A Framework for Auditing for Sustainable Development

October 2003--June 2004

A Framework for Auditing for Sustainable Development

- Sunil K. Bahri§

I. Introduction

Popularised first by the World Commission on Environment and Development in 1987, ‘sustainable development’ has been defined as development that meets the needs of the present without compromising the ability of the future generations to meet their own needs. While concern for environment is fundamental to the concept, it seeks a balance between economic and social progress and the environment.

Concern for preservation of natural resources, abetted by the growing global initiatives for sustainable development, has resulted in integration and mainstreaming of environment within the wider context of government. For instance, the approach paper for the Tenth Five Year Plan (2002-07) of India states: “in the ultimate analysis, environmental management and economic development are mutually supportive aspects of the same agenda. A poor environment undermines development, while inadequate development results in a lack of resources for environmental protection”. The broad objectives and targets of the Plan have been described as achieving an average rate of growth of GDP of 8 percent along with equity and sustainability.

II. Role for SAI

Supreme Audit Institutions can play a major role in enhancing accountability and performance in realisation of the goals of sustainable development. Some of the specific functions that can be envisaged are:

  • a. Catalyse mandatory reporting of environmental impact of economic activity along with national, government and corporate accounts.
  • b. Report on progress towards achievement of targets of sustainable development as reflected in appropriate indicators.
  • c. Seek assurance on compliance of Government agencies, Public Sector Units etc. to environmental legislation.
  • d. Conduct efficiency cum performance audits of enforcement of environmental laws, environmental programmes, environmental impact of other Government programmes and environment management.
  • e. Audit the efforts made by the Government in discharging obligations under the Multilateral Environmental Agreements (MEAs)

III. Environmental Reporting

National Environment Accounting and Reporting

If an effective management of the natural and environmental resources base is to be achieved, policy makers need to have access to a consistent, reliable and comparable data set, relating to the availability and use of such resources. As with all accounting systems, the objective of environmental accounting is to enable preparation of a balance sheet at the end of every accounting period, giving stocks of resources available and the uses they were put to. In addition the environmental impact of economic activity can also be documented.

One of the recommendations of the Rio Summit was development of integrated environmental and economic accounting. Natural resource accounting, green accounting or environmental accounting are used interchangeably to represent the same concept. Natural resource accounts could include a combination of emission account, waste account and environmental expenditure account.

United Nations and its bodies have been promoting the integration of environmental issues in national accounts since early 1980s. The Statistical Division of the UN had developed a satellite system of environmental accounting for use with commercial accounting. Known as Integrated System of Environmental and Economic Accounts (SEEA), it was approved by UN General Assembly in 1993 and has since been in use by a number of member states like UK, France, Japan, Indonesia and Norway. These would include: oil and gas reserves, reserves of important minerals, energy consumption, greenhouse gases, consumption of ozone depleting substances, water resources accounts, status of hazardous waste generation, pollution control in selected industries, state wise status of grossly polluting industries, sources of pollution, losses due to natural disasters, and environmental protection expenditure.

The SAI can play a three-fold role in this regard:

  • a. Join the initiative in persuading the government to institutionalize compilation and reporting of these accounts.
  • b. Verify the reliability of the source and the correctness of the information so compiled.
  • c. Analyze and comment on the trends visible in these accounts in the audit reports

Local Body Reporting

In terms of impact and control, the most important entities for the environment of a community are the local bodies. The devolution of additional powers in recent years has only enhanced this. In urban areas, municipalities handle sewage, solid and hazardous wastes, water supply, regulation of construction etc. Likewise, the rural local bodies (Panchayati Raj Institutions in India) are responsible for community assets and activities such as afforestation, land development, water harvesting, soil erosion etc. It is, therefore, imperative that these institutions also initiate natural resource and environmental reporting.

Corporate Reporting

Disclosure of information about the environmental impact of operational performance is becoming a significant part in the total perspective of corporate governance. The last decade has seen a dramatic increase in the practice of corporate environmental reporting in Europe and North America. In a 1999 survey, KPMG found that almost one out of 4 companies in these countries was producing environmental reports. This was significant since it was mandatory only in a few European countries.

Several Organizations in Europe and the US have come out with guidelines on how to prepare environmental reports. Some common elements in these guidelines are:

Corporate profile and environmental policy.

Environmental targets and is improving the environmental performance of its products and services. objectives

Environmental management systems

Environmental indicators - data on emissions, discharges, wastes and other impacts on the environment.

