Managerial Auditing Journal

Financial auditors and environmental auditing in New Zealand

Christina Chiang Margaret Lightbody
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MAJ
19,2 Financial auditors and
environmental auditing in
224
New Zealand
Christina Chiang
Accounting and Finance, Faculty of Business,
Auckland University of Technology, Auckland, New Zealand, and
Margaret Lightbody
School of Commerce, University of Adelaide, Adelaide, South Australia
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Keywords Auditors, Accounting, New Zealand

Abstract Despite the many international claims that accountants and auditors are positioned to
play a pivotal role in the design and conduct of environmental audits, empirical studies have
indicated that in the early 1990s few, if any, accounting professionals in New Zealand were actively
involved in the conduct of independent external environmental audits. As the extent of
environmental management practices adopted by organisations can be expected to have increased
substantially since this time, there is reason to anticipate that the engagement of financial auditors
with environmental audits may also have changed over the last decade. In order to examine the
nature and extent of such potential changes, this article reviews the involvement of financial
auditors in the conduct of environmental audits in New Zealand in 2001.

Managerial Auditing Journal
Vol. 19 No. 2, 2004
pp. 224-234
q Emerald Group Publishing Limited
0268-6902
DOI 10.1108/02686900410517830
Introduction
For some time, the international accounting profession has been quite vocal in
its claims for accountants and auditors to take a central role in the design and
conduct of environmental audits in general and of environmental management
system audits in particular (see, for example, CICA, 1992; FEE, 1995; IFAC,
1995, 1998). This position has been further supported by individual academics
and practitioners in accounting and business (Adamson and Shailer, 1998;
Akers and Klos, 1995; Bebbington and Gray, 1992; Bewley, 1993; Cockburn,
1991; Dittenhofer, 1995; Gilkison and KPMG, 1999; Goodfellow and Willis, 1991;
Jaggi and Zhao, 1996; McMahon, 1995; Parker, 1996, 1997; Thomson et al., 1993;
Vinten, 1991; Wilmshurst and Frost, 1998). However, despite these international
claims, empirical studies have indicated that in the early 1990s few, if any,
accounting professionals in New Zealand were actively involved in the conduct
of independent external environmental audits (Lambert, 1991; Mathews et al.,
1995; Tozer and Mathews, 1994). This limited involvement was considered to be
due to the focus of most environmental auditing of the time on site and
operational compliance assessments, which primarily utilised technical and
scientific skills that were generally outside the knowledge base of accountants
(Mathews et al., 1995; Tozer and Mathews, 1994).
To date, the little that is known about the involvement of New Zealand
financial auditors in environmental audits is based on studies conducted in the
 early 1990s. As the extent of environmental management practices adopted by Financial
organisations can be expected to have increased substantially since this time, auditors in
there is reason to anticipate that the engagement of financial auditors with New Zealand
environmental audits may also have changed over the last decade. In order to
examine the nature and extent of such potential changes, this paper will review
the involvement of financial auditors in the conduct of environmental audits in
New Zealand in 2001. In doing so the paper will provide insights into the 225
changing nature of environmental audit work being undertaken in New
Zealand and in the roles taken by accountants in such activities. It will also
consider the role that the Institute of Chartered Accountants in New Zealand
(ICANZ) could play in this developing market.

The environmental audit function in New Zealand

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In common with most Western nations, the importance of environmental

management and, consequently, environmental accountability, has become a
significant focus of government and corporate policy in New Zealand over the
last 20 years. As part of this focus, the New Zealand government enacted the
Resource Management Act (1991), which:
Purports to contain all encompassing legislation for the sustainable management and control
of natural and physical resources (Coombes and Davey, 1994, p. 2).
By imposing a duty on every person; nature, corporate or unincorporated, “. . .
to avoid, remedy, or mitigate any adverse effect on the environment (S17)” and
specifying penalties for non-compliance, the Resources Management Act has
been perceived to have driven both an increased demand for environmental
attestation in general and:
An increased demand for environmental audits with a wider scope, covering a more diverse
range of issues, performed in a more comprehensive and rigorous fashion (Tozer and
Mathews, 1994, p. 63).
While no recent studies have attempted to identify the nature or extent of
environmental audits[1] currently being performed in New Zealand, it can be
anticipated that the combined impact of public awareness of environmental
issues and the prioritisation of such matters by the New Zealand government
will have resulted in an increasing number of such audits being undertaken.

