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Sustainability and Social Audit as a measure of Good Corporate Governance

Preface

In today's competitive globalised world, the most commonly disccused terms as a part of viability and credibility of the organisations are sustainability and social responsibility. Improving the  performance and creating a clean image in the eyes of shareholders and various stakeholders are becoming more and more relevant goals among organisations. These increased the scope for a non financial audit which takes into consideration  the relationship of an organisation with the folowing factors that may affect the reputation of the organisation, they are, environment, health and safety standards and society within and outside the organisation.  A social audit  evaluates the impact of organisational decisions on various stakeholders ie, for eg,  whether a board decision affect employee's welfare or shareholders' interests? One of the several examples of areas covered under social audit is Carbon Credit Mechanism and Reporting.  In Social Audits, auditors act on behalf of third parties by ensuring the terms of corporate ethics and social accountability towards them, thereby improving transparency in their relationship with the entity . 

The meaning of two terms are explained as below

Sustainability Audit- A sustainability audit is the process of evaluating the organisational perfomance with respect to various stakeholders whether it meets the expected standards of accountability and transparency towards them.

Social Audit - In case of government departments, Social Audit evaluates  whether the expenditure made by it reap intended benefits. It actually ends up corruption, fruitless expenses and avoid wastage.

Such an audit is the appraisal of an organisation's social commitments and their achievement.

Definitions 

Social Audit and Sustainability are defined as below:

The Business Dictionary defines Social Audit as "The process of evaluating a firm's various operating procedures, code of conduct, and other factors to determine its effect on a society. The goal is to identify what, if any, actions of the firm have impacted the society in some way. A social audit may be initiated by a firm that is seeking to improve its cohesiveness or improve its image within the society. If the results are positive, they may be released to the public. For example, if a factory is believed to have a negative impact, the company may have a social audit conducted to identify actions that actually benefit the society."

The Brundtland Commission Report(Former name -  the World Commission on Environment and Development (WCED)) defines Sustainability  as "meeting the needs of the present without compromising the ability of future generations to meet their own needs."

Why Social Audit has become a necessity?

Social Audit has become a necessity today. Such an audit increases the credibility of an organisation in the eyes of general public. If an organisation goes on with the objective of profit making only, without considering it's side effects on the third parties with which it has commitment, it cannot sustain in the competitive world. Its quality of products and services may be deteriorated. It may pollute the environment. The shareholders may not be benefitted. The customers may not be satisfied. The employees may suffer due to heavy work load and low remuneration. All these evils if go on for long, the organisation will be started to fade away from the industry. This necessitates the organisation to perform not only for itself but also for the stakeholders. Thus, a social audit helps to understand, evaluate and measure the socio economic balance of an organisation by striking a balance between financial and non financial parameters simultaneously. Such a balancing is also termed as sustainable development which has become a critical and crucial organisational goal in the current scenario. 

The Relationship between Sustainability and  Social Responsibility

Although not literally, both terms Sustainability and Social Responsibility technically supplement each other. Social Responsibility is the key factor to achieve Sustainability. It is the sole basis of Corporate Sustainability. An organisation cannot stand as alone in the society without being socially responsible. Corporate Social Responsibility is the way to achieve Sustainable Development. By meeting needs of all stakeholders in society, an organisation achieve an equilibrium state of sustainability . Both Corporate sustainability and Corporate Social Responsibility are used as  tools in attaining good Corporate Governance.

Social Audit Principles

1. Multi Perspective - It takes into consideration of different classes of stakeholders.

2. Comparative - Organisations can compare their performance with external standards and performance of other companies.

3. Comprehensive - Covers all aspects of organisation's performance and operations.

4. Multi Directional - Stareholders give their response on multiple aspects.

5. Regular - Social audits are conducted regularly so that accounts are uptodate.

6. Verification - Accounts are verified by an independent outside professional.

7. Disclosure - Audited accounts are disclosed to various stakeholders.

Areas covered by  Sustainability and Social Audit

Several areas covered by Sustainability and Social Audit include ethical policy compliance, employee welfare, human rights evaluation, customer satisfaction, climate Change and environmental policy compliance, energy consumption,  health and safety standards assurance, supply chain management, assurance to shareholders etc.

Major issues relating to Sustainability

As discussed above, sustainability covers  wide range of areas. Each area has different types of issues. Some commonly found issues are pointed out below.

1. Evironmental Issues include pollution, contamination of food, air and water, global warming,    loss of biodiversity and nature.

2. Energy Issues include fuel emmission, increased price, increasing volatility in oil market, lack of technology for recycling of energy etc.

3. Health and Safety Issues include stress, musculoskeltal, skin disorders, inhalation disorders, lack of safety professional having international competence for supervision and guidance  etc.

