“Sustainability reporting assessment for quality and compliance: the case of Ukrainian banks’ management reports”

Management report is a new form of sustainability reporting (SR) in Ukraine, and its assessment for quality of environmental, social and governance (ESG) criteria disclosure and compliance among banks plays a crucial role for auditors in the verification process. The Quality and Compliance Bank Management Reports (Q&C BMR) Index methodology was developed for this purpose. The methodology includes a range of formal, content, assurance and disclosure scorings. According to the results of a con-tinuous assessment of these management reports of 75 state, private and foreign-owned banks in Ukraine for the 2018 fiscal year, the average Q&C BMR Index is 61.2%. This indicates a fairly high level of quality and compliance with regulatory requirements for disclosure by banks of Ukraine in their SR. Differentiation of the studied population of banks in terms of Q&C BMR Index allowed distinguishing the following rating groups: А – leaders, B – pursuers, C – starters, and D – outsiders. There is a clear trend in the relationship between the ownership of a bank and its Q&C BMR index. Despite the rather high average value of the index, there is an opportunity to improve Ukrainian banks’ SR in the context of its further standardization and disclosure of the full set of ESGs – a criterion for all rating groups (especially C and D). Q&C BMR Index can be used as a benchmark by banks, regulators and auditors when comparing the level of disclosure by banks and their transparency.


INTRODUCTION
Banks' sustainability reporting (SR) is not only an image and an authoritative determinant for promoting banking services or ensuring regulatory transparency requirements for the banking business. The importance of quality and compliance of such reporting with regulatory requirements has grown due to the fact that banks provide financial services to consumers and create stability in the financial markets. In addition, their resources can be mobilized to finance sustainable development initiatives. Therefore, the SR disclosure by banks in social, environmental and governance (ESG) criteria has a significant social effect.
For a long time, corporate social responsibility (CSR) initiatives, sustainable development and the achievement of its goals (SDGs), as well as the disclosure under the ESG criteria by Ukrainian banks were quite discrete and fragmented. PUMB, Platinum Bank, Ukrsotsbank, Ukrgasbank and some others, published their SR. This undoubtedly proves that CSR banking projects were not disclosed at a high level. Improving banks' financial efficiency or developing a CSR mechanism are important in this context, but the assessment of banks' SR as a basis for determining the quality and compliance of such disclosures will allow the introduction of a new approach to CSR in the banking sector. Implementation of management reports by Ukrainian banks is a response to the reform of the national accounting and auditing system in the light of Ukraine's European integration and the fulfilment of the Directive 2013/34/EU of the European Parliament and the Council on the annual financial statements, consolidated financial statements and related reports for certain types of undertakings as of June 26, 2013. Directive 2014/95/EU amends Directive 2013/34/EU on the disclosure of non-financial and diversity information by some large undertakings and groups as of October 22, 2014(European Union Law, 2013, 2014.
In accordance with the requirements of Directives 2013/34/EU and 2014/95/EU, a management report, along with non-financial, corporate governance and state payments reports, is a form of banks' SR as public interests and reporting entities.
In Ukraine, the valuation of non-financial disclosure in the banks' SR became possible due to the use of a management report (consolidated management report) after the acceptance of amendments to the Law of Ukraine On Accounting and Financial Reporting in Ukraine dated July 16, 1999  This fact complicates the assessment of the sustainability disclosure by Ukrainian banks and requires verification of compliance of their management reports with several regulatory requirements. The assessment of the Ukrainian banks' SR is also vital due to the change in the report form of independent auditors, who audit bank reports.
The remainder of the paper is structured as follows. Section 1 provides an overview of the literature and the regulatory framework regarding management reports of banks. Section 2 provides the characteristics of data used and the research methodology design. Section 3 describes results obtained, while the last section contains some concluding remarks.

General and bank-specific
approaches to assessing sustainability reporting The assessment of SR in different companies is widespread in the academia, despite a relatively short history (mainly during last decade). The main reason for this is the regulatory framework and the development of a list of SR indicators. Scientific works in the studied area will be examined within two issues: by country and by the specifics of assessing banks' SR. Besides, there are two areas in which attempts are made to assess the quality of sustainability reporting: 1) a cross-country analysis: • SR practice of different countries all over the world; • SR in EU member countries; and 2) a single-country analysis. According to the analysis performed, the assessment of SR is country-specific. Moreover, the specifics of the banking sector impose an assessment of the formation of indicators of quality, credibility or compliance of these statements with certain in-ternational or national rules. The aforementioned determines the importance of research and the assessment of sustainability reporting of Ukrainian banks.
The previous study (Sukhonos & Makarenko, 2017) contains the results of determining legal issues and assessing the sustainability and CSR of Ukrainian companies. This study is a continuation of the previous one regarding the SR and disclosure with ESG, criteria for Ukrainian banks, and corresponds to the analyzed papers on the SR assessment.
The purpose of this study is to assess the disclosure quality of bank management reports as SR according to ESG criteria and their compliance with European and national requirements.