Accountants and environmental auditing

The accounting literature clearly establishes the potential for financial auditors
to play a role in the conduct of environmental audits. Such arguments generally
centre on the requirements outlined in ISO 14012 Guidelines for environmental
auditing – qualification criteria for environmental auditors. ISO 14012 para 4
recommends that, inter alia, environmental auditors have “appropriate work
experience, formal training and/or on-the-job training in some or all of” a
number of areas, including “audit procedures, processes and techniques”. By
 MAJ establishing commonality between the principles of financial auditing and
19,2 other forms of assurance practice, such as environmental audits, financial
auditors have claimed sufficient expertise to coordinate the provision of
environmental audit services (CICA, 1992; Collison, 1996; FEE, 1995; IFAC,
1995; Lightbody, 2000).
As accounting and auditing practices in New Zealand parallel those common
226 in the Western world, the above arguments would lead to an expectation that New
Zealand’s financial auditors would be participating in the growing number of
environment audits being conducted within that country. However, research
conducted by Lambert (1991) and Tozer and Mathews (1994) indicated a very
limited involvement of accountants in such practices. Tozer and Mathew’s (1994)
survey of the largest 33 accounting firms indicated that only one had been
involved in environmental auditing and that firm “engaged the services of a civil
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engineer and a chemist to conduct the audits” (p. 65). Instead, the majority of
environmental audits were being conducted by engineers and scientists working
as, or for, “environmental consultants” or regional councils. Likewise, only one
respondent indicated that they utilised the skills of an “outside expert” in the field
of accounting. This limited engagement of accountants in environmental
accountability practices is further supported by surveys of accountants employed
within New Zealand companies, state-owned enterprises and government
departments, which revealed that respondents had little involvement in their
entity’s environmental management activities (Coombes and Davey, 1994).
It thus appeared that despite the potential contribution to be made by
accountants, New Zealand’s financial auditors were playing a very insignificant
role in environmental auditing. While none of the studies explicitly examined
the factors driving this low participation rate, some insights were provided by
the authors. In particular, comments were made regarding accountants’ lack of
appropriate technical, scientific and engineering knowledge and skills (Coombes
and Davey, 1994; Tozer and Mathews, 1994) and the lack of appropriate
guidance in the form of standards or other legislation (Tozer and Mathews,
1994). Such comments were echoed, albeit briefly, by the UK financial auditors
interviewed by Collison (1996), who questioned whether financial auditors had
sufficient experience to engage in such audits.

A New Zealand study

As little was known about the contemporary role of financial audit
practitioners in the conduct of environmental audits in New Zealand, a mail
survey was undertaken to investigate the current state of practice. The survey
was distributed to a random sample of 200 auditors selected from the ICANZ
membership list[2]. The study focused on professional accountants providing
auditing services, as such accountants were perceived to be most likely to have
the requisite expertise in “audit procedures, processes and techniques” (ISO
14012 para 4) to enable them to conduct environmental audits.
 The questionnaire developed for this study contained two sections. The first Financial
collected respondents’ views on issues relating to environmental audits. The auditors in
respondents were asked to express their agreement with a number of short New Zealand
statements along a five-point Likert scale anchored at “strongly agree”, “agree”,
“undecided”, “disagree”, and “strongly disagree”. Respondents were also asked to
rank a list of possible drivers of environmental audits from most important to
least important. Finally, respondents were asked to identify whether their firm
227
was involved in conducting environmental audits. Respondents who were not
involved in environmental audits were asked to outline in short answer form the
reasons for their firm’s non-involvement. Respondents conducting environmental
audits were requested to complete a second section of the questionnaire, which
focused on a number of questions regarding how the respondent became involved
in environmental audits and the types of expertise utilised in the conduct of such
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audits. The “expertise” questions paralleled those used in Tozer and Mathews’
(1994) investigation in order to facilitate comparative findings (Table I).
The mail survey was conducted over the period of July to September 2001.
Accompanying the questionnaire was a covering letter that sought
participation, explained the research and stressed the confidentiality of
individual responses. Freepost envelopes were also included to facilitate the
return of the questionnaire by respondents. To improve the response rate, a
single mailed follow-up was made to those not responding to the first mail-out.
The initial response rate was 51 per cent and the final response rate was 56 per
cent. This was comparable with the response rates achieved by Coombes and
Davey (1994) (61.34 per cent) and Tozer and Mathews (1994) (56 per cent).

