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NON-FINANCIAL AUDIT:
RECENT TRENDS IN AUDITING

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1. INTRODUCTION
Traditionally, audits were mainly associated with gaining information about financial systems and the
financial records of a company or a business. However, recent auditing has begun to include non-financial
subject areas, such as safety, security, information systems performance, and environmental concerns. With
nonprofit organizations and government agencies, there has been an increasing need for performance audits,
examining their success in satisfying mission objectives.
There are fundamental differences between financial and non-financial auditing and this has been noted in
practice by companies who have attempted to undertake broader based auditing exercises. For example,
many aspects of the social part of the Triple Bottom Line are more difficult to quantify which creates a
problem when contrasted with the more precise financial auditing structures. As a result, there are now audit
professionals who specialize in security audits, information systems audits, and environmental audits. Under
this backdrop, this chapter is devoted for non-financial auditing such as; environmental audit, social audit,
and others
2. ENVIRONMENTAL AUDIT
Rapid industrialization has threatened the world ecological balance seriously. As a result the green house
effect and other related problems are posing threat to mankind world over. It is therefore the responsibility
of the mankind to think and act accordingly for the sustainable development of the environment.
In many countries, now a day, the environmental matters have become top most priority. There is more and
more demand for assessment of the environmental impact due to the production goods and provision of
services. There is growing pressure houses for business to consider environmental effect on their operations.
As a result, accounting and disclosure of environmental matters have been rapidly emerging as an important
dimension of 'Corporate Accounting and Reporting Practices'. It has become a global issue with a pressing
need to harmonies accounting and reporting of environmental costs and liabilities. The global community
considered it necessary to determine the best practices in accounting for environmental transactions and
events in the financial statements and associate notes. Ultimately accounting for the environment and its
disclosure for the various interested parties in the annual report of the companies has been emerging as an
important area of interest for the government, the public in general, environmentalist and business sector.
Any development activity is directly related to natural and environmental resources. Economic development
without environmental considerations can cause serious environmental damage in turn impairing the quality
of the life of present and future generations. Environmental problems of a country vary with its state of
development, structure of its economy, production technologies in use and environmental policies of the
government.
The old concept of natural resources are plenty and abundantly available as free gift of nature is no longer
valid. It will be wrong to assume that earth's resources are fixed assets. Natural resources are raw materials
and energy directly or indirectly obtained from the natural environment, which may broadly be divided into
renewable and non-renewable. Renewable resources are not unlimited when demand for them outpaces the
time taken for their natural replenishment or recycling. Non-renewable resources, on the other hand, are
either replenished extreme slowly, or for all practical purposes are not replenished at all. Moreover, global
economic growth has brought a host of undesirable side effects in its wake. Ozone depletion, global warming,
water and soil contamination, air pollution, deforestation and waste disposal all pose serious threats of
earth's environment.
Though industrialization is an essential pre-requisite for overall economic growth, yet its damaging effect on
ecological environment needs to be taken care of government of various nations have framed various rules
and regulations to protect the environment but the implementation process is very large, sluggish an
ineffective. In India, to make possible government enacted environment protection act in 1986 to provide for
the protection and improvement of environment.
The growing concern for environment protection is also reflected in the governmental policy of our country.
The 42nd amendment to the Indian Constitution in 1976, Article 48-A was added to the Directive Principles of
State Policy and stated that 'The state shall endeavour to protect and improve the environment and to
safeguard the forests and wild life of the country.' In the chapter of Fundamental Rights, Article 51(A)
provides that 'It shall be the duty of every citizen of India to protect and improve the natural environment
including forests, lakes, rivers, and wildlife and to have compassion for living creatures.' Moreover, the
entries dealing with forests and wild life were shifted from the state list to concurrent list. Several pieces of
legislation concerning environment were enacted before and after the aforesaid amendment to the
constitution.
Increasing awareness for environmental concerns should be translated into reality by taking certain concrete
steps by corporate section by practicing environmental accounting audit and play a vital role in making the
next millennium green millennium.
2.1 CONCEPT OF ENVIRONMENTAL AUDIT
