Official releases: SOP 03-2 ... Attestation interpretations ... SSARS interpretations.

Space considerations prevent publishing here the appendices to SOP 03-2. Since the appendices often are important to understanding SOPs, readers are advised to obtain complete copies. To obtain a copy of SOP 03-2 (product no. 014937), contact the AICPA order department at 888-777-7077.

SOP 03-2--Attest Engagements on Greenhouse Gas Emissions Information (Issued Under the Authority of the Auditing Standards Board)

NOTE

This Statement of Position (SOP) represents the recommendations of the Joint Task Force of the AICPA and CICA on Sustainability Reporting regarding the application of Statements on Standards for Attestation Engagements (SSAEs) to attest engagements on greenhouse gas emissions information. The Auditing Standards Board has found the recommendations of this SOP to be consistent with existing standards covered by Rule 202 of the AICPA Code of Professional Conduct. If an AICPA member does not apply the attest guidance included in this SOP, he or she should be prepared to explain how he or she complied with the SSAE provisions addressed by such attest guidance.

TABLE OF CONTENTS

Background and Introduction
  Climate Change and Greenhouse Gases
  The Kyoto Protocol
  GHGs to Be Regulated by the Kyoto
    Protocol
  Why U.S. Companies Are Considering
    Strategies to Address Their GHG
    Emissions
  GHG Emissions Trading Programs and
    GHG Registries in the United States
  Terms and Definitions Used by Registries
    and Regulatory Frameworks
Scope of SOP
Engagement Acceptance Considerations
Independence
Adequate Knowledge of Subject Matter and
  Use of a Specialist
Criteria
  Attributes to Be Met by GHG Emission
    Reductions
Materiality
Uncertainty in the Measurement of GHG
  Emissions
Consistency
Boundaries
Scopes for Reporting GHG Emissions: Direct
  and Indirect Emissions
Baselines
Examination Engagement: GHG Inventory
  Objective of the Engagement
  Written Assertion by the Responsible Party
Examination Engagement: GHG Emission
  Reduction Information
    Objective of the Engagement
    Written Assertion by the Responsible
      Party
    Examples of GHG Emission Reduction
      Projects
    Prerequisite for an Examination of GHG
      Emission Reduction Information
Engagement Performance
  Planning the Examination Engagement
  Part of Attest Engagement Performed by
    Other Practitioners
  Attestation Risk
  Obtaining Sufficient Evidence
Consideration of Subsequent Events
Adequacy of Disclosure
Representation Letter
Reporting
Attest Documentation
Effective Date
Appendix A: Glossary
Appendix B: Sources for GHG Emission Protocols
  and Calculation Tools
Appendix C: Illustrative Management Representation
  Letter
Appendix D: illustrative Examination Reports
  on GHG Emissions Information
Appendix E: Illustrative Examination Reports
  on GHG Emission Reduction Information

BACKGROUND AND INTRODUCTION

Climate Change and Greenhouse Gases

1. Many scientists believe that global temperatures are increasing and that the increase is due to a Buildup of so-called greenhouse gases (GHGs) in the atmosphere. Certain atmospheric gases (methane, carbon dioxide, nitrous oxide, water vapor, and others) are called greenhouse gases because they are believed to help trap some of the outgoing energy, retaining heat somewhat like the glass panels of a greenhouse. Atmospheric concentrations of carbon dioxide, methane, and nitrous oxide are believed to have increased by over 31 percent, 151 percent, and 17 percent, respectively, since the late 19th century. (1) Over the same period, many scientists have noted an increase of approximately 1 degree Fahrenheit in the average global temperature.

2. Fossil fuel use and other human activities have added significant amounts of GHGs to the atmosphere. GHG emissions are also produced by agriculture, animal husbandry, and various industrial processes. Many scientists believe the release of GHGs into the atmosphere to be the cause of the increase in global temperatures. This has led to a number of global and national initiatives to reduce GHG emissions; one such initiative is the Kyoto Protocol (see paragraphs 4 through 7). Since a significant portion of GHG emissions is closely tied to fossil fuel use, achieving the reductions envisioned by those various initiatives would require reduced consumption of coal, oil, natural gas, and other fuels. Such reductions would clearly affect consumers and industry in the United States and elsewhere.

3. However, there is no universal agreement on the science behind global warming. Some scientists and policy makers oppose initiatives and regulations to reduce GHG emissions because they dispute how much of the global warming trend can be attributed to human activity, arguing that natural forces are also at work. As a result, some are reluctant to make the changes required to reduce GHG emissions while, in their view, the causes, consequences, and severity of climate change remain in doubt.

The Kyoto Protocol

4. At the 1992 Earth Summit in Rio de Janeiro, a voluntary agreement to reduce global concentrations of "man-made greenhouse gases," the United Nations Framework Convention on Climate Change (UNFCCC), was adopted and ratified by the United States and a majority of the world's developed countries. When the voluntary targets outlined in the UNFCCC did little to reduce global concentrations of GHGs, the United Nations (UN) initiated an annual negotiation process known as the Conference of the Parties (COP) to set mandatory reduction targets. In 1997, during the third round of negotiations in Kyoto, Japan, the COP reached an agreement on a mandatory mechanism to reduce global GHG emissions; that agreement is now referred to as the Kyoto Protocol.

5. The Kyoto Protocol set targets for each of 38 developed countries, which would have to reduce emissions by a certain percentage below their 1990 emissions baseline. To be legally binding, the Kyoto Protocol must be ratified by at least 55 countries, including developed countries responsible for at least 55 percent of the emissions in 1990.

6. To give countries more options for achieving their emission reduction targets, the Kyoto Protocol incorporated a number of "flexibility mechanisms," namely emissions trading, clean development mechanism (CDM), and joint implementation (JI). Whether trading systems established under the Kyoto Protocol will allow trades with external parties (that is, those that have not signed the Kyoto Protocol) is still being debated among the signatory countries. GHG emission credits may also be traded outside the Kyoto Protocol processes through independent, voluntary markets such as the Chicago Climate Exchange, or by contracts between two or more companies. It is unclear whether GHG emissions credit trading from these latter two mechanisms can be used to meet targets related to the Kyoto Protocol.

GHGs to Be Regulated by the Kyoto Protocol

7. The Kyoto Protocol would regulate emissions of the following six GHGs:

* Carbon dioxide (C[O.sub.3])

* Methane ([CH.sub.4])

* Nitrous oxide ([N.sub.2]O)

* Perfluorocarbons (PFCs)

* Hydrofluorocarbons (HFCs)

* Sulphur hexafluoride (S[F.sub.6])

Why U.S. Companies Are Considering Strategies to Address Their GHG Emissions

8. U.S. companies with operations in countries that have ratified the Kyoto Protocol may have to meet emission reduction targets in those countries once the Kyoto Protocol becomes effective. Consideration of alternative strategies and related costs will enable those companies to find the lowest-cost alternative before triggering the imposition of requirements and any related fines. Emissions trading is considered to be an effective, cost efficient way to meet limits imposed by regulators, especially toward the end of a compliance period.

9. In addition, there is a sense among many companies that even though they will not be subject to the Kyoto Protocol in the United States, at some point a regulatory framework that places a limit on GHG emissions may be adopted. These companies take the view that it would be wise to start planning and preparing for a "carbon-constrained" future and eventually take advantage of the potential opportunities that GHG emissions trading presents.

GHG Emissions Trading Programs and GHG Registries in the United States

10. There are a number of initiatives to establish GHG emissions trading programs or GHG emission registries in the United States, most of which are in various stages of development. One program currently in development is the Chicago Climate Exchange (CCX) (www.chicagoclimateX.com).

11. The CCX is a voluntary cap-and-trade program for reducing and trading GHG emissions. Entities that agree to become members of the CCX must, upon becoming members, enter into a legally binding commitment to reduce their emissions of GHGs by 4 percent below the average of their 1998 through 2001 baseline by 2006, the last year of the pilot program. CCX will enable participants to buy and sell credits to find the most cost-effective way of achieving reductions. Trading is targeted to begin in the fourth quarter of 2003.

12. Some trading schemes involve trading of C[O.sub.2] only, while others permit trading of the six GHGs identified in the Kyoto Protocol (see paragraph 7 of this Statement of Position [SOP]). The CCX plans to enable trading in the six GHGs described in the Kyoto Protocol. Those non-C[O.sub.2] GHGs can be translated into tons of C[O.sub.2] equivalent using the intergovernmental Panel on Climate Change's (IPCC) Global Warming Potentials (GWP) (www.ipcc.ch).

13. The California Climate Action Registry (www.climateregistry.org) will enable entities operating within the State of California to voluntarily record their annual GHG emissions inventories. In turn, the State of California has stated that it will use its best efforts to ensure that entities voluntarily inventorying their emissions will receive appropriate credit for early action (that is, action before regulation of GHG emissions) under any future international, federal, or state regulatory regimes relating to GHG emissions. Third-party certification (2) of the baseline and emission reductions is a key component of the California Climate Action Registry. An entity can register emissions (a) only for the units in California or (b) for all units within the United States.