Management report as a form of sustainability reporting of a bank: review of the regulatory framework
The preparation and submission of management reports by Ukrainian banks, as well as their verification, correspond to a significant and rather inconsistent regulatory framework (see Table 1). The reason for this discrepancy is the transitional period of the development of the accounting, reporting and audit system in Ukraine. They continue to implement European requirements to put into effect the sustainable development concept.
In particular, Ukrainian legislation on making the SR and audit by banks takes into account the requirements of the The most comprehensive and detailed are the last guidelines due to their content and the procedure for publishing management reports by banks. According to their requirements, banks submit reports at the request of the NBU. In accordance with the requirements of the NSSMC, they prepare at the same time a management report as issuers of securities and, in accordance with the requirements of the Ministry of Finance, as reporting entities in Ukraine.

DATA AND METHODOLOGY
For the study, 75 management reports of Ukrainian banks were analyzed. A period is the financial year 2018. All these reports were evaluated in terms of the quality of disclosure of information on sustainable development and compliance with regulatory requirements. To search for information, two sources were used.
First, corporate websites of Ukrainian banks, where they are required to publish management reports, and auditor confirmation. However, it should be noted that when collecting reports, it was necessary to study in detail the structure of banks' websites, since not all of them published management reports separately. Most of them were part of the banks' annual reports or financial statements. The situation is similar with the reports of independent auditors, which are usually published together with the annual financial statements. As a result, 75 additional sets of bank financial statements and 75 reports of independent auditors were analyzed.
The second source is the publicly available NSSMC disclosure base (stockmarket.qov.ua) for securities issuers, where 75 sets of annual regular information of banks as issuers of securities were checked, as well as its section Corporate Governance Report and Audit Report was explored to verify the NSSMC requirements.
The study was conducted extensively. Banks were divided into the following groups: publicly-owned banks (5), banks of foreign banking groups (20), and private equity banks (50).
The following four groups of criteria were the base for calculating the index according to assessment types (see Table 2): 1. format and submission of a management report; 2. compliance with regulatory requirements; 3. disclosure according to ESG criteria; 4. certification of a management report by audit.
Management reports were assessed using a binary content analysis system. Content analysis is widely used in academia for reporting analyses and identifying or quantifying the presence or absence of data searched ( Internal verification of scoring results was carried out simultaneously by two authors of this article. Such an approach helped to avoid inconsistencies. The information provided by independent auditors regarding the verification of Ukrainian banks' management reports was used as an additional external verification criteria for the obtained results. This indicates independent opinion of auditors on the quality and compliance of these reports.
The developed bank SR assessment algorithm based on the Q&C BMR Index includes a method for normalizing the values of the management report verification parameters within certain limits.
Firstly, it is necessary to find the number of assess-ment criteria among the index components, the number of verified (confirmed) criteria, and put the maximum value of the assessment. Suppose that the maximum score of the index will be between 0 and 100. Then the algorithm by the normalization method can be represented as follows: where y is the calculable value (quality index and compliance of the bank's disclosure), x is the num-ber of verified bank criteria, max is the maximum number of analysis criteria, and min is the minimum number of the analysis criteria.
It is suggested to explain the obtained index scores on a 100-scale assessment and with the alphabetic rating system, where x -interval, n -number of scores, and 100 -the maximum score of the rating system (n⋅x = 100).
It is supposed that the minimum score of a bank is E, then the maximum is A. As a result, there are five sets of scores with certain intervals between them. The index score limits with the alphabetic assessment scale (for the convenience of grouping banks) are represented below: .  A step-by-step implementation of the algorithm is presented as a Report Assessment, which allows automatically determining the bank index and its rating for auditors during the verification.
Based on the algorithm, Privatbank is assessed. Accordingly, out of 14 general assessment criteria, 10 were verified, and the value was placed in formula (2): Q&C BMR Privatbank 11 0 100 78.57. 14 0 According to these intervals, Privatbank has an index score of Group B. A similar assessment procedure was implemented using the Report Assessment program for all 75 banks.

