CSR Audit vs Corporate Responsibility Index

The Government of India is in the process of overhauling the Corporate Social Responsibility (CSR) framework. To ensure better compliance of CSR provisions, it is planning to move to an audit regime soon. While traditionally the role of the Ministry of Corporate Affairs has been that of a Facilitator and a Regulator, with the coming of the CSR mandate, it has now become a Developer as well, and through CSR investments it is taking part in socio-economic development of the country. And in doing so, it now wants to move from the softer to the stricter regime. It may be noted that for CSR violations during the year 2014-15 only, 254 companies are facing prosecutions as of now. This shows the commencement of a stricter regime. The idea is to add quality dimension to CSR investment of companies to ensure that there is actually a social impact of projects undertaken.

In the recent times a lot of changes have been introduced in CSR-related law in the country. Spending on CSR is now mandatory and any amount remaining unspent has to be mandatorily transferred to the Government-designated funds. Henceforth there is no escaping the liability to spend on social causes for companies hitting the eligibility criteria u/s 135 of the Companies Act 2013. In addition, Impact Assessment (which is very much in the nature of a social audit), has already been prescribed for certain companies. Further, CSR 1 and CSR 2 forms have been introduced in order to bring more clarity and transperancy and in order to ensure due diligence with CSR provisions by eligible companies. To add to all these, penal provisions have also been introduced for non-compliant companies. To further give a fillip to all these initiatives, SEBI has also proposed Social Audit and Social Stock Exchange to list social entities carrying on social developmental activities. Furthermore, there are also discussions about introducing a public rating-based evaluation of CSR performance of companies, which seems to be somewhat in the line of Corporate Responsibility Index. In this article I have discussed both CSR Audit and Corporate Responsibility Index in some detail.

What is CSR Audit?

Corporate social audit is an assessment of a company's performance on its corporate social responsibility objectives. In a company’s CSR activities bucket if there are measurable goals, the CSR Audit helps it measure the extent to which the goals were successfully achieved and how far the company succeeded in meeting the expectations of its stakeholders w.r.t. its social and environmental responsibilities. It helps measure the company’s actual social performance against the social objectives it had set for itself, and how the management’s decision making, mission statement and business conduct are aligned with social responsibilities. CSR audit also helps in discovering the interests and objectives of a company’s employees and stakeholders. In other words CSR Audit measures the social return on CSR investment. Companies that give importance to their social responsibility would like to know how well they have performed. In such cases CSR Audit can help it measure its actual social performance against the social objectives it had set for itself. Research has shown that integrating CSR in business strategy contributes to the following: Positive brand awareness Increased employee satisfaction Reduced operating costs Improved community relations Corporate accountability Enhanced investor reliance While day to day monitoring of CSR activities may be difficult for organisations, evaluation of its social responsibilities vis-à-vis activities undertaken are also important. This is due to many reasons. First, the management wants to assure itself that activities as planned are being rightfully taken up and effectively implemented. Second, because governmental priorities and social needs change, which calls for attention of corporate citizens. Third, social responsibilities and activities are open to intense public scrutiny. Fourth, it involves money and the investment in social responsibility should not go wrong. Hence it becomes important to do periodic evaluation to know whether the company is hitting the mark, or falling short of the expectations of stakeholders and its own objectives. Such periodic evaluation would be termed as CSR Audit. It is not mandatory in India, but many companies do voluntarily go for such evaluation and impact assessment of its social initiatives.

How and where to start?

As long as CSR Audit is not mandated, a company may choose to have the auditing process conducted internally by the employees. To have an independent opinion, a company may also go for audit by an outside consultant who has relevant expertise. This will also add value and bring credibility to the evaluation. Stakeholders and the public in general will also have more reliance on an outsider’s audit and opinion.

CSR Audit stages

The following would be the suggested steps for CSR Audit:

• Definition of the depth and scope of the audit assignment based on the goal of audit

• Launching the assignment to employee(s) or an external agency

• Interviews of all the CSR stakeholders to understand the impact

• Analysis of all the CSR activities and assessment of social performance

• Comparison with benchmarks laid by leaders in the industry as also companies in other industries that are complying with similar social responsibilities

• If some projects have failed, the reason therefor

• Where projects have been successfully executed, how they could be made better

• Delivery of the Audit Report

Does Your Company ‘Walk-the-Talk?’

This would mean evaluating whether the company strictly follows the CSR guidelines and objectives laid by it (as also the legal requirements in the Indian context).

CSR Stakeholders

• Government – Adherence to legislations, Information Disclosure, & Environment Protection

• Employees – Safety, Health & Environment

• Customers – Quality control & Customer satisfaction

• Shareholders – Proactive communication & Information disclosure

• Suppliers – market information exchange (valued business partners)

CSR Audit framework

To demonstrate good corporate citizenship, companies in India can voluntarily go for CSR Audit and in the absence of any specific Audit guidelines or auditing standards, companies may report in accordance with a number of globally accepted CSR reporting standards that include:

• AccountAbility’s AA100 standard Global Reporting Initiative’s Sustainability Reporting Guidelines Verite’s Monitoring Guidelines Social Accountability International’s SA8000 standard