4. Employee Issues include low remuneration, lack of efficiency and productivity, lack of employee morale etc.

5. Customer Issues include low satisfaction due to products and services having less quaity.

6. Ethical Issues include biased decisions, going beyond the company policy, copyright infringement, corruption etc.

Sustainability and Social Audit - Benefits and Challenges

The benefits of Sustainability and Social Audit are outlined below:

1. Improves the performance and efficiency of the company.

2. Creates a brand image of the company in the eyes of stakeholders.

3. Increases the credibility and accountability of the company.

4. Reduces cost.

5. Improves production capacity and increases quality of products and services.

6. Helps in long term sustenance of the company in the industry.

7. Reduces wastages.

8. Reduces environmental and social risks and helps to manage risks effectively.

9. Improves the financial performance of the company.

10. It boosts the employee morale, satisfies the customers, creditors and shareholders.

11. Quality Management.

The various challenges in implementing Sustainability and Social Audit in an organisation are outlined below:

1. Undue pressure and influence from management and other executives of organisation.

2. Reduced independence of auditors may affect the issue of an unbiased report.

3. Cost of impementing such an audit and audit recommendations may be high.

4. Lack of idea about the planning, implemetation and pocedure of audit.

5. Auditor may be under pressure so that he has to report to different categories of third parties so that he may have to face troubles.

6. Lack of proper infrastructure and information system in the organisation.

7. Wastage of time.

Steps in Social Audit

1. Planning and Preparation for audit.

- Identify social standards, policies, values and prepare a framework. 

- Allotment of work among audit staff.

- Prepare the budget of the audit.

2.  Determine the Scope of Audit.

- Define the purpose, objectives, risks and programme of audit.

- Set boundaries for audit.

3. Find out the beneficiaries.

- List out the beneficiaries of audit report 

- Meet the beneficiaries and understand their needs.

4.  Checking the Social Accounts.

- Identify the sources of social data

- Fix responsibility to collect data

- Checking the social activities whether objectives are met.

- Identify risks in the genuineness of data.

- Check the monitoring and control of social accounts.

- Check the authenticity, authorization and validity of data.

- Recommend to revise the accounts if needed.

5. Preparation of Audit Report, its presentation and follow up

- Draft the audit report with recommendations for future course of action and its follow up.

- Present the report to various stake holders and society.

- Communicate with the stakeholders about the social performannce of the organisation.

Indian Approach to the Concept of Sustainability and Social Audit

Sustainability is the main goal that most of the Indian companies strive to achieve. India as an investor destination, seeks  Foreign Direct Investment for the growth in almost all sectors, allows global entities to start business here. It increases huge competition in the market. So, the driving force for long term existence in these tough market conditions is huge. Also, with the entry of large number of organisations in the market, the issues relating to compliance of several ethical, environmental, regulatory, health and safety standards are becoming more crucial. Pollution, global warming, corruption, occupational hazards, low quality products and services are examples. Only by  meeting the needs of all sections of society and compliance to ethical, economic and environmental standards, a company can endure in the globalised market.

In India, Tata Iron and Steel Company of Jamshedpur was the first company to implement social audit. It was in 1979. Amendment of the Constitution of Panchayat Raj and decentralisation  increased the scope of social audit. Social audit was also introduced in case of MGNREGA Scheme. (Social Audit Report Format of NREGA can be available at the following link of webpage -http://nrega.nic.in/circular/Social_Audit_format.pdf ). The corruption practices by politicians and government officials in India necessitated the urgency of social audit. This is mainly due to the fact that India is a democratic country and the public money should not go into the pocket of a few vested interested groups. Such an audit ensures that public money goes for public utility itself.

The Comptroller and Auditor General of India, the Supreme Audit Institution in India, undertakes the audit of government entities' funds and expenditure  on behalf of the general public of India. Government has taken necessary initiatives in this area by introducing and promoting Corporate Social Responsibility policy in  the Companies Act, 2013. Also, Government has introduced the term sustainable development as a part of its development activities.

Latest news in respect of Sustainability and Social Audit from India and respective webpages are given below:

'In an initiative to promote transparency in execution of development schemes, the Urban Development Ministry will introduce social audit system for new schemes."

http://economictimes.indiatimes.com/news/politics-and-nation/urban-development-ministry-to-introduce-social-audit-system-for-new-schemes/articleshow/43807262.cms 

"Punjab government will carry out "techno-social audit" of all infrastructure projects in the state to rectify the deficiencies in implementation process and gauge the usefulness of the same.

"The aim of this exercise is to bring more transparency into implementation of infrastructure projects of the state," an official spokesman said here today."

http://economictimes.indiatimes.com/news/economy/infrastructure/punjab-to-initiate-techno-social-audit-of-infrastructure-projects/articleshow/40511275.cms

"The two centrally funded schemes - MGNREGS and Indira Awas Yojna (IAY) - will go in for a social audit every six months in UP.

Agriculture Production Commissioner (APC), UP, Alok Ranjan said that social audit for the two central government schemes will be done regularly from 2014-15."

http://timesofindia.indiatimes.com/city/lucknow/Regular-social-audit-for-central-schemes/articleshow/29913637.cms

Conclusion

Needless to say, the concept of sustainability and social audit has been adopted  by more and more CEOs in the new era. It is an innervoice for change. It is a need of present as well as future. It is a progress oriented challenge that will demolish the long standing barriers between the organisation and the society to which it is a part. It will sharpen the positive outlook of the corporate governance by mitigating the possible side effects to bearable limit and thereby keeping the natural rythm of corporate and social equilibrium. It ensures  the smooth and steady  functioning and growth of the organisation by the best compliance of economical, ethical, environment - friendly, healthy and safety standards.

References

Webpages:

http://unpan1.un.org/intradoc/groups/public/documents/cgg/unpan023752.pdf

http://www.cgg.gov.in/publicationdownloads2a/Social%20Audit%20Toolkit%20Final.pdf

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