Terms and Definitions Used by Registries and Regulatory Frameworks

14. Different registries and regulatory frameworks may use different terms and definitions for similar services. A validation is a service that would provide assurance on the feasibility of the design of an emission reduction project, typically before inception of the project; an entity would typically engage an engineering or a consulting firm to provide such a service. This SOP does not provide guidance on validation services. A verification is the objective and independent assessment of whether the reported GHG inventory properly reflects the GHG impact of the entity in conformance with preestablished GHG accounting and reporting standards. The California Climate Action Registry's Certification Protocol (October 2002) defines a certification as "the process used to ensure that a given participant's GHG emissions inventory (either the baseline or the annual result) has met a minimum quality standard and complied with the Registry's procedures and protocols for calculating and reporting GHG emissions." A certification may be viewed by some as providing absolute, not reasonable, assurance. Practitioners should be aware that various GHG registries and regulatory frameworks may not define these terms in exactly the same way; thus the practitioner should obtain the official definitions of such terms under the registry or regulatory framework relevant to the engagement. However, practitioners should not use such terms in their attest reports on GHG emissions.

SCOPE OF SOP

15. This SOP provides guidance to practitioners for the following:

* Engagements to examine and report on a schedule or an assertion relating to information about a GHG emissions inventory (GHG emissions for a compliance period, such as a year) or a baseline GHG inventory

* Engagements to examine and report on a schedule on or an assertion relating to information about a GHG emission reduction in connection with (a) the recording of the reduction with a registry or (b) a trade of that reduction or credit

Such examination engagements should be performed pursuant to Chapter 1, "Attest Engagements," of Statement on Standards for Attestation Engagements (SSAE) No. 10, Attestation Standards: Revision and Recodification (AICPA, Professional Standards, vol. 1, AT see. 101), as amended.

16. While a review-level service relating to an entity's GHG inventory is permissible under existing attestation standards, it is most likely that the market will ultimately demand an examination-level service. Accordingly, this SOP provides guidance only on an examination-level service.

ENGAGEMENT ACCEPTANCE CONSIDERATIONS

17. Before accepting the engagement, the practitioner should consider guidance on engagement acceptance within Chapter 1 of SSAE No. 10, as amended. The following are examples of specific matters that should be considered:

* Independence (see paragraphs 18 through 20 of this SOP).

* Whether the practitioner has adequate technical knowledge of the subject matter to perform the engagement, including evaluation of the work of any specialists involved in the engagement (see paragraphs 21 through 26 of this SOP).

* Considerations in selecting and using the work of a specialist, when applicable (paragraphs 27 through 29 of this SOP).

* Existence of suitable criteria (see paragraphs 30 through 36 of this SOP).

* Materiality considerations (see paragraph 37 of this SOP).

* Expectations of users of the GHG inventory or reduction information and the practitioner's report thereon.

* Whether the client is likely to have adequate information systems and controls to provide reliable GHG reformation.

* Whether sufficient evidence is likely to exist when the entity has changed measurement methods for GHG emissions from one period to the next (see paragraphs 39 and 65 of this SOP).

* The scope of the entity's GHG inventory (see paragraph 40 of this SOP for a discussion of boundaries and paragraphs 41 through 44 of this SOP for a discussion of direct and indirect emissions for a GHG inventory).

* Availability of historical data. The practitioner should consider the risk that historical data for the base year may not be available if the practitioner is engaged to perform the attest service at a date considerably later than the base year. (See paragraph 45 of this SOP for a discussion of baselines.)

INDEPENDENCE

18. The practitioner performing an attest engagement should be independent pursuant to Rule 101, Independence, of the Code of Professional Conduct (AICPA, Professional Standards, vol. 2, ET sec. 101.01). (3)

19. According to section 201 of the Sarbanes-Oxley Act (the Act), (4) it is unlawful for a public accounting firm registered with the Public Company Accounting Oversight Board that performs an audit of a public company to provide, contemporaneously with the audit, certain nonaudit services; those prohibited services do not include attest engagements on GHG emissions information. A registered public accounting firm may engage in any nonaudit service that is not on the prohibited list for a public company audit client only if the activity is approved in advance by the company's audit committee. The Act does not place any limitations on public accounting firms in providing nonaudit services to public companies that they do not audit or to any nonpublic companies.

20. Certain GHG registries or regulatory frameworks set rules that prohibit professionals who provide assurance on GHG inventories or reductions from providing other services to the entity for a period of time (for example, California Climate Action Registry). The practitioner should consider whether the relevant scheme or registry sets independence requirements beyond those of the AICPA or sets other limitations on the scope of services. (5)

ADEQUATE KNOWLEDGE OF SUBJECT MATTER AND USE OF A SPECIALIST

21. The second general attestation standard states, "The engagement shall be performed by a practitioner having adequate knowledge of the subject matter." Chapter 1 of SSAE No. 10 (AT 101.22), as amended, states that "this knowledge requirement may be met, in part, through the use of one or more specialists on a particular attest engagement if the practitioner has sufficient knowledge of the subject matter (a) to communicate to the specialist the objectives of the work and (b) to evaluate the specialist's work to determine if the objectives were achieved." Before accepting an attest engagement on GHG emissions information, the practitioner should consider whether his or her involvement in the engagement and understanding of the subject matter are sufficient to enable the practitioner to discharge his or her responsibilities. The practitioner should accept an attest engagement on GHG emission information only if the practitioner is satisfied that those persons who are to perform the engagement collectively possess the necessary professional competencies.

22. In most attest engagements on GHG emissions, the nature of the entity's operations, emissions, or the emissions measurement methodology in general requires specialized skill or technical knowledge in a particular field other than accounting or auditing. As a result, the practitioner should possess adequate technical knowledge of the subject matter to understand how GHG emissions information might be misstated and to evaluate the work of a specialist and the specialist's conclusion, when applicable. A practitioner may obtain adequate knowledge of the subject matter through formal or continuing education, including self-study, or through practical experience. The practitioner should read the criteria selected by the responsible party to understand what is involved in die measurements in determining whether the practitioner has adequate technical "knowledge.

23. Since most attest engagements on GHG emissions will require specialized skill or technical knowledge in a particular field other than accounting or auditing, the practitioner may use the work of a specialist, such as an environmental engineer or consultant. If the client is a service entity whose GHG emissions are limited to the use of purchased electricity and natural gas or oil, the practitioner may be able to use published factors to convert the electricity, gas, or oil used to GHGs emitted. Under those circumstances, the practitioner may not need to use a specialist, provided that the practitioner possesses sufficient technical knowledge regarding the published factors, including an understanding of the nature of each factor and distinctions between alternatives, If the client has significant industrial operations with numerous sources of emissions, however, it is more likely that the practitioner will need to use a specialist.

24. If specialized skills are needed to supplement the practitioner's technical knowledge, the practitioner should seek the assistance of a professional possessing such skills, who may be either a member of the engagement team or an outside professional. The practitioner should possess adequate technical knowledge to direct, supervise, and review the specialists work in the former situation and to understand and evaluate the specialists work in the latter situation.

25. When the specialist is not a member of the practitioner's staff, the practitioner should consider the magnitude of the specialist's work in relation to the overall engagement to determine whether the practitioner will be performing a sufficient portion of the engagement to assume overall responsibility.

26. When the responsible party employs an in-house specialist to develop evidence that is used to support the assertion or presentation, the practitioner should consider whether the practitioner or another member of the engagement team possesses adequate technical knowledge to understand, test, and evaluate the in-house specialist's work or whether the practitioner should seek the assistance from an outside specialist. The practitioner should follow the guidance in Statement on Auditing Standards (SAS) No. 73, Using, the Work of a Specialist (AICPA, Professional Standards, vol. 1, AU sec. 336), in evaluating the competence and objectivity of the responsible party's in-house specialist.

27. Considerations in selecting a specialist, or using the work of a specialist engaged by the responsible party, include:

a. The specialist's expertise and competence in the subject matter

b. The relevance of the specialist's expertise to the practitioner's objectives in the attest engagement

c. The objectivity of the specialist

d. The nature and extent of the anticipated use of the specialist

28. If the specialist is employed by the practitioner's firm, the practitioner should follow the guidance in this SOP and the relevant guidance in SAS No. 22, Planning and Supervision (AICPA, Professional Standards, vol. 1, AU sec. 311). If an outside specialist is engaged, the practitioner should follow the guidance in this SOP and the relevant guidance in SAS No. 73. When the practitioner is considering using the work of a specialist engaged by the responsible party, the practitioner should follow the guidance contained in this SOP and the relevant guidance in SAS No. 73, including evaluating the relationship of the specialist to the responsible party.

29. Examples of types of matters that ordinarily may require the practitioner to consider using the work of a specialist or having a specialist participate in the GHG engagement include:

* Review of the quality of client-provided data (for example, appropriateness and accuracy)

a. Determination of whether it is necessary or appropriate to use a derived emissions factor versus a published emissions factor

b. Determination of the population and selection of appropriate published emissions factors

c. Assessment of the methodology used to calculate the specific GHG emissions (see paragraphs 39 and 65 of this SOP)

* Review of the work of the client's in-house or external specialist (for example, to assess whether the assumptions underlying the methodology are reasonable)

CRITERIA

30. The third general attestation standard states, "The practitioner shall perform the engagement only if he or she has reason to believe that the subject matter is capable of evaluation against criteria that are suitable and available to users."

