The Role of Internal Auditor in Sustainable Development and Social Reporting OVERVIEW What is the Corporate social responsibility? Paper by : Mohammed ALamin Yousuf CIA, CISA Corporate social responsibility (CSR), also known as corporate responsibility, corporate citizenship, responsible business, sustainable responsible business (SRB), or corporate social performance, is a form of corporate self-regulation integrated into a business mode. Ideally, CSR policy would function as a built-in, selfregulating mechanism whereby business would monitor and ensure its adherence to law, ethical standards, and international norms. Business would embrace responsibility for the impact of their activities on the environment, consumers, employees, communities, stakeholders and all other members of the public sphere. Furthermore, business would proactively promote the public interest by encouraging community growth and development, and voluntarily eliminating practices that harm the public sphere, regardless of legality. Essentially, CSR is the deliberate inclusion of public interest into corporate decision-making, and the 1
honoring of a triple bottom line: People, Planet, and Profit. Some other sectors like governments in Europe see CRS as the business contribution to our sustainable development goals. Essentially about how business takes accounts of its economic, social and environmental impacts in the way it operates. The scale and nature of the benefit for an organization can vary depending on the nature of enterprise and are difficult to quantify, by adopting CSR the corporate is not looking for short-term benefits. The definition of CSR used within the organization can vary from strict stakeholder impact, definition used by many CSR advocate and often includes charitable efforts and volunteering. Today, corporate social responsibility goes far beyond the old philanthropy of the past donating money to good causes at the end of the financial year and is instead an all year round responsibility that companies accept for the environment around them, for the best working practices, for their engagement in their local communities and for their recognition that brand names depend not only on quality, price and uniqueness but on how, cumulatively, they interact with companies workforce, community and environment. Now we need to move towards a challenging measure of corporate responsibility, where we judge results not just by the input but by its outcomes: the difference we make to the world in which we live, and the contribution we make to poverty reduction and minimizing the damage we made to the environment. Corporate social responsibility (CSR) isn't just about doing the right thing. It means behaving responsibly, and also dealing with suppliers who do the same in order offers direct business benefits. Building a reputation as a responsible business sets you apart. Companies often favor suppliers who demonstrate responsible policies, as this can have a positive impact on how they are perceived by customers. Moreover, some customers don't just prefer to deal with responsible companies, but insist on it. Now the sales of 'environmentally friendly' products continue to grow - and these products often sell at a premium price. 2
Social Responsibility Reporting Today, corporate social responsibility goes far beyond the old philanthropy of the past donating money to Social responsibility reporting at the corporate level is fast becoming a critical element of reporting for public companies at the global level. Social responsibility reporting, also referred to as corporate responsibility (CR) reporting, includes nonfinancial information made available to the public in either a separate report or in addition to the firm annual report. In 2005, Japan led the world in the amount of submitted corporate responsibility reporting. In a publicly traded company, performance is evaluated by internal as well as external stakeholders. In most cases, assessment is based on information created and distributed by corporate management. Information that is publicly reported is a direct reflection of corporate governance within the firm. Financial and nonfinancial information reveal either positive or negative results of the firm s direction and leadership decisions. Corporate governance and leadership must take responsibility for results distributed in public performance reporting, devise improvement plans, and execute those plans in order to improve results before the next reporting period. As the importance of CRS has increased globally, several Europeans government are looking at regulatory approaches to corporate social responsibility for example, France has enacted law requiring listed companies to report annually not only about their financial performance but also on their social and environmental performance. There are some Key global standards on sustainable development to be used as guidelines in reporting such as: Global Reporting Initiative (GRI) is an international, multi stakeholder process and independently institution whose function is to develop and disseminate globally sustainability reporting guidelines it was established in 1997. 3
United Nation Global Compact-launched in year 2000 its main purpose seeks to advance responsible corporate citizenship worldwide in the areas of human rights, labor, and environment. Dow Jones Sustainability world Index. Perhaps, however, the most accepted reporting guidelines is The Global Reporting Initiative (GRI),which established reporting standards that are outlined in the Sustainability Reporting Guidelines. Hundreds of companies adhere to GRI standards in reporting. The GRI is currently working to include detailed industry specific information with respect to responsibility reporting. The Role of Internal Auditor in social reporting The IIA's Standard 2130 on Governance state that internal auditing "should contribute to the organization's governance process by evaluating and improving the process through which: 1) Values and goals are established and communicated 2) The accomplishment of goals is monitored 3) Accountability is ensured 4) Values are preserved. The objective of the internal auditing function has always been to improve any process within the organization that will result in improved revenue and reduced risk. Internal auditing projects are assigned internally and prioritized by the level of risk associated with each identified area. Areas of interest are determined by 4