The European Union Eco-Management and Audit Scheme Defines Environmental Auditing as,
'a management tool comprising a systematic, documented, periodic and objective evaluation of the
performance of the organization, management system and process designed to protect the
environment with aim of: (a) facilitating management control of environmental practices which may
have an impact on the environment; and (b) assessing the compliance with company environmental
policies including observance of the existing regulatory requirement-'
The Confederation of British Industry, 1990 (based on International Chamber of Commerce) defined
environmental audit as
'the systematic emanation of the interactions between any business operations and its surroundings,
this includes all emission to air, legal constrains, the effect on the neighboring community, landscape
and ecology, and the public's perception of the operating company in the local area... Environmental
audit does not stop at compliance with legislation, nor it is a 'green washing' public relations exercise
... Rather it is a total strategic approach to the organization's activities.'
In the words of N. Raja Raman,
Environmental Audit is a series of activities undertaken on the initiative of an organization
management to evaluate its environmental performance. In simple words EA is a managerial tool,
which includes the activity of systematic periodic and documented objective evaluation of have the
organization, management and equipments perform their environmental activities, so that it
facilitates the managerial control over practices and assessing compliance with company policies
would include meeting of regulatory requirements.
The International Chamber of Commerce (ICC, 1991) defines environmental auditing as,
A management tool comprising a systematic, documented, periodic and objective evaluation of
how well environmental organisation, management and equipment are performing with the aim of
contributing to safeguarding the environment by:
facilitating management control of environmental practices; and
Assessing compliance with company policies, which would include meeting regulatory
requirements
2.2 CHARACTERISTICS OF ENVIRONMENTAL AUDIT
a) Management Tool
An environmental audit is but one of many environmental management tools which are used to assess,
evaluate and manage environmental and sustainability issues. This tool can be used in various ways but also
has its limitations. The audit is sometimes confused with an Environmental Impact Assessment (EIA). An EIA
is a tool used to predict, evaluate and analyse environmental impacts before a project commences, whereas
an environmental audit looks at environmental performance for an existing operation or activity.
b) Systematic
The environmental audit is a systematic process that must be carefully planned, structured and organised. As
it is part of a long term process of evaluation and checking, it needs to be a repeatable process which can be
readily replicated by (if necessary) different teams of people in such a way that the results are comparable
and can reflect change in both a quantifiable and qualifiable manner.
c) Documented
The base of any environmental audit is that its findings are supported by documents and verifiable
information. The audit process will seek, on a sampled basis, to track past actions, activities, events, and
procedures to ensure that they are carried out according to systems requirements and in the correct manner.
Document trails are vital in verifying verbal answers to questions and ensuring that persons are carrying out
their duties and tasks according the correct procedures and training.
d) Periodic
Environmental audits form part of a process. Although they are individual events, the real value of
environmental audits is the fact that they are carried out, at defined intervals, and their results can illustrate
improvement or change over time. It can sometimes take as long as three iterations of an audit before
sustainable environmental change and improvement can be tracked clearly. This is because the audit will
often identify the need for behavioural change which cannot always be implemented immediately,
particularly if training programmes have to be altered and terms and conditions of service changed.
e) Objective Evaluation
Although environmental audits are carried out using policies, procedures, documented systems and
objectives as a test, there is always an element of subjectivity in an audit. This flexibility reflects the fact that
different auditors have different life and professional skills and experience and they may bring different
interpretations to site situations and circumstances. Having audit teams that include specialist skills and who
come back annually to repeat audits, will tend to level out any variance caused by individual skills and
experience.
f) Environmental Performance
The essence of any environmental audit is to find out how well the environmental organisation,
environmental management and environmental equipment are performing. Each of the three components is
crucial in ensuring that the organisations environmental performance meets the goals set in its
environmental policy. The individual functioning and the success of integration will all play a role in the
degree of success or failure of the organisations environmental performance.
g) Facilitating management control of environmental practices
Environmental practices can happen with or without direct or specific instructions. The key to good
environmental performance is to ensure that these practices happen according to procedure, guidelines,
