French regulator gears up to supervise non-financial auditors

The French High Council of Statutory Auditors is to become the main supervisory authority overseeing the work of audit firms examining ESG factors across the country.

The French government has mandated Le Haut Conseil du Commissariat aux Comptes – the High Council of Statutory Auditors, known as H3C – as the oversight body for non-financial auditors, making it responsible for the inspection and sanctioning of audits covering environmental, social and governance factors under the EU Corporate Sustainability Reporting Directive.

Although the directive still needs to be incorporated into French law by the end of the year, the country’s minister of justice has indicated that H3C will be the reference point for regulating the work of non-financial audit firms. These include both traditional audit firms that in recent years have taken on sustainability reporting in their expertise and independent assurance service providers.

H3C director general Eric Baudrier said he anticipates a “very big challenge” in combining the supervision of the two professions. Traditional (financial) auditors will have to improve their ESG skills, covering a vast and relatively new territory, while assurance providers may have a specialist climate or sustainability background but are in need of an upscale in financial accountancy, he said.

As part of the CSRD, firms will initially have to provide “limited assurance” on sustainability reports, with the accuracy level ideally moving to “reasonable assurance” in the longer term. The directive specifically allows for these assurance assessments to be carried out by firms other than the traditional auditing firms.

Moving from one assurance level to another is a “difficulty we will all be facing” as current standards are still being worked on, noted Patrick Parent, director for prospective and international affairs at H3C and chair of the Committee of European Auditing Oversight Bodies. He said he is, however, hopeful that the international standard on sustainability assurance currently being developed by the International Auditing and Assurance Standards Board will be a helpful benchmark.

Parent also told Sustainable Views that H3C has had bilateral discussions with other regulators elsewhere in Europe and deems it likely that other governments will also opt for the use of independent assurance providers in the audit of sustainability reports, not least because of the potential gap between the amount of external reviews required and the relatively small number of professionals currently able to undertake them.

Navigating non-financial audits

Since the CSRD comes into force next January, H3C is working on a short timeframe. An estimated 50,000 companies operating in Europe will have to comply with the directive, with the first sustainability reports expected in 2025. By early 2024, new rules on standards, qualifications and inspections need to be set into place for the supervision of non-financial auditors.

Baudrier confirmed H3C is still in the process of defining these frameworks but that it is also bound by the legal implementation of the directive. For example, the directive provides dedicated regulators with the power to enforce rules and impose sanctions but this must first be adopted into French law.

Baudrier said he does not envision a huge difference between financial and non-financial audit inspections but added that the selection criteria for non-financial inspections are not that straightforward.

“At present, we prioritise our engagements to firms where an audit mistake could have a big [financial] impact. We want to do the same on sustainability information but perhaps we will need two teams of inspectors for this,” he said.

He added that when it comes to sustainability assurance, choosing to review the audit of a firm that claims to have a very low carbon footprint, rather than one operating in a carbon-intensive sector, could be appropriate. Work on the right selection criteria is ongoing, he said.

Meanwhile, the complementary skills required from 2024 to be qualified as a non-financial auditor are still to be defined. Parent said that it will be challenging to establish the same rules on independence for both assurance providers and traditional auditors because large audit firms operate in partnerships, and their independence rules are quite difficult to transpose onto commercial entities due to the different governance structure.