Findings
Importance of environmental audits
The importance of environmental management and the associated role of the
environmental audits was strongly supported by the survey respondents. Of

Original sample size Total responses Non-responses

No. No. Per cent of class No. Per cent of class
Male auditors 190 103 54 87 46
Female auditors 10 9 90 1 10
Total 200 112 56 88 44
“Other” audit firms 145 76 53 69 47
“Big Five” audit firms 55 36 65 19 35
Total 200 112 56 88 44
Main cities 116 35 30 81 70
Towns Table I.
84 77 92 7 8 Distribution of overall
Total 200 112 56 88 44 responses to
Note: Main cities ¼ Auckland, Wellington, Christchurch, Dunedin questionnaire
 MAJ the financial auditors surveyed, 76 per cent felt that environmental issues were
19,2 not a mere “passing fad” in New Zealand and that “environmental protection”
was important (77 per cent). They also perceived that there was considerable
pressure coming from the public (45 per cent strongly agreeing and 30 per cent
agreeing) and the New Zealand government (34 per cent and 43 per cent) for
New Zealand entities to be subject to environmental audits. Respondents thus
228 appeared to see a strong future for environmental auditing in New Zealand.

Role of accountants in environmental audits

While the respondents appeared to be in agreement regarding the potential
significance of the environmental auditing market, they seemed less certain
about the role of financial auditors in the provision of such services. The
majority of respondents indicated that they believed that audit practitioners
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should have a role in the conduct of environmental audits in New Zealand (52
per cent). However, there was clearly no universal support for such
involvement, with 25 per cent of financial auditors stating that they
disagreed with this view, while the remaining 23 per cent were “undecided”.
This perception appears to contradict the claims by the profession and
academics that auditors have a significant role to play in environmental audits.
While accountants may have the potential to contribute to environmental audit
practice, many clearly do not see this as part of their role.

Drivers of environmental audits

The appearance of a degree of ambiguity regarding the potential for
accountants in the environmental audit market may also stem from the lack of
perceived influence of either ICANZ, the New Zealand professional accounting
body, or the accounting firms themselves in the push to increase the demand
for environmental audits to be conducted in New Zealand. Only a small
proportion of respondents felt ICANZ (13 per cent) and auditors (14 per cent)
were important drivers of environmental audits, with the majority seeing
public pressure, government legislation and company management as far more
significant influences on practice.

Accountants’ involvement in environmental audits

Despite the relatively low indication of enthusiasm for environmental audit
work, 18 respondents (16 per cent) were found to be currently conducting
environmental audits. A further four auditors (3.5 per cent) indicated their
intention to commence environmental auditing work during the next 12
months. While this may not initially appear a very high participation rate, it is
far higher than the one firm identified by Tozer and Mathews (1994), thus
suggesting that there has been a substantial increase in the participation of
financial auditors in the conduct of environmental auditing in New Zealand
since the early 1990s. The actual participation rate of financial auditors in
environmental audits may well be higher than that indicated by the current
 survey, as the “involved” participants were all found to be working in “Big Financial
Five” firms located in the main cities, which had relatively low response rates auditors in
to the questionnaire. New Zealand
The increasing rate of involvement of accountants in environmental audits
was seen by the respondents as being primarily a factor of client demand for
such services. Respondents currently providing environmental audit services
stated that such involvement had occurred in response to requests from clients
229
(78 per cent). The importance of an existing market for environmental accounting
services was also reflected in the responses of the “non-involved” accountants,
who clearly indicated that they were not engaged in environmental audits as
there was no demand from clients (76 per cent). The financial auditors also
indicated that expertise in environmental auditing was a factor underpinning
their involvement, with 33 per cent of respondents claiming that they were not
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involved in environmental audits as they lacked appropriate expertise. While

only three respondents (3.6 per cent) identified a lack of formalised guidance or
standards as a factor preventing their involvement in environmental auditing, 74
per cent of respondents had earlier agreed that “there is very little practice
guidance for environmental auditing”.