training and systems requirements. For example, a tanker driver may be told to take a load of liquid waste to
a licensed waste site. On the way, he may want to save his employers some money and discharge his load into
a stream. He may have good intentions but if he has not be given clear instructions supported by training to
follow specific instructions, the consequences of his actions can be severe.
h) Compliance with company policies and regulatory requirements
Compliance is traditionally thought of as meaning compliance with the law. However, compliance with
corporate policies is the primary base, which will include legal compliance as a part of any organisations
governance policies. It could be argued that all legal compliance is the minimum requirement and that
companies should have more stringent internal targets to take account of occasions when compliance is not
possible due to mechanical breakdown, power failures or other emergency events. Thus there should be
greater focus upon compliance with corporate policies which should include the requirement for
environmental performance to be better than the minimum legal requirement.
2.3 TYPES OF ENVIRONMENTAL AUDITS
Environmental Management Audits
These are audits which are specifically designed to check and evaluate the effectiveness of environmental
management systems. Sound environmental management at a site or in an operation depends upon
procedures, work instructions, guidelines, specification, training programmes and monitoring systems being
implemented by the employees of the organisation operating on the site. If these employees are not given the
right instructions, training and procedures within the system, they cannot be expected to carry out their work
effectively. Thus, the first stage in auditing an operation is to check the presence, absence and functioning of
the environmental management system (which could be formal or informal). This then creates a baseline
against which one can check the environmental functioning of an organisation more effectively and
objectively.
Environmental Compliance Audits
Environmental compliance (or performance) audits are specifically designed to test compliance (which
covers both legal compliance and corporate compliance) to environmental policies, objectives, laws, by-laws,
ordinances, regulations and standards. These types of audits will often also include more numerical testing
and specific checks on, for example, compliance with requirements in water and air permits and licences.
Environmental Assessment Audit
An environmental assessment audit is an instrument used to check that an Environmental Impact Assessment
complies with the minimum legal requirements and also checks to ensure that due legal process has been
followed. This particular audit is not common in South Africa but is used elsewhere in the world to assist in
EIA quality control and to reduce unnecessary costs and inconvenience should the EIA be appealed against.
Waste Audits
Waste audits are environmental audits which specifically look at the waste management component of an
operation or site. In such audits, the various aspects of waste management would be reviewed and the
methods, procedures and systems checked and verified. In cases where site management are reluctant to
undertake full site environmental audits, it is often easier to motivate for a specialised waste audit because
the results of this will often more readily generate data and actions which can save money.
Environmental Due Diligence Audits
Environmental due diligence audits are described in different ways but are essentially audits which look at
the actual and potential environmental liabilities of a site or operation. They are most commonly carried out
as a precursor to the purchase of property which has been or is likely to be used for industrial or commercial
purposes. Often, they form a part of a wider financial due diligence audit which looks at the various business
risks associated with the purchase of property.
The kind of issues that can emerge from environmental due diligence audits include past dumping or burying
of hazardous waste which may result in pollutants contaminating the groundwater. In such circumstances,
the owner of the land where the waste was buried could be held liable for the clean up costs. It is important,
when purchasing property, to ensure that the new owner is not taking over someone elses hidden
environmental liabilities.
Supplier Audits
A supplier audit is an audit carried out by a client to test the environmental compliance of a contractor or
supplier. It should be an audit using the environmental conditions included in the contract document. In the
absence of any specific conditions, it could be an audit of the suppliers environmental management system
with special reference to the clients business.
It is often said that in any organisation, ones contractors are the weakest link in the chain of operation. This
is not necessarily a reflection on the quality of the contractors service but acknowledgement of the fact that
the contractor will not necessarily have the same goals and objectives as the client organisation. The
contractor and client will have a contractual relationship which is often based upon the supply of a specific
product or service. If the client wishes a contractor to have exactly the same approach to environmental
policy and systems as his own, then this needs to be included in the contract. Furthermore, the compliance
with such policies and systems need to be regularly audited. Thus a supplier or contractor audit is one where
the contractor is audited against the environmental requirements of the contract.

