Indonesia had partial or no specific personnel dedicated to environmental audits and had no either auditors or SAIs competence (Table 1.4). The finding is supported by a previous study conducted by INTOSAI WGEA (2003) that of the 74 SAIs evaluated only 56 per cent (40 SAIs) have specific personnel dedicated to environmental auditing. Fourteen SAIs have less than one per cent of their staff dedicated to environmental audits and most of others have between one and seven per cent (INTOSAI WGEA, 2003). However, it should be noted that even if a SAI did not have dedicated personnel, it is possible for them to conduct an audit as demonstrated by the 44 per cent of SAIs who have experience with environmental auditing (INTOSAI WGEA, 2003).3. The study demonstrated that quality assurance is one of the challenges facedby SAIs. In this research, internal review, peer review and external review were used as criteria for checking assurance. Quality assurance is the process established by an SAI to ensure that needed controls are in place, controls are being properlyimplemented, and potential ways of strengthening or otherwise improving controls are identified (Mazur et al., 2005).The analysis revealed that three SAIs, Sri Lanka, Indonesia and The Netherlands had not referenced this in the standards. Canada met two criteria, internal review and external review (Table 1.4). This finding is in contradiction to the Guidelines on Audit Quality of INTOSAI where Mazur et al. (2005) mentioned that quality assurance is one of the four sections of guidelines and is applicable to all SAIs. The peer review process which determines the extent to which a SAI meets international standards is not referenced in the standards of four SAIs.4. The analysis showed that introductory training was lacking in all guidelineswhereas the other two training issues-technical and continuing education wereincluded in the standards of Canada and The Netherlands (Table 1.4). The Indonesian standard did not meet any of criteria whereas Sri Lankan standard met one criterion, continuing education. In general, this finding is consistent with the previous study on environmental auditing (INTOSAI WGEA, 2003). However, at the same time the result is not consistent with the guidelines on audit quality that require SAIs to provide effective training, including introductory training to help new arrivals adapt to the SAI. Technical training should be conducted to equip auditors with the skills to perform audit tasks. Managerial training should be given to allow employees to acquire skills to direct the work of audit units, and continuing education to ensure that auditors maintain and enhance their capabilities (Mazur et al., 2005).5. The best practice framework demonstrated that SAI independence was anessential criterion. Against three sub-criteria established for the issue in theframework it was found that all four SAIs guidelines satisfied all of them .This finding is consistent with the initiatives taken by the Task Force to strengthenSAI independence (Swedish National Audit Office, 2002). The Task Force wasestablished by the INTOSAI Governing Board at its meeting in 1998 in Montevideo, Uruguay under the chair of Auditor General of Canada, to examine the state of independence of member SAIs.It should be noted that the Task Force has to examine the state of independence ofmember SAIs and make recommendations on ways and means to bring aboutimprovement in a proactive and productive manner. While the independence of SAIs was addressed, the analysis in this study found that auditors independence has not been discussed. The SAI as an organisation may be independent but the individual auditors independence may not be the same.6. The study demonstrated that three SAIs, Canada, The Netherlands andIndonesia, have good reporting whereas Sri Lanka did not meet one of the threecriteria (Table 1.4). In general, the finding showed that SAIs have good reporting.However, when this finding is compared with WGEA survey report (2003) it appears that the selected countries for this research are performing better than some others as WGEA reported that only 69 SAIs have produced 518 audit reports between 2000 and 2002 (INTOSAI WGEA, 2003).To answer the question at what stages are the various SAIs in environmental auditing, the standards of the four SAIs are compared against the eleven best practice principles. The study shows that the SAIs have included principles in their standards in varying quantity. For example, the SAIs of Sri Lanka and Indonesia respectively met 9 and 13 criteria fully out of 33 specific criteria (Table 1.4) which we can say this is low standard. This can be further substantiated by Table 1.5 that Sri Lanka and Indonesia had met 27 per cent and 40 per cent of criteria respectively. The criteria addressed by Sri Lankan and Indonesian standards are the basic elements of environmental auditing. If we use Welfords (2002) five levels of environmental auditing techniques, the SAIs of Sri Lanka and Indonesia have been conducting either systems auditing or traditional environmental auditing.The Canadian and The Netherlands standards addressed 29 and 27 principles out of 33 which we can say that they have a high standard of environmental auditing. The study demonstrated that SAIs of Canada and The Netherlands do meet the principles ofenvironmental auditing and some elements for sustainability auditing such as Health and safety legislation, dissatisfaction, and fair wage policies (Human rights), and phase out of non-renewable, and reduce, repair, reuse and recycling (Futurity). This can be further supported by Table 1.5 that Canada and The Netherlands had satisfied 88 per cent and 82 percent of criteria. Similarly, if we use Welfords (2002) five stages of environmental auditing techniques these SAIs occupy level 4, ecological audits. The ecological audit has recognition for the need to live in harmony with nature. The finding was supported by a previous study that Nitkin and Brooks (1998) mentioned that in Canada it has been suggested that a number of companies have moved beyond environmental auditing to sustainability auditing. The two SAIs of developing countries Sri Lanka and Indonesia satisfied 9 and 13 criteria in full and 9 and 7 partially out of 33 criteria. The SAIs of developed countries Canada and The Netherlands met 29 and 27 out of 33 criteria representing 88 per cent and 82 per cent respectively (Table 1.5). If we work out the average percentage of satisfying criteria between the SAIs of developing and developed countries, the computation shows 57 per cent in developing countries (full/partial) and 84 per cent in developed countries which is a big gap. From this result we can conclude by saying that the SAIs of developing countries are very much laggingbehind in comparing to the SAIs of developed countries. The conclusion supported the findings of previous studies.

