JORIND 9(2) December, ISSN

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1 IMPACT OF SOCIAL AUDITING ON CORPORATE GOVERNANCE, CORPORATE CREDIBILITY AND TRANSPARENCY J.U.B. Azubike (Ph.D, MNIM, FCA) Chief Lecturer in Accounting Abia State Polytechnic, Aba, Abia State, Nigeria. GSM: Abstract Social auditing process is intended as a means for social engagement, transparency and communication of information leading to greater accountability of decision-makers, managers and officials. The underlying ideas are directly linked to the concepts of corporate governance, democracy and participation. The study has observed that social accounts that have been audited by an independent social audit panel will have credible information and will constitute a means of demonstrating not only what the organization has done, but how it intends to improve. The paper has provided a link among social auditing, corporate governance, corporate credibility and transparency, which are necessary for economic development. It has recommended regular social audit exercises. Keywords: accounts. Social audits, corporate governance, corporate credibility, corporate transparency, social Introduction Governments and private organizations are facing an ever-growing demand to be more accountable and socially responsible and the people are becoming more assertive about their rights to be informed and to influence decision making processes of governments and organizations. Faced with these vociferous demands, governments and organizations are looking for new ways to evaluate their performances. Civil society organizations are also undertaking social audits to monitor and verify the social performance claims of the organizations and institutions. Social impact can be assessed in different ways such as social auditing, social accounting or measuring intellectual capital. There are a range of potential benefits in such an assessment including: providing a vehicle for external communication, improving management and internal communication structures and redefining the social objectives of the enterprise. According to Jusatd (2007), social accounting assesses value- formoney. A feature of social accounting is transparency all dealings are exposed to interested parties that could include members of the enterprise, its beneficiaries and its founders. Social audit process is intended as a means for social engagement, transparency and communication of information, leading to greater accountability of decision-makers, representatives, managers and officials. The underlying ideas are directly linked to concept of democracy and participation. Thomas (2007) concludes that the application of social audit at the village level holds tremendous potential for contributing to good local governance and increased transparency and accountability. However, this study us aimed at addressing the following: to ascertain the impact of social auditing on corporate governance, corporate credibility and transparency. Importance of social auditing Social auditing is a process that enables an organization to assess and demonstrate its social, economic, and environmental benefits and limitations. It is a way of measuring the extent to which an organization lives up to the shared values and objectives it has committed itself to (Justad: 2007). Social auditing provides an assessment of the impact of an organization s non-financial 257

2 objectives through systematically and regularly V. monitoring its performance and the views of its raise awareness about the effectiveness and usefulness of services to the community, and shareholders. VI. motivate a period of reflection on important issues such as commitment to improvement in quality of service or product, the relationship with stakeholders and beneficiaries, safety in the work place and of respect for the environment. Speckley (1997) defines social audit as a method for organizations to plan, manage and measure non-financial activities and to monitor both the internal and external consequences of the organization s social and commercial operations. Jones et al (2000:164) see social audit as a tool that allows managers to analyze the profitability and social returns of social responsible action. Weihrich Koontz (2003) see social audit as a commitment to systematic assessment of and reporting on some meaningful, definable domain of the company s activities that have social impact. Social auditing is an instrument for social accountability for an organization. In other words, social audit is an indepth security and analysis of the working of any public utility vis-à-vis its social relevance. Social auditing enables organizations and agencies to assess and demonstrate their social, community and environmental benefits and limitations. According to New-Economics Foundation NEF (2004), before a social audit can take place, one has to be clear about the following issues: Objectives: What the organization is trying to do as an organization, both internally and externally. Action Plan: How the organization is trying to do it. Indicators: How the organization will measure and record the extend to which it is doing it. Corporate governance and corporate credibility Corporate governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. It includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. Corporate governance is an integral system encompassing policies, processes and people, which serves the needs of shareholders and other stakeholders. The Organization of Economic Co-operation and Development OECD (2004:2) states as follows: The corporate governance framework should recognize the rights of stakeholders established by law or through mutual agreements and encourage active co-operation between corporations and stakeholders in creating wealth, jobs and the sustainability of financially sound enterprises. According to OECD (2004), the rights of stakeholders in corporate governance include: I. the rights of stakeholders that are established by law or through mutual agreements are to be respected, Social auditing requires the involvement II. of stakeholders. This may include employees, clients, where stakeholders interest are protected by law, stakeholders should have the opportunity to obtain volunteers, founders, contractors and local effective redress for violation of their rights. residents interested in the organization. Justad III. performance enhancing mechanism for employee (2007) submits that the assessment of social impact participation should be permitted to develop. could result in the following advantages: IV. where stakeholders participate in the corporate I. Increase understanding by the community of the role and purpose of the enterprise. governance process, they should have access to relevant, sufficient and reliable information on a II. Act as an instrument to provide obvious and less timely and regular basis. obvious achievements, V. stakeholders including individual employees and III. demonstrate how added value is provided for the community, IV. increase democracy and transparency, their representative bodies should be able to freely communicate their concerns about illegal or unethical practices to the board and their rights should not be compromised for doing this, and 258