2.4 PROCESS INVOLVED IN UNDERTAKING AN ENVIRONMENTAL AUDIT


There are many different plans and processes for audits. Different circumstances require different
approaches and plan frameworks. The steps in the auditing process are discussed in more detail, below.
a) Scope of Audit
The scope of the audit determines exactly what will be done during the audit and what the deliverables of the
audit will be. In the case of an environmental management systems (EMS) audit, a typical scope or set of
objectives would cover: conformance with EMS criteria; whether or not the EMS has been fully implemented
and the system maintained; areas of potential improvement for the EMS; and effectiveness of internal
management review.
b) Planning of Audit
The effective planning and logistics of an audit is critical to ensure a successful audit. Apart from ensuring
that the appropriate staff is available to answer audit questions, the logistics of an audit needs to be organised
to prevent wasting time.
c) Pre-Audit Meeting
A pre-audit meeting is an important prerequisite for the audit because it is the first opportunity to meet the
auditee and deal with any concerns. It is also the opportunity to gather any documentation that the audit
team can study before arriving on site. The audit protocol and audit plan can be handed over at this meeting
and discussed in advance of the audit itself. The meeting also presents the opportunity to reinforce the scope
and objectives of the audit and discuss practicalities associated with the audit (e.g. access to key staff,
photographs on site, site tour, access to documentation, etc.).
d) Second pre-audit meeting (optional)
Sometimes, auditees may have concerns and questions arising from the pre-audit meeting which cannot be
dealt with telephonically or by email. This type of follow up meeting is entirely optional but may assist in
bolstering confidence in the audit process and providing support for the auditees efforts to establish internal
auditing systems and processes.
e) Auditor Meeting
With more complex audits, it is useful to have an auditor meeting before the audit to allocate specific
assignments to auditors and confirm details and deadlines. The logistics of this will vary enormously.
f) Opening meeting
The opening meeting is the first activity of the on-site audit and is the opportunity to introduce the audit team
to the site staff.
g) Audit Site Tour
The next part of the audit is the site tour which is designed to familiarise the audit team with activities and
operations.
h) Questioning, document review and evidence gathering
The core work of the audit is working through the audit protocol, asking questions, checking answers against
site documentation (manuals, reports, monitoring data, work instructions, procedures, training schedules
etc.), reviewing documentation against standards, policies and action plans and gathering evidence to support
the answers to the questions.
i) Consolidation, audit findings and review
Time must be allowed for the team to consolidate its findings and prepare the basis for the preliminary report
back to be given at the exit meeting.
j) Exit meeting
The exit meeting is run by the lead auditor and is the mechanism to feedback broad, preliminary findings to
site management and staff before the audit team leaves the site.
k) Draft Audit report
The information gathered by the audit team is consolidated and written up as a draft audit report. This draft
report will then be circulated to the audit team and those directly concerned with the audit. The purpose is to
check the report for accuracy.
l) Final Audit report
The final audit report is the corrected final document which contains the findings and recommendations of
the audit. It will also form one of the bases of future audits because the information it contains informs some
of the tests and analyses that need to be performed in the future.
m) Follow up and Action Plans
Environmental audits form part of an on-going process of continuous improvement. They build upon
information from previous audits and create a baseline for future audits. For this reason, follow up work in
the form of analyses of recommendations and action plans is a crucial part of an audit.
n) Next Audit
In order to promote continuous improvement it is recommended that the idea of the next audit be discussed
during the exit meeting.

