(ii) Measuring and reporting on social and environmental performance
Many companies attempt to measure social and environmental performance by setting targets or key performance
indicators (KPIs), and then evaluating whether they have been met. The results are often published to enable a
comparison to be made year on year or between companies. But it can be difficult to measure social and environmental
performance for a number of reasons.
First, targets and KPIs are not always precisely defined. For example, Osprey Co may state a target of reducing
environmental damage caused by its operations, but this is very vague. It is difficult to measure and compare
performance unless a target or KPI is made more specific, for example, a target of reducing electricity consumption by
5% per annum.
Second, targets and KPIs may be difficult or impossible to quantify, with Osprey Co’s planned KPI on employee
satisfaction being a good example. This is a very subjective matter, and while there are methods that can be used to
gauge the levels of employee satisfaction, whether this can result in a meaningful statistic is questionable.
Third, systems and controls are often not established well enough to allow accurate measurement, and the measurement
of socio-environmental matters may not be based on reliable evidence. In Osprey Co’s case, it may not be possible to
quantify how much toxic chemical has been leaked from the factory.
Finally, it is hard to compare these targets and KPIs between companies, as they are not strictly defined, so each
company will set its own target. It will also be difficult to make year on year comparisons for the same company, as
targets may change in response to business activities. For example, if Osprey Co were to expand its operating, its energy
and water use would increase, making its performance on environmental matters look worse. Users would need to
understand the context in order to properly appraise why a target had not been met.
Conclusion
These briefing notes have shown that the environmental incident at Osprey Co will have an impact on our audit in that
detailed audit procedures will need to be conducted to gain evidence regarding whether or not a provision for costs of closure
should be recognised, and if so, its measurement. In addition, Osprey Co’s intention to publish socio-environmental targets
and KPIs is commendable, but it will be difficult for management to measure and report on these matters due to their often
subjective nature.20
3 (a) (i) The circumstances described by the audit senior indicate that Jack Heron may be using his company to carry out money
laundering. Money laundering is defined as the process by which criminals attempt to conceal the origin and ownership
of the proceeds of their criminal activity, allowing them to maintain control over the proceeds and, ultimately, providing
a legitimate cover for the sources of their income. Money laundering activity may range from a single act, such as being
in possession of the proceeds of one’s own crime, to complex and sophisticated schemes involving multiple parties, and
multiple methods of handling and transferring criminal property as well as concealing it and entering into arrangements
to assist others to do so.
Heron Co’s business is cash-based, making it an ideal environment for cash acquired through illegal activities to be
legitimised by adding it to the cash paid genuinely by customers and posting it through the accounts. It appears that
$2 million additional cash has been added to the genuine cash receipts from customers. This introduction of cash
acquired through illegal activities into the business is known as ‘placement’.
The fact that the owner himself posts transactions relating to revenue and cash is strange and therefore raises suspicions
as to the legitimacy of the transactions he is posting through the accounts. Suspicions are heightened due to Jack
Heron’s refusal to explain the nature and reason for the journal entries he is making in the accounts.
The $2 million paid by electronic transfer is the same amount as the additional cash posted through the accounts. This
indicates that the cash is being laundered and the transfer is known as the ‘layering’ stage, which is done to disguise
the source and ownership of the funds by creating complex layers of transactions. Money launderers often move cash
overseas as quickly as possible in order to distance the cash from its original source, and to make tracing the transaction
more difficult. The ‘integration’ stage of money laundering occurs when upon successful completion of the layering
process, the laundered cash is reintroduced into the financial system, for example, as payment for services rendered.
The secrecy over the reason for the cash transfer and lack of any supporting documentation is another indicator that this
is a suspicious transaction.
Jack Heron’s reaction to being questioned over the source of the cash and the electronic transfer point to the fact that
he has something to hide. His behaviour is certainly lacking in integrity, and even if there is a genuine reason for the
journals and electronic transfer his unhelpful and aggressive attitude may cast doubts as to whether the audit firm wish
to continue to retain Heron Co as a client.
The audit senior was correct to be alarmed by the situation. However, by questioning Jack Heron about it, the senior
may have alerted him to the fact that the audit team is suspicious that money laundering is taking place. There is a
potential risk that the senior has tipped off the client, which may prejudice any investigation into the situation.
Tipping off is itself an offence, though this can be defended against if the person did not know or suspect that the
disclosure was likely to prejudice any investigation that followed.
The amount involved is clearly highly material to the financial statements and will therefore have an implication for the
audit. The whole engagement should be approached as high risk and with a high degree of professional skepticism.
The firm may wish to consider whether it is appropriate to withdraw from the engagement (if this is possible under
applicable law and regulation). However, this could result in a tipping off offence being committed, as on withdrawal
the reasons should be discussed with those charged with governance.
If Lark & Co continue to act as auditor, the audit opinion must be considered very carefully and the whole audit subject
to second partner review, as the firm faces increased liability exposure. Legal advice should be sought.
Tutorial note: Credit will also be awarded for discussion of other relevant matters, such as fraud, internal control
deficiencies and audit implications.