leadership with recommendations from all departmental areas within the company including finance, accounting, operations, and sales and marketing. Risk and audit opportunities are often cyclic and arise within the same department or procedure repeatedly over time, often for varying reasons. Internal auditors must therefore keep track of past audit procedures and results in order to refer to them in future audit opportunities or validation requests. IIA standards on governance outline four methods by which an internal auditor should influence corporate authority. As an internal auditor evaluates a specific department or process of the company, he or she should seek to improve that process as it relates to corporate governance in the areas discussed below. Figure 1 outlines these four methods, their relationship to each other, and how they work together to influence a company s governing practices. Establish and Convey 5
Corporate responsibility reporting at this time is varied and has not yet been standardized at the global level. Previous submittals of social corporate responsibility reporting have mainly been for environmental and manufacturing industries. As more and more businesses participate in social responsibility reporting, additional formatting and included material has lead to a wide variety of reporting styles and content. Regardless of the content or format, any company that intends to create and publicize this type of material must first evaluate and determine the values and goals that are to be discussed and reflected in that report. These values must be clearly discussed in the report with information on how the company is supporting and maintaining those values in daily operations. Goals must also be outlined and may often include financial, operational, or philanthropic targets. Internal auditors have the responsibility of understanding the stated values and goals of the company fully and intelligently relating those values and goals to every audit opportunity that is executed. In addition, an auditor may encounter a situation where the values and goals of the company have actually introduced risk in an area or procedure. In that case, the internal auditor has an obligation to raise this risk to management. Monitor When goals and performance targets are established by the company and distributed internally and externally to the public, execution plans outlining the methods for achieving these goals must be stated. The role of internal auditing with respect to corporate governance and their performance goals is to observe and examine the implementation of related execution plans as well as the outcomes of those plans. Validate Corporate governing body is held accountable for its actions within the corporation. The reputation and image of the firm is directly dependent upon 6
ethical and moral actions of executive leaders in business world. Indeed all leaders of business respect and expect firms with disciplined and accountable governing officers. The function of internal auditor is to evaluate the goals to ensure that the reported results distributed by the corporate management is truly and accurate and distributed internally as well as externally either in annual report or separate corporate social responsibility report Uphold Standards External stakeholders, leading competitor companies, as well as compliance officers expect that the standards of companies will be maintained, but seek every opportunity to identify situations where standards have been violated. To avoid situations where corporate problems are isolated externally, internal auditors must identify and communicate their findings to management first. By completing the three actions described above (establish and convey, monitor, validate) the internal auditor can significantly contribute to upholding the standards of the company. Risk reduction within the corporation as a result of internal audit findings will help management become more effective at preserving and maintaining stated corporate values. Compliance For a global company to grow or develop major initiatives must be meticulously designed and executed. Initiatives for sustainable development, those that keep the company running, include activities that influence or directly involve compliance requirements. 7
Recently, required compliance documentation at the corporate responsibility level mainly relates to and includes environmental information and may also include manufacturing or operations information. Regardless of the content, future projections indicate that with more and more global corporations participating in voluntary social corporate responsibility reporting more compliance requirements may arise in each industry sector. Corporations must be prepared to respond to a potential introduction of this type of reporting in order to sustain normal business operations, moreover, some investment organizations are taking investment decision based on some ethical and social screening. The theory behind CSR is that companies can be profitable while at the same time minimizing their negative impact on stakeholders. Conclusion In the era of corporate social responsibility, internal auditors can play an important role in assessing the risks and controls associated with these goals and the strategies and tactics put in place to attain them, as well as the integrity of the resulting performance reporting. Companies should regard their social responsibilities at least on a par with their financial obligations. Too often, financial analysis of companies ignores other risks and resources beyond purely financial matters. These are regarded as soft or non-financial issues, Yet a failure to meet environmental, labor market or even social obligations can have a substantial impact in the longer term.. Internal auditors,, should take the lead in managing risk in these areas besides their traditional role in financial reporting. Some may say CSR of a little value except to do do-gooders the importance of CSR best considered by answering 8