3 VI. the corporate governance framework should be completed by an effective, efficient insolvency framework and by effective enforcement of creditor rights. The OECD principles suggest that the implementation of its principles cannot be prescriptive and that government policy makers must develop them in a way that reflects their own economic, social, legal and cultural circumstances. Richards (2007) opines that a Chief Executive Officer (CEO) of a corporation is paid to enhance the interests of the owners of that corporation, not society or community at large. There will always be tension in achieving the balance between investing the company s resources in a profit mode against a wide context, having a published code of corporate governance that defines the company s responsibilities in that way helps support the manager who takes that particular standpoint. Richards (2007) subscribes to the view that a responsible company and therefore its CEO should balance the immediate short term interest of its shareholders with the wider interests of its community or stakeholders at large. He suggests that companies operating in a developing economy should give greater weight to their responsibility towards, for example, the welfare of employees and their families, the communities surrounding their businesses, suppliers, creditors, local content providers and environmental protectors. Richards (2007) reports the outcome of a recent research undertaken by the USA management consultant Mckinsey, that 80% of investors stated that they would pay a premium for stocks in well governed companies, Sanusi (2003) while quoting Wolfensohn former President of the World Bank concludes, interalia, that the governance of companies is more important for world economic growth than the government of countries. Cultural, political and economic norms influence the way in which a society approaches corporate governance and its impact on board leadership, management oversight and accountability to shareholders and other stakeholders. Sanusi former Governor of Central Bank of Nigeria (2002) cautions that there is no single factor that contributes to institutional problems than the lack of effective governance. The issue of good governance is, therefore, an imperative for ensuring successful government performance. Building good corporate governance is a shared responsibility among all stakeholders, each of whom may exert pressure to move an institution in a slightly different direction. Sanusi (2003) further observes that in any establishment, good governance starts with its owners, then it extends down the board and management to the employees. No matter what the ownership is, there is need for transparency and accountability in its relationship with other stakeholders. In this context, all rules that define the governance responsibilities, incentives and sanctions facing the board, management and staff must be well articulated. The first major step in creating good governance is for all players to mutually agree on the common corporate goals, which must be specific, explicit and consistent. In the process, there will be tradeoffs and deliberate balancing of various stakeholders are explicitly defined, there should be an incentive structure and sanctions which must be effectively monitored and enforced. Nigeria has adopted its own code of governance in a narrow sense that defines corporate governance as it relates to shareholders or corporations rather than as it pertains to wide stakeholders or the society at large. Along with corporate social responsibility and corporate credibility, corporate governance provides the foundations of market integrity and, thus, imposes a lot of responsibility on the Board of Directors that involves striking a deliberate balance between the various stakeholders (Sanusi: 2003). Balancing stakeholders interests and embracing good corporate governance, corporate transparency and corporate social sustainability practices are the prerequisites for attracting economic growth. Impact of social auditing on corporate governance, corporate credibility and sustainability. 259