31. Criteria that are established or developed by groups composed of experts that follow due process procedures, including exposure of the proposed criteria for public comment, ordinarily should be considered suitable.

32. Different industries, regulatory organizations, or organizations acting in a standard-setting role may have developed guidance on measurement relevant to all industry, regulated group, or GHG emissions in general. Alternatively, an entity may develop its own methodology or criteria for measurement of emissions.

33. The practitioner should consider whether criteria described in paragraph 32 are suitable (see Chapter 1 of SSAE No. 10 [AT sec. 101.23-.32] as amended, for guidance). For guidance on availability, of criteria, see Chapter 1 of SSAE No. 10 (AT sec. 101.33-.34), as amended.

34. Most entities will need to select a framework and further refine measurement criteria, perhaps using software tools for measuring emissions in specific industries or using certain industrial processes, such as cement production or aluminum smelting. The practitioner should review the entity's measurement protocol and consider whether the entity's measurement methods are appropriate. (6)

Attributes to Be Met by GHG Emission Reductions

35. Various registries and GHG emissions trading schemes have specified attributes to be met by an emission reduction for it to be registered or traded. Common attributes are identified and described below; however, definitions may vary by trading scheme. The practitioner should also be aware that, in the context of a specific registry or emissions trading scheme, there may be additional requirements to be met by the emission reduction.

a. Ownership. In many cases, ownership is clear. Examples of such cases include efficiency upgrades at a manufacturing facility or fuel-switching at a power plant. For some project types, however, particularly those with renewable energy and demand-side management projects that offset or displace fossil-fuel emissions, demonstrating ownership can be challenging. Ownership of the reductions may be open to dispute because the reductions do not occur on the site of the project, but rather on the site of a fossil-fueled facility whose power was displaced. These are known as indirect emission reductions because the reductions occur at facilities other than the one where the project has been undertaken. The possibility that the direct source of emissions would claim title to the same reductions claimed by the project developer or that the joint venture partners would claim title to the same reductions of their joint venture (referred to as double-counting) represents a risk that buyers prefer to avoid. It is possible that multiple claimants, such as the owner of the emitting source, technology vendors, and the entity installing the technology, could claim ownership of these reductions.

b. Real. An emissions reduction is real if it is a reduction in actual emissions resulting from a specific and identifiable action or undertaking that is not a mere change in activity level (for example, due to typical business fluctuations) and net of any leakage to a third party or jurisdiction. Leakage occurs when an emission reduction project causes emissions to increase beyond the project's boundaries. Entities entering into an emission reduction project typically must demonstrate that the emission reduction will not cause emissions to increase beyond the project's boundaries.

C. Quantifiable or measurable. An emission reduction is quantifiable or measurable if the total amount of the reduction can be determined and the reduction is calculated in an accurate and replicable manner.

d. Surplus. An emission reduction is surplus if the reduction is not otherwise required of a source by current regulations or a voluntary commitment to reduce emission to a specified level.

e. Establishment of a credible emissions baseline. Many programs measure emission reductions by comparing a credible emissions baseline without the project to the emission baseline with the project. To give meaning to a reduction quantity it should be compared with a credible baseline (that is, a baseline compiled in accordance with the current protocol, using the same boundaries and scope).

f. Unique. Credits should be created and registered only once from a specific reduction activity and time.

36. Some registries or trading schemes may have a requirement for additionality. Environmental additionality requires that the emission reductions achieved by the project would not have occurred in the absence of the project (the reduction must be additional to any required reductions; that is, if the entity has taken on a cap, the reduction must be additional to the cap). A credible emission baseline is crucial for an entity to demonstrate additionality. Practitioners should be aware that various GHG registries and regulatory frameworks may not define additionality and the terms referred to in paragraph 35 in exactly the same way; thus the practitioner should obtain the official definitions of such terms under the registry or regulatory framework relevant to the engagement.

MATERIALITY

37. The practitioner should be aware of the materiality guidance in Chapter 1 of SSAE No. 10 (AT sec. 101.67), as amended. The practitioner should also consider whether the applicable GHG registry- or voluntary or regulatory framework sets specific materiality limits of which the practitioner should be aware. If a GHG registry or framework sets specific materiality requirements that are more stringent than those of SSAE No. 10, the practitioner should consider whether it is possible to meet such requirements before accepting the engagement.

UNCERTAINTY (7) IN THE MEASUREMENT OF GHG EMISSIONS

38. Uncertainty in emissions estimates can be due to inherent risk or control risk. The practitioner should consider the implications of uncertainty in emissions estimates. Examples of matters that may create or increase uncertainty in emissions estimates include the following:

* Use factors that are poorly researched or uncertain (for example, factors for C[H.sub.4] and [N.sub.2]0 from combustion processes)

* Use of average case factors not perfectly matched to specific and varying circumstances (for example, miles per gallon, average kgC[O.sub.2]/MWh generated)

* Deliberate estimation to compensate for missing data (for example, nonreporting facilities or missing fuel bills)

* Assumptions that simplify calculation of emissions from highly complex processes

* Imprecise measurement of emissions-producing activity (for example, miles traveled in airplanes or rental vehicles, hours per year specific equipment is used)

* Insufficient frequency of measurement to account for natural variability

* Poor calibration of measuring instruments

CONSISTENCY

39. Measurement of the GHG inventory requires consistent application of measurement methods. If the entity has changed measure ment methods from one period to the next, the practitioner should consider the implications on the engagement (for example, whether it is essential that the same methods be used because either comparative information is presented or a reduction is being calculated and, if so, whether the entity has restated the prior period as results using the same measurement method as the current period). (See paragraphs 40, 45, 65 and 72 of this SOP.)

BOUNDARIES

40. It is important for the entity to draw clear organizational boundaries. This is particularly salient when accounting for GHG emissions from partially owned entities or facilities. The criteria framework selected by the entity may provide guidance on how to set organizational boundaries. Once organizational boundaries have been set, the entity must set its operational boundaries. Leakage may affect the choice of operational boundaries. In planning the engagement, the practitioner needs to understand the boundaries that have been set by the entity to plan the engagement and the potential for leakage. If leakage has occurred, the entity may account for it by adjusting its baseline or by changing its boundaries.

SCOPES FOR REPORTING GHG EMISSIONS: DIRECT AND INDIRECT EMISSIONS

41. GHG reporting and emission reductions may encompass one or more of the following three scopes of emission:

* Scope 1: Direct GHG Emissions. These are emissions associated with the following:

a. Production of electricity., heat, or steam

b. Physical or chemical processing

c. Transportation by the entity of, for example, materials, products, waste, and employees

d. Fugitive emissions

* Scope 2: Indirect GHG Emissions From the Generation of Imported or Purchased Electricity, Heat, or Steam

* Scope 3: Other Indirect Emissions, including the following:

a. Employee business travel

b. Outsourced activities, contract manufacturing, and franchises

c. Transportation by the vendor or contractor of, for example, materials, products, waste, and employees

d. Emissions from product use and end of life

e. Employee commuting

f. Production of imported materials

42. In the United States there is a focus on both actual emissions and emissions intensity (that is, emissions per unit of production). For example, national GHG reduction policy focuses on emission intensity while emissions trading organizations (for example, the Chicago Climate Exchange) trade in emission reduction credits, usually expressed as an annual rate (for example, tons of GHGs per year).

43. The practitioner should consider whether the proposed scope of the engagement is appropriate, whether it covers (a) direct GHG emissions; (b) indirect GHG emissions associated with the generation of purchased electricity, heat, or steam; and (c) other indirect emissions.

44. Some reporting schemes may classify these emissions sources differently than those noted in paragraph 41 of this SOP. The practitioner should evaluate the potential for double-counting of emissions and reductions, especially in instances of indirect emissions and shared ownership or control. If the practitioner has been engaged to provide assurance on an entity's indirect emissions, especially those emissions for a supplier not under the direct control of the entity, the practitioner should consider whether he or she can obtain a written assertion from the responsible party and obtain sufficient evidence to form an opinion; the practitioner also should consider the availability or existence of data for emitting sources not under the direct control of the entity.

BASELINES

45. A baseline is the amount of the entity's emissions for a specified base year against which any future changes in emissions are evaluated. The baseline should be recalculated, however, for changes in scope and boundaries, subsequent acquisitions, and sales or closing of emitting sources. If the practitioner is engaged to perform the attest service at a date considerably later than the base year, the practitioner should also consider potential differences in the quality of the data and consistency of methodology between the base year and the current year.

EXAMINATION ENGAGEMENT: GHG INVENTORY

Objective of the Engagement

46. The criteria selected determine the specific subject matter of the examination engagement and what is to be presented. It is anticipated that appropriate disclosures will be included in the presentation, not just the quantity of GHG emissions for a period of time, and that the presentation may include or be accompanied by other information, such as the discussion of the responsible party's commitment and strategy, projections, and targets related to its GHG emissions. Therefore, the form of opinion will vary depending upon the information presented under the selected criteria.