the following question. Does reputation matter? If we remember some companies are rated in the top 25 global brands (Arthur Anderson) has disappeared within matter of weeks. Be that as it may, what future role should internal auditors play within their companies in setting the agenda and laying the groundwork for corporate responsible behavior? There is broad agreement that for the future, chief audit executives need to ensure that social responsibility is on the board s agenda of corporate governance issues. They should be aware of existing standards and global initiatives as they relate to CSR and use them as yardsticks against which to measure their organization s performance. Additionally, auditors should advise the board on identified best practices and determine whether their organization s core values and code of conduct still reflect the desired position of the enterprise in today s and tomorrow s world. Finally the internal auditor s should use the international standards and practices designed by independent organizations or competitors which are mentioned earlier as benchmarks against which to measure their organization s CSR performance. Summing up the role internal auditors need to play in the future, Phillip H. Rudolph, an attorney involved in Foley Hoag LLP s corporate responsibility practice, says, CSR issues are increasingly touching upon subjects of material relevance to corporations and their boards, and internal auditors need to be correspondingly vigilant in making sure their companies are not falling short of what shareholders and management should reasonably expect. In Sudan some companies are contributing very little to the activities that involve social activities the areas of contribution is limited to building schools, digging wells for water, establishing hospitals but nothing has been done to reduce the harm they caused it to the environment such as reducing the pollution, this may be due to the absence of legislation that obliged the industrial& oil companies to follow and to report about their financial performance as well as environmental. Recommendations 9
1-Many global firms have come to realize that the financial reporting alone no longer satisfies the needs of their shareholders, employees, and customers in Sudan it is the right time for the government to establish strict rules and guidelines to be followed by oil, industrial, and other companies, to report about environmental and social performance at same time with financial performance, and in addition to that the government has to encourage private sectors to develop strategy for advancing vision to: Promote business activities that bring simultaneous economic, social and environmental benefits. Work in partnership with community bodies, unions, consumers and other stakeholders. Encourage innovative approaches and continuing development and application of best practice Ensure we have decent minimum levels of performance in areas such as health & safety, the environment and equal opportunities Encourage increased awareness, open constructive dialogue and trust. Create a policy framework which encourages and enables responsible behavior by business This supports the Government s strategy for sustainable development, with its aims of integrating our objectives on social progress, effective protection of the environment, prudent use of natural resources and high and stable levels of economic growth and employment to ensure a better quality of life for everyone, now and for generations to come. We want to encourage business practices that help to ensure successful and profitable companies and that also contribute fully to achieving our sustainable development goals. Can companies generate profit while contributing to sustainable development? The following case study is provided to observe how the company can generate profitability while it is adhering to environmental and community development policies Process 10
United XYZ Ltd commitment to environmental leadership has been demonstrated through a pioneering project to turn biogas from sewage treatment into fuel for vehicles, as well as exporting it to the national gas grid in partnership with ABC Grid, their Combined Heat and Power engines harvest methane gas from sewage sludge to provide heat for treatment processes and electricity to run sewage works, saving 6.7m with an additional income of 4.5m. They have also managed to save their 400-strong supply chain 6m per annum by working with them to measure and reduce their own carbon footprint. In the community, United XYZ partnership with Nadic Ground work trust has seen its employees give more than 20,000 hours to volunteering projects; benefit over 18,000 pupils through climate change education programs; raise more than 11 million for Water Aid and engage with vulnerable customers on debt issues. United XYZ Ltd work on sustainability includes a pioneering 10m program to improve the condition of the Peak District and Trough of Bow land water catchment estates, while their corporate governance and long-term planning model sets a culture of remuneration and reward that is sustainable and looks to the long term, rather than rewarding quick wins. Their policy of significant investment in full time staff at their call centers in place of temps has seen their number increase from 40% - 80%, with a customer satisfaction rating of 80%. Impact Combined Heat and Power engines saved 6.7m with an additional income of 4.5m Carbon footprint of 400 strong supply chain reduced with a saving of 6m Over 18,000 pupils educated through climate change programs Over 11m raised for Water Aid Full time staff increased from 40% - 80%, customer satisfaction rating of 80% 11
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