Role of accountants in environmental audits

As noted earlier, claims for a role for financial auditors in the conduct of
environmental audits have been grounded in the existence within accounting
firms of expertise in audit methodology and procedures (e.g. Collison, 1996;
Lightbody, 2000). Respondents indicated their support for this perspective,
identifying skills in the development of an appropriate audit methodology
framework (24 per cent) and in the identification and assessment of risks (10
per cent), as well as expertise in audit processes and procedures such as
systems evaluation, compliance testing, and audit documentation (48 per cent).
A further 10 per cent of respondents also suggested that accountants could
draw on their existing professional networks (e.g. through ICANZ’s monthly
journal and its Sustainability Group) to communicate with and support one
another in the development of environmental audit expertise.
The acknowledgement that the role of financial auditors in the conduct of
environmental audits would be limited by the scope of their expertise was
supported by the finding that 14 (78 per cent) respondents conducting
environmental audits were engaging the services of “outside experts” in the
auditing process. The technical specialist knowledge “brought in” by the
accountants included health and safety, environmental science, chemical
engineering, forestry engineering, law, emission, waste and resource
management. This was consistent with the trend identified earlier by
Lambert (1991) and Tozer and Mathews (1994). In the same manner, 50 per cent
of accountants providing environmental audit services stated that they
contracted-out their in-house expertise to other providers. Expertise regarding
 MAJ due diligence, exposure to liability and resource management were most
19,2 commonly provided to other entities. These findings suggest that New Zealand
accounting firms are tending to address the range of interdisciplinary expertise
required to conduct environmental audits by “buying-in” the expertise needed
to supplement existing specialisations, rather than by trying to employ all
necessary skills “in-house”.
230
Discussion
Earlier studies of accountants’ involvement in environmental audits indicated
an almost complete absence in New Zealand. However, while the current study
indicated that only a few financial auditors are involved with environmental
audits, it certainly identified a much greater involvement than was found in the
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early 1990s. It thus indicates that there is a slow, but growing presence of
financial auditors in the environmental audit field in New Zealand.
The involvement of New Zealand’s financial auditors was seen to generally
occur, at least initially, in response to the “outside” pressure of client demands,
rather than through the audit firm proactively seeking to develop (or buy-in)
expertise with the intention of trying then to access a market for such work.
This trend of reactivity makes sense as most practices would not be willing to
incur substantial “start-up” costs associated with providing a new audit service
unless there was some existing demand for its provision. A lack of widely
available guidance regarding the scope and process of environmental audits
would also add to such “start-up” costs, as each practice would need to develop
its own standards and procedures to conduct such engagements[3]. The ability
of the “Big Five” accountants to “import” environmental auditing expertise and
established sets of procedures from their “global” partners may thus be
contributing to their higher rate of involvement in the provision of
environmental auditing services in a relatively immature market such as
New Zealand.
Previous commentaries from the professional accounting bodies have
argued that professional accountants are well positioned not only to involve
themselves in environmental audits, but also to take a lead in the management
of such work (CICA, 1992; FEE, 1995; IFAC, 1995, 1998). The source of this
“superiority” is argued to lie in the accountant’s long history of “knowledge of,
and experience in the evaluation of, management and control systems”
(Lightbody, 2000, p. 157). This study provided support for these
recommendations, with the financial auditors in this study identifying their
contribution to environmental auditing as focusing on the areas of audit
methodology, process, and management.
The conduct of an environmental audit requires considerably more than just
auditing skills. As outlined in ISO 14012 (1995, para 4), environmental auditors
require a combination of skills in a range of scientific, managerial, and audit
disciplines. A significant number of respondents in this survey admitted that
 their lack of technical skills and environmental specialist knowledge had Financial
prevented them from confidently taking up potentially new challenges in auditors in
environmental auditing. However, the financial auditors involved in New Zealand
environmental audits were seen to have overcome this “knowledge gap”
through the development of multidisciplinary, often inter-firm, teams of
experts. The financial auditors surveyed were seen to regularly contract-in
outside “experts” to provide specialist scientific and technical skills to their
231
own audit team. Likewise, many of the financial auditors stated that they were
sub-contracting their own expertise out to other organisations conducting
environmental audits. The findings of this study thus suggest that, rather than
expecting the necessary range of environmental audit expertise to be held by
an individual person or firm, it is common for environmental audits to be
conducted by a collaborative team of environmental experts from various
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disciplines brought together for the purpose of conducting an efficient and