2.5 ENVIRONMENTAL AUDITING AND DECISION-MAKING


a) Transparency: An environmental audit report is one of the useful means of demonstrating an
organisations commitment to openness and transparency. If an organisation believes it has nothing to
hide from its stakeholders, then it should feel confident enough to make its environmental audit reports
freely available to those who request them.
b) Audit report distribution: As a basic rule, environmental audit reports should be made available to all
stakeholders. In such circumstances, the information contained within the report should be written in
such a manner that all stakeholders are able to understand it. Should the report be excessively technical,
there should be non-technical summaries or appendices included. Some reports are specifically written
for internal organisational consumption and for use as baseline information and guidance for the purpose
of continuous improvement. At the commencement of the audit process, it is advisable to ascertain who
the potential audience of the audit report will be and to get consensus on the format, content, circulation
and status.
c) Confidentiality: The external auditor is an outsider and, as such, must be given access to strategic,
sensitive and proprietary company information in order to be able to carry out the audit. In order to
protect proprietary company secrets and information that ensures a companys competitive advantage,
an external auditor may be required to sign some form of secrecy agreement to reinforce the need to
safely manage information during the course of the audit. As a basic principle of professionalism, the
auditor should keep all information gathered confidential, unless given permission to release information
by the client.
d) Participation of Stakeholders on Audits: Stakeholders such as neighbouring communities are often
very suspicious of the industrial operations that they live next to. This suspicion often stems from a lack
of knowledge and understanding of what goes on inside the factories and sites. Inviting representatives
of these neighbouring communities to participate in the routine internal audits, and even the less
frequent external audits, is a means of demonstrating good faith and openness.
e) Audit Follow-up: Audits are exercises which generate considerable quantities of valuable management
information. The time and effort and cost involved in this exercise is often considerable and in order to be
able to justify this expenditure, it is important to ensure that the findings and recommendations of the
audit are considered at the correct level within the organisation and that action plans and
implementation programmes result from the findings.
Audit follow up is part of the wider process of continuous improvement. Without follow-up, the audit
becomes an isolated event which soon becomes forgotten in the pressures of organisational priorities
and the passing of time.
f) Auditing and Formal Systems: Many companies are taking the route of establishing environmental
management systems which are based upon the ISO 14001 standard for EMS. The choice of whether to
actually certify the system formally is dependent upon cost benefit and associated demand from
customers and clients. Whilst it may be seen to be desirable to certify, many organisations will align their
internal environmental management systems to ISO 14001 and delay the formal certification until there
is a business motivation to certify.
The ISO 14000 series contains a number of standards which expand upon the primary ISO 14001 system,
notably ISO standards 14004 (General guidelines) 14010 (Auditing principles), 14011 (Audit
procedures), 14012 (Auditor qualification criteria), 14041 (Life Cycle Analysis) and 14050 (Vocabulary).
2.6 CONCLUSION
Environmental audits can add value to the management approaches being taken by companies and
organisations and is a way of identifying, evaluating and managing environmental risks (known and
unknown). It can be undertaken at various levels of sophistication and detail which can be tailored to the
needs of the client organisation.
The focus on business is shifting from just a financial profit bottom line to a broader Triple Bottom Line.
This means that organisations need to collect more data and evaluate performance on a wider and more
diverse basis. The environmental audit assists in the process of testing performance in the environmental
arena and is fast becoming an indispensable aid to business decision making.

3. SOCIAL AUDIT

The term social audit may be interpreted in several ways. As far as common understanding goes, it is an
essential assessment of how well a company has discharged its social obligations. However experts see it as a
systematic and comprehensive evaluation of an organizations social performance which is interpreted as
organizational efforts in enriching the general welfare of the whole community and the whole society.
The need for social audit arises because of various reasons. In order to reach the objective of enriching
economic wealth for the shareholders, the firm does it at the cost of social and environmental disorder. And
since many would not take into account the social costs of such negative implications, their prices do not
reflect the real cost. The organizations do it more because of competitive reasons. However if the larger
interest of society is to be preserved, there has to be some consideration for social good.
The company is expected to behave and function as a socially responsible member of the society like any
other individual. It cannot ignore moral values nor can it ignore actual compulsions. There is a need for some
form of accountability on part of the management which is not only limited to shareholder alone. In modern
times, the objective of business has to be the proper utilization of resources for the benefit of others. A profit
may still be a necessary part of the total picture but it should not be the only purpose. The company must
accept its obligation to be socially responsible and to work for the larger benefit of the community.
Society expects businesses to share the fruits of progress and growth. Moreover, the social concern by the
organization proves to be an asset for them in the long run especially under environmental distress because
of the goodwill and the positive image earned all through these years.
3.1 DEFINITION OF SOCIAL AUDITING
Different people have interpreted the expression social audit differently. To some authors, it means the public
disclosure of a companys social performance; to others it means internal evaluation of a companys social
responsibility performance. Some authors think that social audit is a comprehensive evaluation of the way a
company discharges all its responsibilities to its shareholders, customers, employees, and to the wider
community. Thus, there is a total disagreement among the scholars as to the exact meaning, and the
components of this novel concept. However, we shall give a brief account of the opinion of experts as below.

