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France set to overhaul audit supervisory authority

National Assembly of France building
The National Assembly of France: the new authority to replace H3C is set to be announced in the coming days and will formally come into place with a change in French law in December (Photo: Bertrand Guay/AFP via Getty Images)

The French High Council of Statutory Auditors will be renamed and reshaped to reflect the inclusion of non-financial audit supervision in the institute’s mandate

A new authority for assurance will be established in France, replacing Le Haut Conseil du Commissariat aux Comptes (the High Council of Statutory Auditors, known as H3C), to better integrate the supervision of sustainability assurance, as legislated under the EU Corporate Sustainability Reporting Directive, which will come into force in January 2024.

Patrick Parent, director for prospective and international affairs at H3C and chair of the Committee of European Auditing Oversight Bodies, tells Sustainable Views that the new authority will be announced in the coming days and formally come into place with a change in French law in December.

“We will have a big change in the way supervision is organised in France,” he says, adding that the new authority will encompass both the supervision of financial as well as non-financial audits.

A recruitment wave will be necessary as soon as the new authority is in place to create an inspection team that covers sustainability audits, Parent says. The aim in the first year(s) will be be to assist and guide the entities involved in sustainability assurance rather than sanctioning them, he adds.

Back in May, H3C told Sustainable Views that it would become responsible for the supervision of traditional audit firms, as well as independent assurance service providers that in recent years have taken on sustainability reporting.

The CSRD allows for sustainability assessments to be carried out by independent providers other than traditional auditing companies, but it is up to member states to decide how to structure this into law. “We know for sure that some member states, such as France, will opt to include independent assurance providers in the national implementation of CSRD,” Parent says.

Assurance standards

As things stand, the assurance component under CSRD still needs to be defined further, with a deadline of October 2026 for the first set of EU sustainability assurance standards to be finalised.

The 50,000 companies expected to comply with the legislation — those with more than 500 employees and over €150m worldwide net turnover, or with more than 250 employees and over €40m worldwide net turnover — must, in the first instance, provide “limited assurance” on their sustainability reports, moving to “reasonable assurance” in the longer term.

Limited assurance under CSRD would probably predominantly focus on the process a company has used to comply with the directive and how it disclosed certain information. It is also expected that companies will have to digitise some of their sustainability reporting, which the non-financial auditor would have to check.

The first sustainability reports are, however, expected to be published in 2025, before the 2026 deadline for finalising standards. This timeline discrepancy means that as long as EU assurance standards are not formally adopted, the CSRD will allow for the use of other assurance standards. At present, though, not many alternatives exist.

In August 2023, the International Auditing and Assurance Standards Board released its draft International Standard on Sustainability Assurance 5000, which aims to bring the same rigour that is applied to financial assurance to sustainability audits. It is designed as an umbrella standard that is sector-agnostic and suitable for any sustainability topic under different reporting frameworks.

“It is based on principles, rather than procedures or steps, which is why it can have such a wide application,” says STX Group chief commercial officer Marijn van Diessen.

For Elizabeth Jacobs, senior specialist in sustainable finance at think-tank E3G, the ISSA 5000 cuts a path for improving trust in sustainability disclosures. “This opportunity comes at an interesting time for the industry, as stakeholder confidence in assurance, as well as financial audit disclosures, can hugely impact success in the transition to a net zero economy,” she says.

A consultation on the proposed ISSA 5000 will run until December 1, with the final version to be issued before the end of 2024.

Hurdles to overcome

Although the ISSA 5000 could fill the gap until the EU determines its own sustainability assurance standards under CSRD, significant differences underlie the way these standards were envisioned and structured, says Parent.

He argues that the IAASB is attempting to use what currently exists in financial assurance and adjust it to sustainability reporting, but believes that this approach might create some concerns.

The European Sustainability Reporting Standards, which underpin the CSRD, are vastly different from the sustainability standards developed by the International Sustainability Standards Board (IFRS S1 and S2) and from the upcoming US Securities and Exchange Commission’s climate disclosure rules.

This variation results in the underlying disclosures by the reporting entities being quite different, says Parent. He urges EU regulators to take into account the specificities of the ESRS and to create more “tailor-made” EU sustainability assurance standards.

Jurei Yada, programme lead for EU sustainable finance at E3G, believes that European companies applying the ISSA 5000 could provide valuable insights for the development of the European Commission’s delegated acts on assurance standards.

Another challenge to implementing the new requirements is finding qualified professionals to work in the field. E3G would like to see the commission complementing the gradual enhancement of sustainability information and assurance engagement with guidelines and training for the future workforce.

Parent expects competition to emerge in the sustainability assurance market because of a lack of sufficient knowledge and expertise. The newly formed H3C will look at imposing minimum requirements in terms of hours/days spent acquiring knowledge on sustainability reporting, before an individual — either from an established audit firm or an independent assurance provider — will be allowed to provide sustainability assurance in France, he says.

A service from the Financial Times