47. The practitioner's objective typically is to express an opinion about whether:

a. The entity's schedule of greenhouse gas emissions (GHG inventory) (8) information is presented, in all material respects, in conformity with the criteria selected by management (see paragraphs 30 through 36 of this SOP); or

b. The responsible party's written assertion about the schedule of greenhouse gas emissions information is fairly stated, in all material respects, based on the criteria selected by management.

Written Assertion by the Responsible Party

48. A written assertion by a responsible party (9) may be presented to a practitioner in a number of ways, such as in a narrative description, within a schedule, or as part of a representation letter appropriately identifying what is being presented and the point in time or period of time covered. An example of a written assertion on a GHG inventory follows: "XYZ Company asserts that its schedule of GHG emissions information for the year ended December 31, 20XX, is fairly stated, in all material respects, based on [identify criteria selected by management]."

(1)Source: lntergovernmental Panel on Climate Change (IPCC) Third Assessment Report: Climate Change 2001 Summary for Policy Makers, p. 34, Table SPM-1. www.ipcc.ch/pub/reports.htm.

(2)See paragraph 14 of this Statement of Position (SOP) for a definition of the term certification.

(3)For guidance on independence when engaged to issue an attest report that is restricted as to use. see Interpretation No. 11 "Modified Application of Rule 101 for Certain Engagements to Issue Restricted-Use Reports Under the Statements on Standards for Attestation Engagements," of Rule 101, Independence (AICPA, Professional Standards, vol. 2, ET section 101.13).

(4)See also subsections (g) through (l) of Section 10A of the Securities Exchange Act of 1934.

(5)For example, a greenhouse gas (GHG) framework or registry may set independence requirements that specifically prohibit a practitioner who has performed a financial statement audit or other specified service for an entity from also providing a verification (examination) of an entity's GHG emission inventory for a certain period of time.

(6)For example, the WRI/WBCSD GHG Protocol (released on October 23, 2001), when supplemented by appropriate specified methodologies for calculating GHG emission, may be suitable criteria for calculating GHG emission inventory. This is an emerging area: as a result, other suitable frameworks may be developed in the future. See Appendix B, "Sources for GHG Emission Protocols and Calculation Tools."

(7)The term uncertainty as used in the field of GHG emissions refers to variability in the measurement of GHG emissions rather than the term uncertainty as defined in the auditing literature.

(8) An entity's emissions of GHGs for a specified period, typically a year or a series of years, are often referred to as the entity's GHG inventory.

(9) The responsible party is defined in Chapter 1, "Attest Engagements," of Statement on Standards for Attestation Engagements No. 10, Attestation Standards: Revision and Recodification (AICPA, Professional Standards, vol. 1, AT sec. 101.11) as the person or persons, either as individuals or representatives of the entity, responsible for the subject matter.

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EXAMINATION ENGAGEMENT: GHG EMISSION REDUCTION INFORMATION

Objective of the Engagement

49. The practitioner's objective is to express an opinion about whether:

a. The entity's GHG emission reduction information related to a specific project or on an entity-wide basis is presented, in all material respects, in conformity with the criteria selected by management; or

b. The responsible party's written assertion about the GHG emission reduction information related to a specific project or on an entitywide basis is fairly stated, in all material respects, based on the criteria selected by management.

Written Assertion by the Responsible Party

50. A written assertion may be presented to a practitioner in a number of ways, such as in a narrative description, within a schedule, or as part of a representation letter appropriately identifying what is being presented and the point in time or period of time covered. An example of a written assertion on a GHG emission reduction project follows: "XYZ Company reduced GHG emissions in connection with project ABC by 50,000 tons of C[O.sub.2] equivalents for the year ended December 31, 20XX, based on [identify criteria selected by management]."

Examples of GHG Emission Reduction Projects

51. Examples of GHG emission reduction projects include but are not limited to the following:

* Use of renewable energy systems such as wind, solar, and other low emission technologies

* Change in processes to increase energy efficiency/installation and use of more energy efficient equipment

* Carbon sequestration: no-till farming; agricultural grass and tree plantings

* Change from more GHG-intensive fuels to less GHG-intensive fuels (for example, from coal to natural gas or nuclear power)

* Recovery and use of agricultural and landfill methane

* Improvement in the fuel efficiency of vehicle fleets

* Reduction in venting or flaring on offshore oil production platforms (installation of zero flare systems; rapid response to unplanned events)

* Cessation of operations at noneconomical plants

* Demand-side management projects

Prerequisite for an Examination of GHG Emission Reduction Information

52. As a prerequisite to providing examination-level assurance on GHG emission reduction information, the practitioner should perform procedures on the entity's GHG emissions for the period in which the project took effect sufficient to form an opinion on the GHG emission reduction information.

53. If one practitioner has examined and reported on an entity's GHG inventory but another practitioner is engaged to examine and report on the entity's GHG emission reduction information, the practitioner engaged to examine and report on the GHG emission reduction information should consider the guidance in SAS No. 1, Codification of Auditing Standards and Procedures (AICPA, Professional Standards, vol. 1, AU sec. 543, "Part of Audit Performed by Other Independent Auditors") in deciding whether he or she may rely on the work of the other practitioner. The practitioner also should consider the consistency of the assumptions and methods for measuring the GHG emission reduction to that used in measuring the GHG inventory reported on by the other practitioner. See paragraphs 39 and 65 of this SOP.

54. Members of professions other than public accounting are subject to their own professional requirements; those requirements may differ from those of the public accounting profession. When a non-CPA has provided verification or certification services (see paragraph 14 of this SOP) with respect to an entity's GHG inventory and the practitioner is engaged to provide assurance on an entity's GHG reduction, the practitioner should perform examination procedures to obtain sufficient evidence with respect to the entity's GHG inventory as part of examining the entity's GHG emission reduction (for example, the practitioner should consider the appropriateness of the methodology and any emission factors used, and whether the base year emissions wert adjusted if needed). The practitioner should consider certain aspects of the specialist's work in accordance with SAS No. 73.

ENGAGEMENT PERFORMANCE

Planning the Examination Engagement

55. The examination should be performed in accordance with attestation standards established by the AICPA (see Chapter 1 of SSAE No. 10). This SOP is not intended to provide all the guidance set forth in the applicable standards established by the AICPA.

56. The practitioner should establish an understanding with the client regarding the services to be performed. The understanding should include the objectives of the engagement, management's responsibilities, the practitioner's responsibilities, and the limitations of the engagement. The practitioner should document the understanding in the working papers, preferably through a written communication with the client, such as an engagement letter.

57. Other considerations in planning the examination engagement include the following:

Applicable to GHG Inventories and Reductions

a. Obtain an understanding of the entity's business and ascertain whether the entity has operations, and therefore GHG emission sources, in multiple locations and ascertain the types of GHG emissions produced.

b. Ascertain the organizational and operational boundaries used for the emissions inventory.

c. Ascertain whether there have been any mergers, acquisitions, divestitures, sales of emitting sources, or outsourcing of functions with significant emissions that may require adjustment of the entity's baseline.

d. Ascertain whether all significant sources of emissions have been identified by the entity.

e. Evaluate the potential for double-counting of emissions and, if applicable, reductions.

f. When applicable, obtain an understanding of any regulatory framework(s) (for example, state-or country-specific regulations, permits, or operating licenses governing emissions where the client has operations; the Kyoto Protocol) or any requirements relevant to a voluntary commitment to register or reduce GHG emissions.

g. Obtain a description of how GHG emissions have been calculated and reported, including emissions factors and their justification, and any assumptions on which estimates are based.

h. Obtain an understanding of the internal control over gathering and reporting GHG emissions data, including data assembly and data retention. Effective internal control may reduce the likelihood of material misstatement of an entity's GHG inventory.

i. Ascertain which protocols were used for measurement of emissions; also ascertain whether they were used in a consistent manner throughout the entity over the period under examination.

j. Consider the use of a specialist.

k. Consider whether a legal letter should be obtained.

Applicable to GHG Reductions Only

l. Ascertain type(s) of emission reduction(s); for instance, switch in fuel type or change in production process (see paragraph 39 of this SOP).

m. Under some registries or regulatory frameworks, the emitting entity is required to engage an outside specialist to evaluate the scientific or engineering basis for the proposed reduction project (sometimes referred to as a validation); those rules may further specify that the party evaluating the science cannot be the same party as the verifier. Where applicable, ascertain whether another reputable party has evaluated the science and found it to be acceptable. Obtain a copy of the related report and consider implications of findings reported.

n. Ascertain whether there are any ownership issues relating to the GHG emission reduction credits to be sold. (For example, in the case of a landfill, does the seller own the landfill or have ownership rights over the emission reduction by virtue of a contract?)