Gap analysis and further research recommendationThis analysis has some limitations. The study design was well defined but the topic of environmental auditing and sustainable development is a broad area. I should again emphasise that the conclusions are based on the review of four SAIs and that the sample is not representative of the various INTOSAI regions. This is significant because the situation of the SAIs in the various countries can vary widely. More studies on the status and potential influences on sustainability auditing are needed. This is because no single issue is the cause and there is no magic bullet. Inorder to get better results, a quantitative research method may be recommended. In this study a research technique like interview, questionnaire, checklist, and site visits were not carried out due to time and resource constraints. The future research may be recommended to examine the actual auditing practice in different SAIs using audit report case studies.

CHAPTER.5 CONCLUSION AND RECOMMENDATION

The primary purpose of this study was to examine the environmental auditingstandards of SAIs of various countries. For this research a sample of four SAIs, two from developing countries and two from developed countries, were identified.The literature review showed that there are numerous principles to guide best practice environmental auditing. Incorporating these principles eleven criteria with three subcriteria each were included in a framework for evaluating the practices of four selected SAIs. The eleven main criteria were:(i) Systematic;(ii) Objectivity;(iii) Documented;(iv) Independence;(v) Transparency;(vi) Competence and qualification of auditor;(vii) Reporting;(viii) Quality assurance;(ix) Effective training;(x) Human rights; and(xi) Futurity.The standards of SAIs were compared against established criteria to find out at what level the particular SAIs stand. From the comparisons it was apparent that the SAIs of Sri Lanka and Indonesia are in the infant stages because they satisfy only the basic criteria of environmental auditing and not the elements for sustainability auditing. If we use Welfords (2002) five level audit hierarchy based on the focus of the approach at each level, the SAI of Sri Lanka falls in level 2. In systems audit at the second level an environmental management plan is usually in place, and audit appraises the systems within the organisation in addition to checks related to level one. The targets and objectives at this level are largely self-determined. The SAI of Indonesia is moving towards level three, traditional environmental audit, which is a static economy-wise appraisal and which takes into account interconnectivity of various sectors, protection of employees and the community, and contingency planning. The study showed that SAIs of Canada and The Netherlands do meet the principles of environmental auditing and many elements for sustainability auditing (82% and 88% respectively in Table 1.5). Similarly, if we use Welfords (2002) five level audit hierarchy the SAIs occupy stage 4 i.e. ecological audits. The ecological audits recognise and assert the need to live in harmony with nature. It is therefore evident from the findings of study that the SAIs of developing countries are lagging behind in comparing to SAIs of developed countries. However, considering the barriers to developing and conducting environmental auditing discussed earlier in the literature review, the following suggestions therefore may be recommended:

1. Effective trainingSAIs staff should undertake appropriate and professional competence and timelyeffective training. The training may include introductory training, technical training, managerial training, and continuing education. The analysis revealed that training is lacking in the SAIs. Table 1.4 illustrated that SAI of Sri Lanka do meet one of three training criteria established in best practice framework, continuing education whereas the Indonesian standard does not satisfy any criteria. Furthermore, the SAIs of Canada and The Netherlands meet two out of three criteria. The finding is further strengthened by the finding that 83 per cent of SAIs have lack of skills or expertise within the SAI (INTOSAI WGEA, 2003).In view of this, all types of training should be imparted to employees of SAIs so that their skills or expertise are enhanced. The study also showed that the introductory training has not been addressed in all SAIs standards and therefore this may be recommended. This training is useful for the new arrivals to adapt to the SAI. Every SAI can conduct this training through in-house training by their internal staff/employee.

