The new weak point in corporate accountability

Compliance teams are rapidly building ESG disclosure programs to meet new rules. Internal auditors, however, are often constrained by legacy financial assurance methods that cannot fully verify nonfinancial data. The result is a credibility divide. ESG reports may appear compliant with frameworks and deadlines but lack verifiable assurance or evidence-based validation. As regulators, investors, and consumers demand greater transparency, this disconnect between compliance and audit has become one of the most critical governance challenges of the decade.

Two Functions, Two Logics

Compliance and audit share the goal of protecting corporate integrity, but they operate on fundamentally different logics.

Compliance is rule-based and forward-looking. It interprets regulations, manages disclosures, and ensures adherence to frameworks such as the EU Corporate Sustainability Reporting Directive (CSRD) and the Global Reporting Initiative (GRI). Compliance ensures the right boxes are checked and the company meets external expectations.

Audit is evidence-based and retrospective. It validates the accuracy and effectiveness of internal controls, traditionally for quantifiable financial data. Auditors test evidence, not intent.

ESG reporting, however, introduces new variables, qualitative and forward-looking data such as emissions targets, human rights metrics, and board diversity ratios. These metrics resist conventional financial assurance. A compliance team may assert that disclosures align with reporting standards, yet an audit may lack the proof to confirm their reliability. That gap between “aligned” and “assured” is the compliance audit gap.

Why the Gap Persists - Fragmented Standards

The ESG reporting ecosystem remains fractured. Companies navigate multiple frameworks like the International Sustainability Standards Board (ISSB), Sustainability Accounting Standards Board (SASB), Task Force on Climate-related Disclosures (TCFD), the Global Reporting Initiative (GRI), and Carbon Disclosure Project (CDP). Compliance teams often select the one most convenient or widely accepted by their stakeholders. Auditors, however, must apply consistent assurance standards across all reporting, which is difficult when definitions of materiality, metrics, and boundaries differ from one framework to another.

The result is inconsistency. A metric verified under one standard may not meet assurance requirements under another. Without harmonized standards, internal audit teams are left without a clear benchmark to test ESG data integrity.

Weak Data Infrastructure

Financial systems have decades of data governance and control maturity. ESG data, by contrast, is often decentralized, managed through spreadsheets, supplier portals, or unintegrated sustainability platforms. Many companies lack structured validation workflows, audit trails, or control testing around this data. Compliance teams can confirm that ESG metrics are collected, but internal audit may find that there is no reliable evidence chain to verify their accuracy. Weak data infrastructure turns ESG assurance into an exercise in trust rather than verification.

Skills Asymmetry

Compliance officers understand regulations and disclosure obligations. Auditors understand testing, controls, and assurance frameworks. ESG reporting demands both skill sets, yet most organizations separate these competencies. Few audit teams have environmental science, supply chain ethics, or social governance expertise. Conversely, sustainability officers may lack knowledge of audit standards such as the ISAE 3000 (revised) or AICPA AT-C 105, which govern nonfinancial assurance engagements. This skills gap perpetuates siloed ESG oversight and weakens assurance credibility.

Regulation Is Raising the Stakes

The era of voluntary sustainability reporting is ending. The CSRD now mandates sustainability assurance for companies operating in the European Union, with requirements expanding in 2026 and reasonable assurance expected by 2028. The U.S. Securities and Exchange Commission’s climate disclosure rule, promulgated but currently unenforced amid legal challenges, will similarly push companies to treat ESG data as financially material information. Markets in the United Kingdom, Japan, and Singapore are adopting similar requirements. Investors are also pressuring companies to provide audited ESG data that matches the rigor of financial statements.

This regulatory shift effectively transforms internal audit into a sustainability assurance partner. Audit committees must now oversee ESG disclosures, risk management, and control effectiveness with the same intensity applied to financial reporting. Companies that do not modernize their audit and compliance coordination risk reputational and legal exposure.

How Audit Must Evolve

Audit functions must expand beyond their traditional boundaries to remain credible in this new landscape.

1. Expand Scope: Move beyond verifying ESG data accuracy to assessing the design and operation of sustainability control frameworks. Audit should evaluate governance, risk assessment, and data reliability processes tied to ESG reporting.
2. Modernize Methodology: Adopt frameworks such as ISAE 3000 (revised) and the Committee of Sponsoring Organizations of the Treadway Commission (COSO)’s Internal Control over Sustainability Reporting (ICSR). These standards align nonfinancial assurance with established financial control structures.
3. Develop Capability: Upskill auditors in sustainability accounting and data analytics, or co-source external ESG specialists to strengthen assurance quality.