Part of Attest Engagement Performed by Other Practitioners

58. If another practitioner is providing assurance on the GHG inventory for a subsidiary of the entity, that practitioner also should follow the guidance in this SOP. The practitioner who is engaged to provide assurance for the entity, as a whole (hereafter referred to as the principal practitioner) should consider whether the practitioner for the subsidiary has the skill and knowledge required to conduct the engagement. SAS No. 1 (AU sec. 543) provides guidance on the professional judgments the independent auditor makes in deciding whether he or she may serve as principal auditor and use the work and reports of other independent auditors who have audited the financial statements of one or more subsidiaries, divisions, branches, components, or investments included in the financial statements presented. The principal practitioner may find that guidance helpful when performing an attest engagement on GHG emissions and another practitioner is providing assurance with respect to the GHG emissions of a subsidiary or other component of the client entity. The practitioner for the subsidiary should inquire about whether the subsidiary is using the same protocol, scope of reporting, and boundaries as the parent entity.

Attestation Risk

59. Attestation risk is the risk that the practitioner may unknowingly fail to appropriately modify his or her attest report on the subject matter or assertion that is materially misstated. It consists of (a) the risk (consisting of inherent risk and control risk) that the subject matter or assertion contains deviations or misstatements that could be material and (b) the risk that the practitioner will not detect such deviations or misstatements. The degree of reliability between methods of measurement of emissions varies (inherent risk). For example, the degree of reliability from a stack test may be greater than that from the use of emissions factors. The reliability of the information also depends on the source of the GHGs and the measurement systems in place.

60. Examples of causes of possible misstatements of GHG inventory or GHG emission reduction information include the following:

* Human error in calculations

* Use of incorrect emissions factors

* Omission from the inventory of emissions from one or more emitting sources

* Omission from the inventory of one or more GHG emissions (for example, omission of methane emissions)

* Failure to properly account for leakage (for example, when the entity has outsourced a major function that accounted for a significant part of its GHG emissions baseline but has not adjusted its baseline to reflect such change)

* Failure to appropriately adjust the baseline for events such as sales or acquisitions of emitting sources

* Existence of one or more significant deficiencies in the entity's internal control over reporting of emissions information

* Double counting of an emission source within the entity

Obtaining Sufficient Evidence

61. In conducting an attest engagement, the practitioner accumulates sufficient evidence to restrict attestation risk to a level that is, in the practitioner's professional judgment, appropriately low for the high level of assurance that may be imparted by his or her report. A practitioner should select from all available procedures--that is, procedures that assess inherent and control risk and restrict detection risk--any combination that can restrict attestation risk to such an appropriately low level. (See Chapter 1 of SSAE No. 10 [AT sec. 101.51-.53], as amended.)

62. In an examination engagement of a GHG inventory or an emission reduction, the practitioner should select from the following procedures, among others:

a. Obtain evidence of how emissions were calculated and any underlying methodologies, emission factors, and assumptions.

b. Evaluate techniques used by the client to calculate the emissions or emission reduction, including how completeness and uncertainty are addressed in those calculations. Reductions are calculated by comparing the amount of emissions from one period to another. For clients reporting on a facility basis, this will usually be done annually. For clients reporting on a project basis, the period may vary depending on the nature of the project. Measurement techniques include, but are not limited to, the use of mass balance equations (MBE), emissions factors, stack tests, and direct measurement of emissions, including continuous emission monitors (CEMs). For reductions calculated in comparison to a base year, evaluate adjustments to the base year based on structural changes with the client's organization and on changes in ownership/control of the emitting source(s). (Mergers, acquisitions, sales of emitting sources, outsourcing of certain functions, and joint ventures [practitioners should ascertain how the entity accounts for joint ventures may cause leakage and would likely require adjustment of the baseline.) Note that adjustments based on organic growth or decline are generally not appropriate.

c. Ascertain whether there have been any changes in the protocol(s) used to calculate emissions. Where applicable, ascertain whether the subsidiary uses the same protocol.

d. Conduct site visits as considered appropriate.

e. Inquire about the business purpose or reason behind such measurements or emission reductions.

f. Ascertain whether there have been any changes in baselines, such as sales or acquisitions of operational facilities or subsidiaries.

g. Where applicable, obtain information about the frequency of meter readings and calibration and maintenance of meters.

h. Examine relevant contracts.

i. Obtain an understanding of the internal control over the subject matter of the contracts and contractual aspects.

j. Trace informanon to supporting documents.

k. Inquire about the nature of significant judgments and estimates made by management and any uncertainties regarding measurements; the practitioner should consider management's process for and internal control over developing those estimates, inquire about key factors and assumptions underlying those estimates, and evaluate the reasonableness thereof.

l. Where applicable, trace emissions factors used to recognized sources.

m. Ascertain whether emissions factors have been properly applied and whether the underlying assumptions are documented; consider whether those assumption have a reasonable basis.

n. Perform analytical procedures (for example, change in amounts from the previous year, fluctuations in amounts during the present year, variation from an independent expectation developed by the practitioner).

o. Where applicable, compare emission data to number of units sold for the period.

p. Where applicable, confirm details of the transaction(s) (for example, quantity of methane sold or purchased) with the other party to the transaction.

q. Inquire about whether there have been any changes in production levels (lower emissions due to a drop in production level might not be permanent); obtain evidence supporting production levels.

r. Inquire about whether there have been any communications from regulators concerning emission levels or noncompliance with permits or regulatory schemes.

s. Obtain supporting evidence for any emission reduction credits that are banked, purchased from, or sold to a third party (such information may be included in a public report on a GHG inventory).

t. Obtain and read environmental (or Environmental, Health and Safety [EH&S]) internal audit reports and minutes of audit committee meetings (or other relevant board committees to which the enviromnental/EH&S internal auditors report).

u. Inquire about whether there have been any subsequent events that would affect the subject matter or the assertion.

v. Obtain a legal letter when considered appropriate (for example, to address (1) noncompliance with regulatory schemes [emissions exceed permitted amount], (2) ownership of credits, or (3) the existence of any unasserted claims).

w. Obtain written representations from management.

63. In an examination engagement of GHG emission reduction information, the practitioner should also select from the following additional procedures, among others:

a. Obtain evidence of significant changes in the production process, switches from one fuel type to another, or other changes resulting in the emission reduction.

b. Evaluate techniques used by the client to calculate the emission reduction. Reductions are calculated by comparing the amount of emissions from one period to another, typically a year. Measurement techniques include but are not limited to the use of MBEs, stack tests, and metering of gases or effluents, including CEMs.

c. Inquire about the reason or business purpose for the reduction and consider the possible implications with respect thereto. Consider obtaining from management a written representation regarding the reason for the reduction project (See paragraph 36 of this SOP on additionality.)

d. Inquire whether there are any permits applicable to the facility and, if so, examine the permit for factors that may have a bearing on the reduction project (for example, reductions that meet other requirements cannot be transferred).

e. Where applicable, examine reports prepared by the seller for purposes other than the sale of the GHG credit (for example, an emission report filed with a regulatory agency) and check for consistency of information related to the sale.

f. Where applicable, confirm details of emission reduction credits with the relevant GHG registry.

CONSIDERATION OF SUBSEQUENT EVENTS

64. Events or transactions sometimes occur subsequent to the point in time or period of time of the subject matter being tested but before the date of the practitioner's report that have a material effect on the subject matter and therefore require adjustment or disclosure in the presentation of the subject matter or the assertion. These occurrences are referred to as subsequent events. In performing an attest engagement, the practitioner should consider information about subsequent events that comes to his or her attention. While the practitioner has no responsibility to detect subsequent events, the practitioner should inquire of the responsible party (and his or her client if the client is not the responsible party) about whether they are aware of any subsequent events, through the date of the practitioner's report, that would have a material effect on the subject matter or the assertion. If the practitioner has decided to obtain a representation letter from the responsible party, the letter ordinarily would include a representation concerning subsequent events. (Chapter 1 of SSAE No. 10 [AT sec. 101.95-.99], as amended, provides additional guidance on the consideration ofsubsequent events in an attest engagement.) Types of events that may represent a subsequent event in the context of an attest engagement on GHG emissions include the following:

* Changes in baseline emissions due to events such as acquisition or disposition of facilities, change in number of shifts at a facility, or change in production levels

* Destruction of the facility to which an emission reduction relates

* In the case of a GHG emission reduction, unplanned or accidental release of sequestered carbon

ADEQUACY OF DISCLOSURE

65. When the entity has changed its boundaries or emissions calculation methodologies, and when mergers, divestitures, acquisitions, or closures occur, the practitioner should consider whether those changes are likely to be significant to the users of the report. If so, the practitioner should determine whether the criteria are clearly stated or described for each of the dates or periods, and whether the changes have been adequately disclosed. (See Chapter 1 of SSAE No. 10 [AT sec. 101.70 and 101.76-.77].) See paragraph 72 of this SOP for reporting guidance.