2. TransparencyThe analysis showed that transparency is lacking in SAIs. Transparency can beenhanced through freedom of access to information, participation arrangements, andexistence of an explicit ethical framework. Transparency must be both internal and towards individuals and organisations the SAIs deal with. It should be made clear that the SAIs are open to criticism. Transparency with the outside world must display the standards that SAIs use and the results they achieve.

3. Quality assuranceFrom the findings it was seen that the quality assurance is a pertinent standard. It is an assessment process focussing on the operation of the quality control system. In order to have good auditing, a SAI should have four main types of quality assurance include internal review, external review, peer review and feedback from audits (Mazur et al., 2005).An internal review is establishing a separate office, independent from the audit units,reporting directly to either the president in an audit office or the relevant collegiums in a court of audit (Mazur et al., 2005). In external review, a private audit firm might be asked to review a sample of attestation audits. A consulting firm or academic experts could be asked to review selected performance audits (Mazur et al., 2005).Peer review assesses the extent to which a SAI meets international standards. Such a review generally involves experienced auditors from other SAIs (Mazur et al., 2005).

4. Audit capacityIt is important that there should be an audit capacity such as auditors competence,SAIs competence and specific personnel dedicated to environmental auditing. Theanalysis showed that the SAIs of developed countries have audit capacity whereas the SAIs of developing countries have less or no capacity. Table 1.4 demonstrated that out of three sub criteria established in the framework, the developing countries SAIs Sri Lanka and Indonesia, do not satisfy all criteria whereas Canada and The Netherlands meet all criteria.

The auditors and SAIscompetence can be improved through employment ofqualified staff. Furthermore, auditors competence can also be enhanced throughconduct of trainings, conferences, seminars and meetings from time to time. The most important is that there should be qualified specific personnel allocated in SAIs who looks after the environmental auditing. The audit capacity can also be improved if the SAIs of developed countries share their experience, expertise and ideas to SAIs of developing countries. There is no doubt that as time progresses environmental audits will be undertaken inall SAIs especially as the public becomes more and more aware of the need to protect the environment.

6.REFERENCES

Ananda, E. A. G. (2004). Getting Started: Beginning an Environmental AuditingInitiative in Sri Lanka, International Journal of Government Auditing, Vol. 32,No.2, pp. 28-29.Australian National Audit Office (2005) Sustainability Reporting-The Role ofAuditors.http://www.anao.gov.au/WebSite.nsf/0/13A1FBB95D56FE7FCA256FB000E6D46 16.05.2005.Awasthi, A. K. (1999) Environmental Issues in Audit, India.Auditor Generals Department (undated), Sri Lanka Auditing Practice Standard(SLAPS 15) The Consideration of Environmental Matters in the Audit ofFinancial Statements.Anthony, R.T. Emery and Michael, W (2003) Eco-Auditing and EnvironmentalLiability: an International Perspective. Managerial Auditing Journal 18/8(2003), pp. 631-636.Bryman, A. (2001), Social Research Methods, Oxford University Press Inc., NewYork.Barton, H. and Bruder, N. (1995) A guide to Local Environmental Auditing, EarthscanPublications Limited, London.Commoner, B. (1990) Can capitalists be Environmentalist? Business and SocietyReview, 75, pp. 31-35.Donald, R. Drach (2004) International Organisation of Supreme Audit Institution,International Journal of Government Auditing, April 2004, Vol. 32, No. 2, pp.01-44.Department of the Environment (1990) This Common Inheritance: BritainsEnvironmental Strategy HMSO, London.Department of the Environment (1994) Sustainable Development: The UK StrategyHMSO, London.

LIST OF CONTENTS

1. INTRODUCTION

2. ENVIRONMENTAL AUDITING

3. METHODOLOGY

4. CASE STUDY

5.CONCLUSION

6.REFERENCE

ENVIRONMENTAL AUDITING