RESULTS
The results of the SR assessment of 75 Ukrainian banks for 2018 are very impressive (see Table  A1, Appendix A). The average value of the Q&C BMR Index for the banking system of Ukraine is 61.2%. This shows a rather high level of quality and compliance with the regulatory requirements of SR disclosure by Ukrainian banks. In addition, this indicates compliance of the conditions of such disclosure with the analyzed criteria: 1) format and submission of reports (formal criteria); 2) compliance with regulatory requirements (compliance criteria); 3) content criteria (disclosure according to ESG criteria -criteria of social and environmental aspects of bank activity, and, for banks with more than 500 employees, disclosure of corruption and human rights policies); 4) certification of a management report by audit (verification criteria). They allow differentiating 75 banks into four main groups according to the value of the Q&C BMR index (Table 3).
According to the commonly accepted system of calculated index values, rating group A is the "leaders". It includes banks with the highest index values. Group D contains the "outsider banks" with the lowest value. Rating group B stands for "followers" and C stands for "starters", with intermediate index values. It should be noted that none of the banks fell into the rating group E (which is provided by index values between 0 and 20) in terms of the quality and compliance condition when compiling such a form of SSR as a management report. This fact confirms a rather high level of SR disclosure by Ukrainian banks.
At the same time, the division of banks into four selected groups is not equable. The highest fre-   Table 4 presents the analysis of the Q&C BMR index and the position of a bank in a particular group according to the ownership type.

Score range Banks
A clear trend is found in the relationship between the ownership of a bank and the value of its Q&C BMR index.

DISCUSSION
The leading banks of rating group A are mostly publicly-owned or are part of foreign banking groups compared to banks with private equity. It should be noted that Ukrgasbank was the first publicly-owned bank to publish a full sustainability report in addition to the minimum requirements for preparing and submitting a management report in 2018. Banks with foreign capital, as a rule, form the CSR system, include SDGs in their activities, and disclose information in accordance with ESG criteria following the traditions and policies adopted in the parent structures.
Group B -followers -has a similar number of publicly-owned banks and banks with foreign capital. However, the number of Ukrainian private equity banks increases to 12. There is a fundamental difference between this group and the leaders in terms of quality and compliance. Despite the same level of meeting the formal, compliance and verification criteria, the compliance with content criteria is different. In particular, Group A banks disclose not only ESG criteria in their corporate governance reports, but also anti-corruption and human rights policies. Banks of Group B mainly focus on the social aspects of CSR, with minimal disclosure of environmental criteria. Anticorruption policies (even at a bank with more than 500 employees) are covered by only five banks, and human rights policies are covered by three banks. Bollas-Araya and Seguí-Mas (2014) also conclude that social aspects prevail in banks' disclosures.
Banks from groups C and D follow minimal formal, compliance and verification criteria. Social and environmental non-financial criteria are rarely disclosed. This group consists mostly of banks with private equity (54%).  all rating groups mostly comply with the regulators' requirements), data visualization in management reports is provided by only 32 banks out of 75 (42.3%). Meanwhile, the effective presentation of indicators in management reports is made by 12 out of the 13 banks of Group A. This is in line of the best international practice of SR submission.
The presence of the verification criteria shows that auditors from large audit networks verified banks' reports. It is an SR characteristic that indicates the banks-leaders.10 of the 13 management reports of these banks were audited by Big Four companies. In addition, auditors gave an opinion with a notice for some banks. This applies to 72.0 % of banks of groups C and D. There are some modifications in their reports of independent auditors. This fact may indicate the impact of the overall quality of banks' reporting on the quality and compliance of their SR.

CONCLUSION
The developed Q&C BMR Index can be used as a benchmark for comparing the disclosure level of banks and their transparency in general and in relation to ESG criteria in particular. The use of this index is practically significant for auditors and regulatory bodies in assessing banks' SR in order to increase the transparency level of banks and the further development of SR and its standardization.
There is a clear tendency in the correlation between the ownership of a bank and the value of its Q&C BMR index. Therefore, publicly-owned banks and banks with foreign capital should mainly be in higher-rating groups A and B, while banks with private capital in groups C and D.
In addition to the minimum compliance, verification and formal criteria, banks from high-rating groups are characterized by high-quality visualization of indicators in their management reports, verification of management reports by the Big Four companies and no modifications in the audit opinion (certification of a management report by audit).
For any bank, positioning in the index gives an idea of its compliance with the requirements for disclosing information on sustainable development and comparing itself with competing banks.
For regulatory authorities, regular reviews of bank reports provide an analytical basis for determining the level of compliance with regulatory requirements on the sustainable development disclosure. Besides, this makes it possible to ensure the transparency of the banking system, considering the progress of banks in corporate social responsibility and sustainable development goals.
Another area in which these requirements can be implemented is the use of the Reports Assessment program developed as part of the study, to automatically verify and evaluate the bank management reports for audit companies. Using the proposed approach allows you to increase the validity of an auditor's opinion for the tasks of checking management reports of banks.
The study allows you to demonstrate the limitations of national approaches to disclosure of management reports of Ukrainian banks. Its results are the basis for the development of measures to further improve management reports of banks, as well as SR of financial institutions, and their standardization in Ukraine. Current trends in increasing their transparency in the EU and the world are taken into account.
Future investigations aim to expand the time horizon of research. That is, an assessment of bank management reports in Ukraine for 2019 will be available from April 30, 2020 (or from a date that depends on quarantine restrictions). Moreover, it will be interesting to compare the quality and compliance of SR of banks from other countries, including Europe and Ukraine.