REPRESENTATION LETTER

66. In an examination engagement, a practitioner should consider obtaining a representation letter from the responsible party. Written representations from the responsible party ordinarily confirm representations explicitly or implicitly given to the practitioner, indicate and document the continuing appropriateness of such representations, and reduce the possibility of misunderstanding concerning the matters that are the subject of the representations. Examples of matters that might appear in such a representation letter include the following:

a. A statement acknowledging responsibility for the subject matter and, when applicable, the assertion

b. A statement acknowledging responsibility for selecting the criteria, where applicable

c. A statement acknowledging responsibility for determining that such criteria are appropriate for its purposes, where the responsible party is the client

d. Management's assertion about the subject matter based on the criteria selected

e. A statement acknowledging ownership of the emissions or emission reductions

f. A statement that all known matters contradicting the assertion or presentation and any communication from regulatory agencies affecting the subject matter or the assertion have been disclosed to the practitioner

g. A statement that management (responsible party) has disclosed to the practitioner all significant deficiencies in the design or operation of internal control over its GHG inventory

h. A statement regarding the availability of all records relevant to the subject matter

i. A statement that management has responded fully to all inquiries made by the practitioner during the engagement

j. A statement that any known events subsequent to the period (or point in time) of the subject matter being reported on that would have a material effect on the subject matter (or, if applicable, the assertion) have been disclosed to the practitioner

k. Other matters as the practitioner deems appropriate

l. Relevant to an emission reduction, a statement regarding the business purpose of the emission reduction project

m. Relevant to an emission reduction, a statement that the reduction is both real and additional to any requirements

Appendix C includes an illustrative management representation letter.

67. When the client is not the responsible party, the practitioner should consider obtaining a letter of written representations from the client as part of the attest engagement. Examples of matters that might appear in such a representation letter include the following:

a. A statement regarding whether the client is aware of any matters that might contradict the subject matter or the assertion

b. A statement that all known events subsequent to the period (or point in time) of the subject matter being reported on that would have a material effect on the subject matter (or, if applicable, the assertion) have been disclosed to the practitioner

c. A statement acknowledging the client's responsibility for selecting the criteria, where applicable

d. A statement acknowledging the client's responsibility for determining that such criteria are appropriate for its purposes

e. Other matters as the practitioner deems appropriate

68. If the responsible party or the client refuses to furnish all written representations that the practitioner deems necessary, the practitioner should consider the effects of such a refusal on his or her ability to express an opinion about the subject matter. If the practitioner believes that the representation letter is necessary to obtain sufficient evidence to express an opinion, the responsible party's or the client's refusal to furnish such evidence in the form of written representations constitutes a limitation on the scope of an examination sufficient to preclude an unqualified opinion and is ordinarily sufficient to cause the practitioner to disclaim an opinion or withdraw from an examination engagement. However, based on the nature of the representations not obtained or the circumstances of the retusal, the practitioner may conclude, in an examination engagement, that a qualified opinion is not appropriate. Further, the practitioner should consider the effects of the refusal on his or her ability to rely on other representations.

REPORTING

69. SSAE No. 10, as amended, permits the practitioner to report either on the written assertion or directly on the subject matter to which the assertion relates. However, as stated in Chapter 1 of SSAE No. 10, paragraph 1.66, as amended, if conditions exist that, individually or in combination, result in one or more material misstatements or deviations from the criteria, the practitioner should modify the report and, to most effectively conmmnicate with the readers of the report, should ordinarily express his or her opinion directly on the subject matter, not on the assertion.

70. The report should contain language describing inherent limitations, such as the following:

   Environmental and energy use data are subject
   to inherent limitations, given the nature
   and the methods used for determining such
   data. The selection of different but acceptable
   measurement techniques can result in
   materially different measurements. The precision
   of different measurement techniques
   may also vary.

71. The precision of different measurement techniques may vary; for example, stack tests would provide more precise measurements than the use of published emission factors.

72. When the measurement methods and the application thereof have not been consistent from period to period, the practitioner's report should be modified. The form of the modification depends on whether the presentation or management's assertion appropriately disclose those facts or whether prior periods, if presented or used in the calculation of a reduction, are restated. If the responsible party (that is, in most cases, the client) does not appropriately restate the baseline and prior period(s) inventory for the change, the practitioner should include an explanatory paragraph in the practitioner's report describing the lack of consistency and should express a qualified or an adverse opinion due to a departure from the criteria. If the responsible party does appropriately restate, the practitioner should include an explanatory paragraph (following the opinion paragraph) in his or her report that refers to the change in the measurement methods or application.

73. When the trading scheme or GHG registry contains specific materiality requirements that are more stringent than those of Chapter 1 of SSAE No. 10, as amended, the practitioner may wish to consider including a reference to those requirements in the attest report.

74. Chapter 1 of SSAE No. 10, as amended, requires the report on an attest examination engagement to contain a statement of management's responsibility for the subject matter or the assertion. The statement of management's responsibility may also address management's responsibility for selecting and adhering to the criteria used.

75. Appendix D presents illustrative reports for the examination of an entity's GHG emissions information for a period of time. Appendix E presents illustrative reports for the examination of an entity's GHG emission reduction information.

76. The practitioner, in his or her attest report, may wish to refer to the report of another practitioner under the following circumstances:

* When reporting on an attest engagement on GHG emissions and another practitioner is providing assurance with respect to the GHG emissions of a subsidiary or other component of the client entity

* When reporting on an attest engagement on an emission reduction and another practitioner has examined and reported on the entity's emissions inventory

See Appendix D, Example 3, for an example examination report that refers to the report of another practitioner.

77. The practitioner reporting on the emission reduction would only be able to divide responsibility with the practitioner reporting on the GHG inventory information if both practitioners are reporting on emissions information for the same emission source(s) addressed by the reduction project. For example, if practitioner A reported on a GHG inventory for Plant X for which practitioner B is reporting on the emission reduction, practitioner B may divade responsibility by referring in his or her report to the work of practitioner A. However, if practitioner A reported on the company's GHG inventory for its nationwide operations taken as a whole, practitioner B, who is reporting only on the reduction project at Plant X, would need to perform sufficient additional procedures on the GHG inventory at Plant X and should not refer in his or her report to the work of practitioner A.

ATTEST DOCUMENTATION

78. SSAE No. 11, Attest Documentation (AICPA, Professional Standards, vol. 1, AT sec. 101.100-.107), sets documentation requirements. The practitioner should be aware that the GHG registry or regulatory scheme relevant to the attest engagement may have set additional documentation requirements for those providing assurance on GHG emissions inventories or reductions (sometimes referred to as verifiers).

EFFECTIVE DATE

79. This SOP is effective for reports on attest engagements on GHG emissions information issued on or after December 15, 2003. Early implementation is permitted.

APPENDIX A GLOSSARY

Additionality. A project is additional if it would not have happened but for the incentive provided by the credit trading program (for example, Clean Development Mechanism [CDM] or Joint Implementation [Jl]). The Kyoto Protocol specifies that only projects that provide emission reductions that are additional to any that would occur in the absence of the project activity shall be awarded certified emission reductions (CERs) in the case of CDM projects or emission reduction units (ERUs) in the case of JI projects. This is often referred to as environmental additionality. Financial additionality is the notion that a project is made commercially viable through its ability to generate value in the form of certified emission reductions. Various greenhouse gas (GHG) registries; or regulatory frameworks may define these terms differently.

Allowance. An allowance is the unit of trade under a trading system. In a closed trading system, trading of allowances is permitted only between parties subject to the scheme or regulatory system. Allowances grant the holder the right to emit a specific quantity (for example, one ton) of emissions once. The total quantity of allowances issued by regulators dictates the total quantity of emissions possible under the system. Allowances are typically granted to emitters by governmental entities or agencies either for free or for a fee. At the end of each compliance period each source must surrender sufficient allowances to cover its emissions during that period. In an open trading system, trades can be made between parties within the system and parties outside the system.

Baseline. A baseline refers to the level of emissions during some specified period, often referred to as a "baseline year." Emission reductions targets are often expresscd as a percent reduction from the baseline emission level.

Boundaries. There are two types of boundaries: organizational and operational. When accounting for GHG emissions from partially owned entities, it is important to draw clear organizational boundaries, which should be consistent with the organizational boundaries that have been down up for financial reporting purposes. After the entity has determined its organizational boundaries in terms of the entities it owns or controls, it must then set operational boundaries with respect to direct and indirect emissions. The WRI/WBCSD Greenhouse Gas Protocol provides additional guidance on setting organizational and operational boundaries with respect to GHG emissions.

Certification. The process used to ensure that a given participant's GHG inventory (either the baseline or the annual result) has met a minimum quality standard and complied with a specific registry's procedures and protocols for calculating and reporting GHG emissions is often referred to as a certification. Many perceive that a certification would be required to provide a higher level of assurance than a verification or a pracftioner's examination report.

Closed trading system. In a closed trading system, trading of allowances is permitted only between parties subject to the scheme or regulatory system. (See also "Open trading system.")

Credit. The term credit is used in a number of contexts, most commonly in relation to emission reductions that have been achieved in excess of the required amount for one of the following:

* The Kyoto Protocols Joint Implementation (JI), also known as emission reduction units (ERUs)

* The Kyoto Protocol's Clean Development Mechanism (CDM), specifically known as Certified Emission Reductions (CERs)

* The Kyoto-related and voluntary trading schemes

Data assembly. Data assembly is the process the client uses to "roll-up" individual site or process level information to a facility- or corporate-level report. For example, the entity may choose to have a manufacturing unit report only the number of widgets it produced each year and have corporate level environmental staff apply the appropriate emission factors to calculate the resultant emissions. Alternatively, the entity may choose to have all calculations done at the operational level and assign only quality control responsibilities to the corporate staff.