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. Social auditing provides an
assessment of the impact of an organizations non-financial objectives through systematically and
regularly monitoring its performance and the views of its stakeholders.
_ Caledonia Centre for Social Development, United Kingdom

Social Audit is an independent evaluation of the performance of an organization as it relates to the


attainment of its social goals. It is an instrument of social accountability of an organization. In other
words, Social Audit may be defined as an in-depth scrutiny and analysis of the working of any public
utility vis--vis its social relevance.
_ Centre for Good Governance, AP

The social audit is an idea whose time has come, but which is not ready to be taken off the drawing
board and put to work.
_ Melvin Aushen

Social audit is a commitment to systematic assessment and reporting on some meaningful, definable
domain of a companys activities that have a social impact.
_ De Boweni

3.2 CHARACTERISTICS OF SOCIAL AUDITING

From the above definitions, it could be deduced that social audits have the following characteristics:
(i) Social Audit is a process for evaluating, reporting on, and improving an organizations performance and
behavior, and for measuring its effect on society. The social audit can be used to produce a measure of
the social responsibility of an organisation.
(ii) Social Audit is an Audit of the non-financial impact of an organization on society.
(iii) Social Audit is a review of the public interest non-profit and social activities of a business. These audits
usually are performed primarily for internal benefit and typical are not released to the public. Internal
or external consulting groups, as part of regular internal audits, may perform the social audit routinely.
These evaluations consider social and environmental impacts of business activities.
(iv) Social audit means method of measuring a companys level of social responsibility.
(v) Social audit is an audit in which social performance is analysed to know whether the activities of an
entity have affected the society positively or negatively.
(vi) Furthermore the evaluation of socio economic effect from any business, companies, enterprise Govt.
policies etc. is called Social Audit.
In the past, there have been substantial efforts to define common themes in social audit. From the experience
of all those involved, a good social audit carries all the following characteristics:
a) Improved social performance - This is the overarching principle, and this refers to the continuous
improvement in performance by the organization relative to the chosen social objectives as a result of
social audit.
b) Multiple stakeholder perspective - It is important for all groups affected or who affect the organization
to be included in the process of social audit.
c) Comparability - The process should allow for comparison with other organizations, over time and
between stakeholder groups.
d) Comprehensiveness - The process should be designed to collect all relevant materials and areas of
concern should not be left out simply because the organization would not like the result.
e) Regularity of coverage - To facilitate comparability and to demonstrate a commitment to the process, it
should be regular, with a frequency of once every two years.
f) Independent verification - Verification by independent auditors gives the process credibility.
g) Transparent reporting - The result (or a synopsis) of the social audit should be published so that the
stakeholders can see the results, and this will accordingly encourage openness.

3.3 SOCIAL AUDIT Vs OTHER AUDITS


Social audit is often misinterpreted as another form of audit to determine the accuracy of financial or
statistical statements or reports and the fairness of the facts they present. A conventional financial audit
focuses on financial records and their scrutiny by an external auditor following financial accountancy
principles whereas the concept of social audit is more comprehensive, having a greater scope than that of
traditional audit. In general, social audit refers to a process for measuring, understanding and improving the
social performance of an activity of an organisation. Social auditing is again distinct from evaluation in that it
is an internally generated process whereby the organisation itself shapes the social audit process according to
its stated objectives. In particular, it aims to involve all stakeholders in the process. It measures social
performance in order to achieve improvement as well as to report accurately on what has been done.
Financial audit is geared towards verification of reliability and integrity of financial information. Similarly,
operation audit looks at and compliance with policies, plan procedures, laws, regulations, established
objectives and efficient use of resources. On the contrary, social audit examines performance of a
department/programme vis- -vis its stated core values in the light of community values and the distribution
of benefits among different social groups reached through good governance principles.
Social audit adds another dimension of key performance measurements in creating social wealth in the form
of useful networks and administration/accountable and transparent to the stakeholders. Creating social
wealth is one of the key contributions of social audit. Thus, social audit strengthens the legitimacy of the state
as well as trust between the state and the civil society.
Social audit is proposed as a supplement to conventional audit to help Government departments/public
agencies to understand and improve their performance as perceived by the stakeholders and to improve
performance. Social audit is to be done at different levels of government and the civil society. Social audit is
an ongoing process, often done in 12-month cycles that result in the preparation of annual social audit
document or report of an organisation.