Energy, transport and resource use and conservation.

Compliance with regulation and permits, including prosecution records.

Products stewardship - how the company

Financial Indicators - The costs associated with the environmental programs, possibly including liabilities and provision for future remedy.

It is possible to evaluate improvement in a company’s environmental performance by benchmarking it with others in the industry. However, the environmental performance reports will be reliable only if they are subjected to independent verification. Unfortunately, both verification and benchmarking are still primitive even in the developed countries.

For corporate reporting, the role of the SAI will be limited to encouraging public sector units to adopt environmental reporting and thereafter express opinion on the correctness of these reports. Any progress in this regard will add to the momentum for such reporting in the private industry. Going beyond, the SAI could also take the lead in generating favourable opinion in the accounting and auditing fraternity by organizing seminars etc.

IV. Indicators of Sustainable Development

An important element in measuring progress towards sustainable development is formulation of targets and associated indicators. These indicators act as a vital link in ensuring that governments are held to account for their performance against their sustainable development objectives. These open up scope for audit scrutiny in three broad areas:

  • a. Whether targets are soundly based viz. cover key areas, reflect international commitments, are based on clear rationale and sound measurement of existing base line, are time limited, are based on a measurement plan and are measurable within the limits of uncertainty imposed by the data.
  • b. If the indicators are relevant and reliable viz. easy to interpret, show trends over time, be responsive to changes in driving forces, have reference values against which progress can be measured, based on a clear understanding of the goal of sustainable development and are measurable at a reasonable cost.
  • c. Progress revealed by comparing indicators with the associated targets. If the deadline has passed then commentary on achievement is easy and the focus can shift towards explaining why the targets have not been met. If the deadline is some way off, the audit would have to focus on whether the target is likely to be met.

In pursuance of the recommendations of the Rio Earth Summit, the Commission on Sustainable Development has developed a list of indicators after a prolonged deliberative process. To begin with, the SAI could use these to comment upon progress towards sustainable development.

V. Compliance to Environmental Legislation.

Activities of several government agencies e.g. municipal bodies, electricity boards,
Port trusts, power generation companies, steel amp; mining companies, forest corporations, hospitals etc. impact environment in substantial measure. They are accordingly obliged to comply with environmental legislation. This has substantial cost implications and contingent liabilities in the event of non-compliance. SAI should, therefore, verify whether the audited entity has conducted its environmental activity in compliance with all applicable obligations, estimate the liabilities due to non-compliance and identify the factors impending realisation of the targets.

VI. Performance Audits of Legislation amp; Programmes.

Auditing Environmental Legislation

Controlling negative environmental impacts of the economic activity relies substantially on environmental laws. Three broad areas may be the focus of audit in this context:

  • i. The time taken in formulation and enactment of legislation after taking a policy decision.
  • ii. Adequacy of the legislation in addressing the relevant concerns.
  • iii. Efficacy of the administrative machinery in enforcing compliance.

There has been a surfeit of legislation across the globe in recent years. The enforcement machinery has, however, lagged behind. Sustained reporting on these issues by the SAI could act as a major catalyst.

Auditing Environmental Programmes

The Government may undertake several programs and schemes towards environment conservation. These can broadly be classified as under:

  • a. Survey of natural resources.
  • b. Conservation of natural resources including, forestry and wildlife. There are specific schemes for biosphere reserves, wetland, mangroves and coral reefs, biodiversity, medicinal plants and combating desertification.
  • c. Environmental impact assessment.
  • d. Prevention and control of pollution.
  • e. Regeneration and development including national river conservation, national afforestation and ecodevelopment.
  • f. Research, education, training and information dissemination.
  • g. Legislative and Institutional support.

While financial outlay only on some of these may be substantial, they all have a significant bearing on the environment, thereby meriting selection for efficiency-cum-performance audit. Such audits will be concerned with a) the economy of administrative practices, b) the efficiency of utilization of human, financial and other resources employed on the program and activity and c) the effectiveness of the program or activity in achieving its objectives and its intended impact.

Auditing the Environmental Impact of Other Government Programmes

In addition to programmes whose principal aim is to protect or improve the environment, all activities affect the environment in some way through their use of resources or their consequences for the area in which they are conducted. Some Government programmes have significant impacts - which may be both positive and negative, intended and unintended. Activities of Public Sector Undertakings (PSUs) in the Oil, Mining, Steel, Power generation and transportation sectors also impact the environment significantly.