Direct GHG emissions. Direct GHG emissions, or Scope 1 reporting under the WRI/WBCSD Greenhouse Gas Protocol, represent emissions associated with the following:

* Production of electricity, heat, or steam

* Physical or chemical processing

* Transportation by the entity of, for example, materials, products, waste, and employees

* Fugitive emissions

GHG inventory. An entity's GHG emissions for a compliance period, such as a year, is referred to as its GHG inventory.

Indirect GHG emissions. Indirect emissions, or Scope 2 reporting under the WRI/WBCSD Greenhouse Gas Protocol, represent emissions from the generation of imported or purchased electricity, heat, or steam. Other indirect emissions, or Scope 3 reporting under the GHG Protocol, include the following:

* Employee business travel

* Outsourced activities, contract manufacturing, and franchises

* Transportation by the vendor or contractor of, for example, materials, products, waste, and employees

* Emissions from product use and end of life

* Employee Commuting

* Production of imported materials

Inventory. See "GHG inventory."

Leakage. Leakage occurs when an emission reduction project causes emissions to increase beyond the project's boundaries. Entities entering into an emission reduction project typically must demonstrate that the emission reduction will not cause emissions to increase beyond the project's boundaries.

Offset. Offsets are created when a source makes voluntary, permanent emission reductions that are in surplus to any required reductions. Entities that create offsets can trade them to other entities to cover growth or relocation. Regulators may be required to approve each trade. Regulators normally require a portion of the offsets to be retired to ensure an overall reduction in emissions. Offets are an open system (an open system is one in which trades can be made between parties within the system and parties outside the system). One offset is an emission reduction that a pollution source has achieved in excess of permitted levels and/or required reductions. The excess amount is the credit and can be sold on the market.

Open trading system. In an open trading system, trades can be made between parties within the system and parties outside the system. (See "Closed trading system.")

Permit. Permits are certificates of operation that allow holders to operate a Facility provided they do not exceed a specified rate (kilograms/tons per day). Permits are often designated as an upper limit. Because few systems operate at 100 percent of capacity at all times, actual emissions are usually a fraction of the theoretical upper limit of allowed emissions. However, as new permits become harder to obtain, existing operations are motivated to increase their level of operations under their existing permits (for example, by adding a second shift, thereby legally increasing the overall quantity of emissions). Allowances (see "Allowances") are transferable, while the permit itself is attached to a specific installation or site.

Validation. The process used to ensure that a given project, if implemented, can achieve the projected reduction results. The entity may validate the feasibility of the design of an emission reduction project internally, or the entity may engage an outside party (typically an engineering or a consulting firm) to perform the validation.

Verification. A verification is the objective and independent assessment of whether the reported GHG inventory properly reflects the GHG impact of the entity iu conformance with pre-established GHG accounting and reporting standards.

Verified emission reductions (VERs). VERs are created, in the absence of government rules, by project-based activities that are defined by the buyer and seller and verified by a third party.

EMISSIONS TRADING PROGRAMS

Baseline-and-credit program. In a baseline-and-credit program (that is, credit- or project-based trading), each participant is provided a baseline against which its performance is measured. If an action is taken to reduce emissions, the difference between the baseline and the actual emissions, where actual emissions are less than the baseline, can be credited and traded. The baseline established for crediting purposes can be fixed or dynamic, decreasing or increasing over time. The key distinction between a cap-and-trade program and a baseline-and-credit program is that in the former, regulated sources' emissions are required to remain under an emissions cap, which is a fixed quantity. Such a limit is not necessarily imposed in a baseline-and-credit program. The Kyoto Protocol's Clean Development Mechanism (CDM), for example, would operate as a baseline-and-credit program. (1)

Cap-and-trade program. In a cap-and-trade program (that is, allowance-based trading), the maximum level of emissiom that can be released from sources is set by the control authority. This level is the cap. All sources are required to have allowances to emit. The allowances are freely transferable; they can be bought or sold. The control authority issues exactly the number of allowances needed to produce the desired emission level. The largest example of this kind of system, and the most comprehensive trading program to date, is Title IV of the U.S. Clean Air Act Amendments of 1990, under which allowances of SO2 can be traded to comply with an emission cap. (2)

Joint Task Force of the AICPA and ClCA on Sustainability Reporting

Beth A. Schneider, Chair

Ron Bergin

Dennis R. Jennings

Eric Israel

John L. Payne, P.E.

Emil Ragones

Alan Willis

AICPA Staff

Charles S. Landes

Director, Audit

and Attest Standards

Jane M. Mancino

Technical Manager, Audit

and Attest Standards

J. Louis Matherne

Director, Business, Assurance and Advisory Services

CICA Staff

Gregory P. Shields, CA

Director, Assurance Services Development

The Joint Task Force of the AICPA and CICA on Sustainability Reporting gratefully acknowledges the contributions of Michael J. Radcliffe in the development of this SOP.

(1) Adapted from Richard Rosenzweig and Josef Janssen, The Emerging International Greenhouse Gas Market (Arlington, Va.: Pew Center on Global Climate Change, 2002).

(2) See note 10.

Attestation Interpretations

Attestation Interpretations are recommendations on the application of Statements on Standards for Attestation Engagements (SSAEs) in specific circumstances, including engagements for entities in specialized industries, issued under the authority of AICPA senior technical bodies. If the practitioner does not apply the attestation guidance included in an applicable attestation interpretation the practitioner should be prepared to explain how he or she complied with the SSAE provisions addressed by such attestation guidance.

AT SECTION 9101

Attest Engagements: Attest Interpretations of AT Section 101

5. Attest Engagements on Financial Information (15) Included in XBRL Instance Documents

.47 Question--What are XBRL and an XBRL Instance Document?

.48 Interpretation--XBRL, the business reporting aspect of the Extensible Markup Language (XML), is a freely licensable open technology standard, which makes it possible to store and/or transfer data along with the complex hierarchies, data processing rules, and descriptions that enable analysis and distribution. (16) An entity may make its financial information available in the form of an XBRL Imtance Document ("Instance Document"). An Instance Document is essentially a machine-readable format of financial information (that is, a computer can read the data, search for information, or perform calculations). Through the XBRL tagging process, a mapping of the financial information is created that enables a user to extract specific information, facilitating analysis. For example, XBRL would enable a user to use a software tool to automatically extract certain financial line items and automatically import those amounts into a worksheet calculating financial ratios.

.49 The Instance Document consists of various data points and their corresponding XBRL tags (which describe the financial information) and may include references to other items such as a PDF (Adobe Acrobat) version of financial information. Hence, an Instance Document is a stand-alone document that may be published using a Web site, e-mail, and other electronic distribution means.

.50 Question--What are the practitioner's considerations when the practitioner has been engaged to examine and report on whether the Instance Document accurately reflects the financial information?

.51 Interpretation--The third general attestation standard states that the practitioner shall perform the engagement only if he or she has reason to believe that the subject matter is capable of evaluation against criteria that are suitable and available to users. Two related criteria, XBRL taxonomies and XBRL International Technical Specifications, meet the available and suitable attributes under the attestation standards because a panel of experts developed the criteria and followed due process procedures that included exposure of the proposed criteria for public comment. The entity has the ability to extend the XBRL taxonomy by creating its own entity extension taxonomy. The entity may also create one or more custom entity taxonomies (for example, for a unique industry that is not yet represented by an XBRL taxonomy). Since neither the XBRL entity extension nor the custom taxonomy typically undergoes due process procedures when developed, the practitioner should evaluate whether the XBRL entity extension or custom taxonomy represents suitable and available criteria as described in paragraphs 24 through 34 of AT section 101.

.52 The practioner should perform procedures he or she believes are necessary to obtain sufficient evidential matter to form an opinion. Example procedures the practitioner should consider performing include:

* Compare the rendered (17) Instance Document to the financial information.

* Trace and agree the Instance Document's tagged infomartion to the financial information.

* Test that the financial information is appropriately tagged and included in the Instance Document.

* Test for consistency of tagging (for example, an entity may use one taxonomy tag for one year and then switch to a different tag for the same financial information the following year. In this case, the financial information for both years should use the same tag).

* Test that the entity extension or custom taxonomy meet the XBRL. International Techinical Specification (for example, through the use of a validation tool).

.53 When the client is the responsible party, the client will provide the practitioner with a written assertion regarding the subject matter. An example of a written assertion follows:

   We assert that the accompanying XBRL Instance
   Document accurately reflects the data
   presented in the financial statements of XYZ
   Company as of December 31, 20XX, and for
   the year then ended in conformity with [identify
   the criteria--for example, specify XBRL taxonomy,
   such as "XBRL U:S. Consumer and Industrial
   Taxonomy," and where applicable, the company
   extension taxonomy, such as "XYZ Company's
   extension taxonomy" and the XBRL International
   Technical Specifications (specify version)].

.54 The practitioner should identify in his or her report whether the underlying financial information has been audited or reviewed, and should refer to the report of such audit or review. (18) If the underlying information has not been audited or reviewed, the practitioner should disclaim an opinion on the underlying information. Any information in the Instance Document that is not covered by the practitioner's report should clearly be identified as such.