• Green Globe Certification / Standard

• The ISO 14000 environmental management standard

• The FTSE Group – FTSE4GOOD Index

• The United Nations Global Compact – Communication on Progress (COP) Report

The Audit Report

On completion of the CSR audit, a company may choose to keep the report for use of the management only, or make it public. Some companies come up with a periodic CSR Report and they may choose to publish the audit report in it. The same may also be made available on the website for the knowledge of all the stakeholders in general. For listed companies this report is all the more important to make public. For some companies the audit report may be just a document helpful in monitoring and evaluating the company’s social performance, for others it may be a means of judging the external environment to find out as to how vulnerable the company is. For yet others the audit report is helpful in gaining an edge over competitors. Some companies may decide to exclusively use the Audit report for internal training purposes only towards the end of bettering its future social performances. Based on a company’s audit findings, the management may brainstorm on how to do the CSR projects better in order to have greater impact and how to select projects in order to strategically set the company apart. It may focus on areas that need improvement and those that may be carried on the way they have been done. The audit report may also focus on the community issues that are likely to affect the company’s business and what role the company would like to play in resolving them. The management may also like to rework the timeline for project implementation.

Benefits of CSR Audit

There are many benefits of getting a CSR Audit done, even if not required by law. Not only does CSR Audit provide information to analyse the performance of the company’s social projects it also helps to single out the areas that need improvement to achieve the desired organizational goals. The cost incurred in getting the audit done may thus be rightfully treated as business expenditure. The following are some of the key benefits a company may derive from the audit:

• Helps lower the chances of failure of CSR projects

• Helps plan the proper implementation of the programme

• Determines the long term impact of social projects

• Assesses the impact of the organization on the society

• Provides important data to communicate to the stakeholders for positive impact Enhances the efficiency of operations by lowering loopholes, bureaucracy and corruption

• Helps to ensure optimum utilisation of available resources including manpower

• Brings awareness among management and employees for using sustainable approach in their work

• Helps reduce the operation costs in the long term

• Serves as a way of communicating with various stakeholders

• Helps identify unproductive projects vis-à-vis the productive ones

• Ensures that CSR projects are not duplicated

CSR Audit in India

As of now the CSR Audit is not mandatory in India. But discussions are going on in this line for introducing CSR Audit. Audit of welfare projects have already been initiated with teams headed by eminent persons. A Government level CSR Committee is expected to be formed in this regard and it is expected to have eminent person, technology experts and NGO representatives on board. The Committee will ensure compliance of CSR law. Since discussions are at the very initial stage, it is not clear as to what type of audit will be proposed for CSR. It may be in the form of an audit by third party agencies (like Statutory Audit, Secretarial Audit and Cost Audit) or a Social Audit in the form of projects rating by the society. Further, it is yet to be seen whether the audit will be in the form of a compliance audit like the examples stated earlier, or will it be audit of impact assessment of projects only. Ideally, it should be a combination of both. What is Corporate Responsibility Index?

It is a strategic management tool that is aimed at enhancing the capacity of businesses to develop, measure and communicate best practice in the field of corporate social responsibility. This is done through benchmarking corporate social responsibility strategy and implementation process. The CR Index was created by more than eighty leading businesses in the UK and Business in the Community, which is a unique movement of 700 member companies committed to continually improving their positive impact on society. Launched in 2002, the CRI provides a standardized method and question set through which companies can report on their ethical and environmental performance, and the extent to which responsible business is integrated into their strategy. It does not cover the normal business operations of the company. At present the CRI is in the form of an online questionnaire, where the index covers four areas: corporate strategy, integration, management and impact (which covers six environmental and social impact areas) with questions on everything from diversity policies to carbon emissions reduction goals. Points are awarded to companies for individual questions from which they are given percentage scores for each area. Then the total is drawn to find the company’s overall percentage score. Thereafter the performance bands, viz. Bronze, Silver, Gold, Platinum or Platinum Big Tick, are awarded to the companies. Continued high scoring year after year would suggest that a company is maintaining commitment to a responsible business agenda. The Questionnaire is devised in such a manner that it would encourage more and more companies to participate. It is a big challenge to keep the questionnaire detailed enough and at the same time not making it boring. While the existing CRI is a questionnaire-based, the same may also be made social audit-based. Similar data about a company’s performance may be gathered from the public which can rate the projects of companies on the lines of hotel or film ratings online. The government of India is probably looking at introducing this kind of a rating at the moment as per the latest reports published.

Benefits of Corporate Responsibility Index

Whether incorporating the Corporate Responsibility Index in Annual Financial Statements would be beneficial for a company or not needs to be seen. But apparently, the following would be the benefits of CRI: Simple exercise resulting in evaluation of CSR projects The index is easy for stakeholders to understand and have an idea about the company’s performance Involvement of the public at large indicates zero bias Companies will tend to be more responsible if the grading is in the hands of the society Duplicity, delay and inefficiency of projects may be checked Chances of failure of CSR projects will be lowered Long term impact of social projects can be assessed The impact of the organization on the society can be evaluated Optimum utilisation of available resources including manpower will be ensured There will be awareness among management and employees for using sustainable approach in their work. There will be reduction in the operation costs in the long term

Conclusion

For a country like India, mandatory CSR seems to be a step in the right direction. But the codification is definitely poor. We are in a Trial and Error phase with not much of specific guidelines to follow. The coming years will see a lot more stringency and clarity of provisions. If any monitoring mechanism like CSR Audit or Corporate Responsibility Index is introduced, CSR law compliance will also shoot up. Until then we can ‘Wait and Watch’.