The environmental impacts of the activities can be highlighted as part of a wide-ranging performance audit. Alternatively, a narrowly defined study focusing solely on the environmental impacts could be taken up. The audit should start with the Government’s own assessment, if any, of the likely environmental impacts. We may review the adequacy of:

  • a. the description of the programme or activity, its environment and the baseline conditions;
  • b. the completeness of the range of key impacts identified;
  • c. the data used to assess the likelihood of the impacts and their expected scale; and
  • d. any proposals for measures to counter the impacts.

From the outset, the Government may identify measures which counter or reduce environmental impacts. The audit may address whether these measures:

  • i. have been put in place and are in accordance with best practice or best available technology not entailing excessive cost, and
  • ii. have had the preventive effect intended, and, if not, what actions the Government has taken instead.

In some cases the counter-measures may need to be suitable for preventing or dealing with low-risk but major-impact occurrences, such as unintended releases of radioactive substances. Accident and incident procedures may be rarely used, but they need to be kept operable, in case of need. Where such procedures are important, the audit may review the procedures, the training of any staff involved and the frequency of testing the procedure.

Auditing Environmental Management Systems.

Several organisations are adopting environmental management systems to ensure
that they are systematically setting policies for continual improvement in environmental performance and are achieving the policy objectives. Voluntary accreditation schemes have been introduced nationally, regionally, and internationally to enable organizations to obtain external confirmation of the adequacy of their environmental management systems and recognition that they are operating such systems.

The International Standard for Environmental Management Systems, ISO 14001, identifies the following features of best practice in this regard:

  • i. Planning - taking account of environmental aspects and legal and other requirements, setting objectives and targets and introducing environmental management programmes.


    ii. Implementing and operating - establishing structures and responsibilities, training staff and communicating the main requirements; documenting the environmental management systems; and preparing emergency plans.

  • iii. Checking and taking corrective action - monitoring and measurement; identifying non-compliance and taking action; and auditing the environmental management system.
  • iv. Management review of all aspects of the system.

At the XV INCOSAI it was agreed that for SAIs to seek to become accredited verifiers under these voluntary schemes was inappropriate. However, if an SAI has a sufficient performance audit mandate it may choose to audit Government environmental management systems.

VII. Multilateral Environmetal Agreements.

While there has been a proliferation of MEAs in recent years, very little is known about implementation and compliance. The assessment of implementation, compliance and effectiveness of MEAs is complicated and is plagued with gaps in data, conceptual difficulties and methodological problems. Under the circumstances, the government and parliament are not well informed on the state of execution of policies. The SAI could play an important role in assessing data gaps, and even make an effort to examine the implementation, compliance and effectiveness of MEAs. We could provide information not previously reported and make recommendations for improvement in the future. Cooperation between the SAIs in this field could meet the cross-boarder character of environmental problems. Best practices in policy design and implementation could be identified and brought to the attention of policy makers in the respective states.

The overall objective of audit of an MEA is to evaluate how far the various provisions have been implemented and to find out the extent to which the underlying commitments have been complied with. At the outset, the objectives of the MEA should be identified clearly along with the time framework within which these have to be implemented. Important activities that have to be undertaken for implementation of various provisions have also to be identified, so that delay, if any, in implementation, along with the underlying reasons, could be analyzed. Particular emphasis needs to be placed on those aspects, non-implementation or inadequate implementation of which, could result in significant environmental risks.

At the XV INCOSAI held in 1995, it was decided that INTOSAI should encourage the SAIs to cooperate, wherever possible, in auditing their respective countries’ compliance with international environmental accords. At the same time, it was also decided that INTOSAI should encourage the SAIs to carry out joint or concurrent audits. Such coordinated and joint effort in auditing the environmental accords is important for several reasons. First, most environmental issues have a
trans-boundary character, i.e. environmental problems like global warming, acid rain and ocean pollution are global problems. Second, environmental audits may help to develop competence. Concurrent, coordinated or joint audits can be seen as a way of sharing methodology and audit approaches among member countries. Third, the information gathered as a result of audit of an Accord, may be shared with other SAI and even widely disseminated to other SAIs, thus saving time and effort.


There is an urgent need for the SAIs to broaden the scope of the role that they can play in assisting the long and arduous journey towards sustainable development. In fact environmental concerns need to be embedded in our approach towards accountability.

§ Presently Pr. Director (International Relations) - Office of the CAG of India, New Delhi


Go to the top