.55 Report Examples

Example 1: Reporting on the Subject Matter

Independent Accountant's Report

We have examined the accompanying XBRL Instance Document of XYZ Company, which reflects the data presented in the financial statements of XYZ Company as of December 31, 20XX, and for the year then ended [optional to include the location of the financial statements, such as "included in the Company's Form 10-K for the year ended December 31, 20XX"]. XYZ Company's management is responsible for the XBRL Instance Document. Our responsibility is to express an opinion based on our examination.

We have also audited, in accordance with auditing standards generally accepted in the United States of America, the financial statements of XYZ Company as of December 31, 20XX, and for the year then ended, and in our report dated [Month] XX, 20XX, we expressed an unqualified opinion on those financial statements. (19) (20)

Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included examining, on a test basis, evidence supporting the XBRL Instance Document and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.

In our opinion, the XBRL instance Document of XYZ Company referred to above accurately reflects, in all material respects, the data presented in the financial statements in conformity with [identify the criteria--for example, specific XBRL taxonomy, such as the "XBRL U.S. Consumer and Industrial Taxonomy," and where applicable, the company extension taxonomy, such as "XYZ Company's extension taxonomy," and the XBRL International Technical Specifications 2.0].

[Signature]

[Date]

Example 2: Reporting on Management's Assertions

Independent Accountant's Report

We have examined management's assertion that [identify the assertion--for example, the accompanying XBRL Instance Document accurately reflects the data presented in the financial statements of XYZ Company as of December 31, 20XX, and for the year then ended in conformity with (identify the criteria--for example, specific XBRL taxonomy, such as the "XBRL U.S. Consumer and Industrial Taxonomy," and where applicable, the company extension taxonomy, such "XYZ Company's extension taxonomy," and the XBRL International Technical Specifications 2.0)]. XYZ Company's management is responsible for the assertion. Our responsibility is to express an opinion on the assertion based on our examination.

We have also audited, in accordance with auditing standards generally accepted in the United States of America, the financial statements of XYZ Company as of December 31, 20XX, and for the year then ended, and in our report dated [Month] XX, 20XX, we expressed an unqualified opinion on those financial statements.

Our examination was conducted in accordance with attestation standards established by the American Institute of Certified Public Accountants and, accordingly, included examining, on a test basis, evidence supporting the XBRL Instance Document and performing such other procedures as we considered necessary in the circumstances. We believe that our examination provides a reasonable basis for our opinion.

In our opinion, managemeut's assertion referred to above is fairly stated, in all material respects, in conformity with [identify the criteria--for example, specific XBRL taxonomy, such as the XBRL U.S. Consumer and Industrial Taxonomy," and where applicable, the company extension taxonomy, such as "XYZ Company's extension taxonomy," and the XBRL bttemational Tedmical Spedfications 2.0].

[Signature]

[Date]

[Issue Date: September 2003.]

SSARS Interpretations

The staff of the Accounting and Review Services Committee (ARSC) is authorized to issue interpretations to provide timely guidance on the application of pronouncentents of the ARSC. Interpretations are reviewed by members of that committee. An interpretation is not as authoritative as a pronouncement of the ARSC, but members should be aware that they may have to justify a departure from an interpretation if the quality of their work is questioned.

The text of this revised interpretation has been marked to show changes from the existing text. New language is shown in boldface italics; deleted language is shown by strikethrough.

AR SECTION 9100

Interpretations of AR Section 100, "Compilation and Review of Financial Statements"

8. Reports on Specified Elements, Accounts, or Items of a Financial Statement--Revised

.27 Question--Paragraph 45 of SSARS No. 1 [section 100.45] provides guidance when the basic financial statements are accompanied by information presented for supplementary analysis purposes. However, a nonpublic entity may wish to engage an accountant to issue a review or compilation report on a separate presentation of specified elements, accounts, or items of a financial statement or to report the results of applying agreed-upon procedures to specified elements, accounts, or items of a financial statement. Do SSARS apply in such circumstances?

.28 Interpretation--No. SSARS provides guidance concerning the standards and procedures applicable to compilations and reviews of financial statements. Presentations of specified elements, accounts, or items of a financial statement are not financial statements.

Although SSARS do not apply, an accountant who assists his or her client in preparing such a presentation should comply with the principles of professional conduct, General Standards [ET section 201]. If the practitioner is concerned that his or her name may be associated with such presentation, the practitioner may issue a disclaimer similar to the wording in paragraph 100.03 indicating that such presentation has not been audited, reviewed, or compiled by the practitioner and, accordingly, no opinion or any other form of assurance is being expressed.

In addition, Statement on Auditing Standards (SAS) No. 62, Special Reports. [AU section 623] and Interpretations thereof provide guidance with respect to reporting on such presentations when the engagement is intended to result in the expression of an audit opinion. SSAE No. 10, Attestation Standards: Revision and Recodification chapter 2, Agreed-Upon Procedures Engagement [AT section 201], provides guidance with respect to reporting on the results of applying agreed-upon procedures to specified elements, accounts, or items of a financial statement. SSAE No. 10, chapter 1, Attest Engagements [AT section 101] provides guidance with respect to reporting on such presentations when the accountant is engaged to express moderate assurance in a review report.

[Issue Date: November 1981; Revised: January 2001; Revised: November 2002; Revised: September 2003.]

24. Reference to the Country of Origin in a Review or Compilation Report

.93 Question--When issuing a review or compilation report, should there be a reference to the country of origin of the accounting principles used to prepare the financial statements, similar to the requirement when issuing audited financial statement?

.94 Interpretation--SSARS do not require the reference to the country of origin as review and compilation reports refer to the American Institute of Certified Public Accountants. However, there is no prohibition of the reference if the accountant believes it is appropriate under the circumstances to include it in the report.

25. Omission of the Display of Comprehensive Income in a Compilation

.95 Question--When an element of comprehensive income is present, can the display of comprehensive income be omitted when issuing a compilation report with substantially all disclosures omitted?

.96 Interpretation Yes. FASB Statement No. 130, Reporting Comprehensive Income, requires the display of comprehensive income when a full set of financial statements is presented in conformity with generally accepted accounting principles. However, the display of comprehensive income may be omitted by identifying the omission in the compilation report or engagement letter (SSARS No. 8, Amendment to Statement on Standards for Accounting and Review Services No. 1, Compilation and Review of Financial Statements). The following is suggested modified wording (shown in italic) to the standard compilation report found in AR section 100.18:

   Management has elected to omit substantially
   all the disclosures, the statement of cash
   flows, and the display of comprehensive income
   required by generally accepted accounting
   principles. If the omitted disclosures, the
   statement of cash flows, and the display of comprehensive
   income were included in the financial
   statements, they might influence the
   user's conclusions about the company's financial
   position, results of operations, and cash
   flows. Accordingly, these financial statements
   are not designed for those who are not informed
   about such matters.

.97 In addition, if the accountant issues a compilation report on financial statements that omit substantially all disclosures and the display of comprehensive income but include the statement of cash flows, the following is suggested modified wording (shown in italic) to the compilation report found in AR section 100.18:

   Management has elected to omit substantially
   all the disclosures and the display of comprehensive
   income required by generally accepted accounting
   principles. If the omitted disclosures
   and the display of comprehensive income were included
   in the financial statements, they might
   influence the user's conclusions about the
   company's financial position, results of operations,
   and cash flows. Accordingly, these financial
   statements are not designed for those
   who are not informed about such matters.

.98 If the accountant compiles financial statements that include all disclosures but omit the display of comprehensive income, the omission should be treated is a departure from generally accepted accountng principles.

.99 Additionally, if an element of comprehensive income has not been computed, for example, unrealized gains and losses arising from investments in marketable securities classified as "available for sale" then the accountant should consider a departure from generally accepted accounting principles and follow the guidance in AR sections 100.41-.43.

(15) Financial information includes data presented in audited or reviewed financial statements or other financial information (for example, Management Discussion and Analysis).

(16) The XBRL tags, and their relationship to other XBRL tags, are represented in a taxonomy. The XBRL taxonomy is needed for a full rendering of the XBRL Instance Document.

(17) A rendered Instance Document converts the machine-readable format to a human readable version through a software tool.

(18) When no audit or review report has been issued, no reference to a report is required.

(19) If the financial statements have been reviewed, the sentence would read: "We have also reviewed, in accordance with [standards established by the American Institute of Certified Public Accountants] [Statements on Standards for Accounting and Review Services issued by the American Institute of Certified Public Accountants], the financial statements of XYZ Company as of March 31, 20XX, and for the three months then ended, the objective of which was the expression of limited assurance on such financial statements, and issued our report thereon dated [Monthl XX, 20XX, [describe any modifications of such report]." If the financial information has not been audited or reviewed, no reference to a report is required. The sentence would read: "We were not engaged to and did not conduct an audit or review of the [identify information], the objectives of which would have been the expression of an opinion or limited assurance on such [identify information]. Accordingly, we do not express an opinion or any other assurance on [it] [them]."

(20) If the audit opinion on the related financial statements is other than unqualified, the practitioner should disclose that fact, and any substantive reasons therefore.