effective audit. It thus appears that financial auditors should not be deterred
from engaging in environmental audits due to a lack of personal technical
knowledge and skills, but rather should be encouraged to seek to form alliances
with other professionals with the necessary scientific and engineering
qualifications. In doing so, financial auditors could draw on existing
professional guidance regarding reliance on the work of “experts” that is
utilised in the conduct of financial audit engagements.
The respondents in this study continue to indicate a limited role currently
being played by ICANZ in terms of their involvement in the development of
guidelines for the conduct of environmental audits and in their engagement
with the growing public pressure for organisations to provide environmental
assurances to their stakeholders. To be fair to ICANZ, there may have been
little direct pressure on them to generate such guidelines. The majority of
environmental audits undertaken in New Zealand by external auditors are
likely still to be regulatory compliance audits, which will be conducted in line
with the audit processes and against the specific objectives outlined by the
government in various legislative requirements. In addition, the accountants
undertaking more comprehensive environmental auditing engagements are
primarily employed by the “Big Five” firms, who will have utilised their own
resources to develop global standards for environmental audit work and will
thus not seek such guidelines from ICANZ itself.
While there may be limited pressure on ICANZ to develop specific
environmental audit guidelines for New Zealand, the insights provided by this
study do suggest some other contributions it could make to encourage or
support financial auditors who wish to undertake environmental audit
engagements. The survey findings have indicated that it is common practice
for financial auditors engaged in environmental audits to be “contracting-in”
the technical services of “outside experts” and thus acting as “lead auditors” in
the audit process. ICANZ is ideally positioned to provide support to members
 MAJ in understanding the legal requirements for establishing and managing such
19,2 interdisciplinary teams and by researching and disseminating knowledge
regarding “best practice” management of such non-traditional
multi-disciplinary audit processes.

232 Conclusions
By surveying financial auditors holding membership of ICANZ, this study
provides contemporary insights into the nature and extent of the involvement
of financial auditors in the conduct of environmental audits in New Zealand.
The findings of the study suggest that the numbers of financial auditors
involved in environmental audits, particularly in a management role, are
gradually increasing. However, the majority of financial auditors were not
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providing environmental audit services, claiming that there was currently no

demand for environmental audits or that they did not have the appropriate
expertise. As public and legislative pressure for environmental disclosures are
expected to continue to grow, it may thus be expected that there will be a
gradual increase in the demand for environmental audits in New Zealand. The
ability of financial auditors or accounting firms to meet such demand may well
be determined by their willingness to “contract-in” the services of “outside
experts” or to enter into joint arrangements with other professionals to enable
the provision of the full range of technical and methodological skills necessary
for the conduct of quality environmental audits. To this end, ICANZ may be
able to play an important support role, disseminating the knowledge necessary
not only to manage the scope and process of environmental audits but also to
help accountants to utilise their existing expertise in utilising the work of
non-accounting “experts” within financial audits to develop a role as the “lead
auditors” in the formation of multidisciplinary environmental audit teams.

Notes
1. The term “environmental audit” has been used to identify a range of activities including
externally imposed regulatory compliance audits and management-driven internal
assessments and reviews (see, for example, CICA, 1992; Collison, 1996; IFAC, 1995;
Lightbody, 2000).
2. A request was made to ICANZ for the comprehensive mailing list of auditors from which the
researcher would make the actual selection. This was, however, not forthcoming, because
there were restrictions imposed on access to the ICANZ database. Instead, the ICANZ
membership officer made a selection of 200 auditors and provided the researcher with a list
of the selection. The researcher was assured that this would be a representative sample,
chosen randomly from the ICANZ database of their records of auditors. In view of the
limiting factor, the researcher accepted this as the best sample option.
3. As cases of litigation involving financial auditors had clearly established the usefulness of
generally accepted standards of audit practice as a defence to claims of negligent practice, it
is reasonable to expect financial auditors to be comfortable providing audit services only
where a sound set of commonly utilised guidelines existed.
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Bewley, K. (1993), “The green team”, CA Magazine, Vol. 126 No. 8, pp. 44-6.
233
CICA (1992), Environmental Auditing and the Role of the Accounting Profession, The Canadian
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Coombes, R. and Davey, H. (1994), The New Zealand Accountants’ Role in Environmental
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Nelson.
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 MAJ Thomson, R.P., Simpson, T.E. and Le Grand, C.H. (1993), “Environmental auditing”, Internal
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Further reading
Gray, R.H. and Symon, I.W. (1992), “An environmental audit by any other name . . .”, Integrated
Environmental Mangement, Vol. 6, February, pp. 9-11.
Matthews, C, and Matthews, M. (1999), “Internal environmental auditing in Australia: a survey”,
Discussion Paper Series, No. 195, September, Massey University College of Business,
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Palmerstone North.
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