4 Social auditing responds to changes in the social Informs the social community, public bodies, economy such as non-profits and co-operatives. If done well and with integrity, social auditing can shareholders and clients of how resources are utilized, and reduce levels of risks in organizations Justad Used as a marketing tool to assist in winning future (2007) observes that social auditing has ways of contracts and new clients. promoting and demonstrating accountability and transparency, but also has positive consequences. For all organizations doing social auditing, it is important to report on outputs : to document what Jusatd (2007) concludes that social impact c an be assessed through social auditing with the benefit of providing external communication, improving organization is actually doing and how. In other management and internal communication words, the effects of outputs should be identified and whether the organizations claim to be structures as well as increasing democracy and transparency. accomplishing what is intended. Conclusion and recommendations Social auditing allows an organization to build on existing documentation and reporting and develop a process whereby it can account for its social performance, and through which it can understand its impact on the community and be accountable to its key stakeholders. The essence of social accounting is, therefore, to account for what an organization does and listening to what others say so that future performance can be more effectively targeted at achieving the chosen objectives. Keeping social accounts gives quantitative and qualitative information that tells about the performance of an organization and what people think about it (Azubike: 2009). Social auditing enables an organization to assess and demonstrate its social, economic, and environmental benefits and limitations. It is a way of measuring the extent to which an organization lives up to the shared values and objectives it has committed itself to. Along with corporate social responsibility and corporate credibility, corporate governance provides the foundations of market integrity and, thus, imposes a lot of responsibility on the Board of Directors of an organization. Social auditing promotes and demonstrates accountability, transparency and has other positive advantages. Social accounts that have been audited by an independent social audit panel have credibility information for such audited accounts is a powerful means of demonstrating not only what the organization has done, but how it intends to improve. Publishing social accounts allows those people who benefit from what organization does, those who do the work, those who pay for it, and those who work in partnership with the company, to understand the true nature of the added value the organization achieves (Jusatd:2007). Social audit fulfils all the following aims simultaneously: Monitor the social and ethical impact and performance of the organization Provide a basis for future action plans and management strategies, Since social auditing increases an organization s willingness to implement good corporate governance and transparency, it is recommended that organizations should carry out social audits at regularly intervals. It is further recommended that social audits should be carried out with the involvement of stakeholders that may include employees, clients, volunteers, contractors and local residents. References Azubike, J.U.B. (2009), Evaluating Corporate Social Responsibility Accounting, Reporting and Auditing in Nigeria: an Empirical Study of the Relevance of Social Audit Models, Ph.D Thesis submitted to Ebonyi State University, Abakaliki 260

5 Central Bank of Nigeria (2006), Code of Corporate Governance for Banks in Nigeria: Post Consolidation, Abuja: CBN. Centre for Good Governance (2005), Social Audit: a Tool for Performance Improvement and Outcome Measurement, London: Hyderaabad. Coleman, J. (1990), Foundations of Social Theory, Cambridge: Harvard University Press. Jones, G. R. et al (2000), Contemporary Management, 2 nd edition, Boston: McGraw Hill P Jusatd T. (2003), Social Standards and Social Auditing (online: Organization of Economic Co-operation and Development OECD (2004), Principles of Corporate Governance, Paris: OECD Journal. Richards, K. (2007) Corporate Social Responsibility in the 21 st Century Nigeria: Business and Governance, Businessday, Lagos: 23 May, 2007 Sanusi, J. O. (2002), Promoting Good Corporate Governance: Issues and Challenges, Abuja The Punch, June 2002 P. 14. Sanusi J. O. (2003), Embracing Good Corporate Governance Practices in Nigeria, Abuja: Financial Institutions Training Centre. Speckley, F. (2000), Social Audit Toolkit, London: Social Enterprise Partnership Local Livelihoods. The New Economics Foundation (2000), Online: http// Thomas K. (2007), Social Audit (online: Weihrich, H and Koontz, H (2003), Management: a Global Perspective, 10 th ed. New Delhi: McGrawHill Publishing. 261