Leading organizations are already embedding ESG audits into their annual plans, conducting “assurance readiness” reviews to identify gaps before regulators or investors do.

How Compliance Can Help Close the Gap

Compliance departments play a pivotal role in making ESG data auditable. That begins with designing processes that are both disclosure-ready and evidence-ready.

• Establish data ownership: Assign responsibility for ESG data generation and validation within each business unit.
• Embed controls: Create standardized internal control procedures for ESG data, modeled after those used in financial reporting.
• Coordinate across functions: Form ESG risk and compliance committees that include sustainability, finance, legal, and audit representatives.

When compliance teams build governance discipline into ESG data collection and management, they lay the foundation for reliable assurance and investor confidence.

The Cultural Divide

The compliance audit gap is not only technical but also cultural. Many organizations still treat ESG as a sustainability or public affairs initiative rather than a governance function. Sustainability teams may focus on storytelling, while audit and compliance emphasize evidence and controls.

Bridging this divide requires embedding ESG within the organization’s enterprise risk management framework. The “three lines” model offers a practical path:

• First line: Business units own the risks and generate the data.
• Second line: Compliance and risk management establish and monitor standards.
• Third line: Audit provides independent assurance.

When all three lines are aligned, ESG data is managed with the same rigor as financial data, and accountability is shared rather than isolated.

A Tale of Two Companies

Two multinational manufacturers faced identical CSRD disclosure mandates.

Company A placed ESG reporting under its sustainability team. Compliance verified alignment with GRI standards, but the internal audit was not involved. When regulators later questioned the company’s emissions data, internal inconsistencies were discovered. The company could not produce an audit trail, resulting in reputational damage.

Company B took a different approach. It integrated ESG into its internal control system. Compliance defined standardized data definitions and governance protocols. Audit tested data collection and validation processes under ISAE 3000. The company’s sustainability report withstood external scrutiny and gained investor confidence.

The distinction between the two companies was not commitment but structure. Company B treated ESG as an assurance process, not a marketing exercise.

Emerging Best Practices

Organizations that are closing the compliance audit gap are adopting several consistent practices:

1. Align Materiality: Map ESG issues to financial materiality, ensuring audit resources focus on the most relevant data.
2. Automate Data Lineage: Implement digital tools that trace ESG data from origin to disclosure, improving transparency and accuracy.
3. Conduct Assurance Simulations: Run internal mock audits to identify gaps before external assurance engagements.
4. Clarify Roles: Define partnership charters between compliance and audit, specifying oversight and escalation protocols.
5. Disclose Assurance Governance: Publish information about internal assurance processes in ESG or sustainability reports to demonstrate accountability.

These actions help create credible, transparent, and auditable sustainability information that meets the growing expectations of regulators and investors alike.

The Cost of Delay

Ignoring the compliance audit gap carries measurable risks. Regulators have begun investigating companies for misleading sustainability claims. Investors increasingly view unaudited ESG data as unreliable, affecting valuation and access to capital. Civil society organizations and media outlets are more vigilant in exposing greenwashing or inconsistencies between public claims and operational practices.

Without audit-grade assurance, ESG disclosures can quickly shift from assets to liabilities. Companies that fail to establish credible ESG governance frameworks risk fines, litigation, and reputational harm that far exceed the cost of proactive assurance integration.

The Path Toward Integrated Assurance

The future of corporate reporting is integrated assurance, an ecosystem where financial and nonfinancial data flow through the same control architecture. In this model, compliance defines regulatory boundaries, audit validates system integrity, and sustainability experts provide subject matter insight.

Technology will accelerate this integration. Artificial intelligence can flag anomalies in ESG data; blockchain solutions can trace supply chain emissions data; and automation can streamline control testing and evidence collection. Yet technology alone is not enough. The foundation remains disciplined governance and collaboration among compliance, audit, and sustainability functions.

When companies treat ESG reporting as an internal control discipline rather than a communications exercise, assurance becomes more than a compliance requirement, it becomes a driver of trust.

From Compliance to Credibility

The compliance audit gap in ESG and financial reporting is more than a technical deficiency. It is a governance challenge that determines whether sustainability reporting will evolve into a reliable pillar of corporate accountability or remain a patchwork of unverified claims.

Compliance ensures disclosures exist. Audit ensures disclosures are true. Both are essential to corporate credibility. Bridging this gap requires unified governance, shared responsibility, and a commitment to assurance standards that match the rigor of financial reporting. Companies that move now to align compliance and audit under a single, integrated assurance framework will not only meet regulatory expectations but also strengthen investor trust and corporate reputation. Those who wait risk finding themselves compliant in form but exposed in fact.