3.4 OBJECTIVES OF SOCIAL AUDIT

The purpose of conducting Social Audit is not to find fault with the individual functionaries but to assess the
performance in terms of social, environmental and community goals of the organizations. It is a way of
measuring the extent to which an organisation lives up the shared values and objectives it has committed
itself too. It provides an assessment of the impact of an organizations non- financial objectives through
systematic and regular monitoring based on the views of its stakeholders.
Social audit tries to make the traditional economic and technical values as two-sub system within the larger
social system social audit primarily tries to cover the following areas:
a) Ethical Issues: They offer basis for determining what is right and what is wrong in terms of a given
situations. Ethics is best understood when we cite examples relating to unethical conduct. A few such
examples can be price discrimination, unfair trade practices, cheating customers pirating employees
ideas, learning the job without observing the contract.
b) Equal Opportunities: A second relevant social issue, which comes under social audit, is the enquiry of
treatment in employment and a fair justice system in the organisation Employment decisions in an
organisation should be based on merit and ability and not on the basis of arbitrary quotas based on
gender, race or religion.
c) Quality of Work Life: Besides demands for safe, healthy and human work environment people are
seeking greater meaning in their lives greater responsibility, growth, freedom and flexibility fair reward
system are a few things which employees have preference for. There is also a growing demand for
employee assistance programmes keeping in mind the present day stressful situations they are exposed
too.
d) Consumerism: Business has a special obligation towards the consumer as the business exists to serve
and satisfy the needs of the consumers. It is the principal duty of business to make available to the
consumer items of daily needs in the right quantity at a right time, and price of the right quality.
However many Indian products are not safe at all and the consumer suffers at hands of corrupt and
dishonest corporate houses.
e) Environmental Protection: Growing water, air and environmental pollution by various industries in
recent times has led to a public outcry demanding environmental protection at any cost.
f) Checking Corruption: Bringing transparency and checking corruption are two other objectives of social
audit too. Transparency here is not merely display of information in a board mentioning total estimated
budget and total expenditure or broad framework of the programme. It is about providing detail of head
wise budget and expenditure with copy of bills and vouchers in case of finance and copy of other
relevant records to help people understand detail of the process adopted including all decisions taken
and selections made.
g) Identifying Critical Areas of Improvements: Another objective of social Audit is to help an
implementing agency to know and identify its critical areas of improvements and how best the
programme can be implemented through peoples participation. It is a way towards successful
implementation of programme for the people and by the implementation. Taking into account the views
of most vulnerable people in the society including single women headed family, people with disability,
uncared aged and poorest of the poor is another important objective of social audit.
h) The purpose of conducting social audit is not to find fault with the individual function areas but to assess
the performance in terms of social, environmental and community goal of the organisation. It is a way of
measuring the extent to which an organisation lives up to the shared values and objectives it has
committed itself too. It provides an assessment of the impact of an organisations non- financial
objectives through systematic and regular monitoring, based on the views of its stakeholders.

3.5 TYPES OF SOCIAL AUDIT


The various types of social audit may be listed as below:
a) Social Process Audit
It tries to measure the effectiveness of those activities of the organization which are largely taken up to meet
certain social objectives. Corporate executives in this case try to examine what they are doing and how they
are doing. The method involves four steps:
Find circumstances leading to the starting of the social audit programme
List out goals of the social programme
State how the organization is going to meet such goals
Qualitatively evaluate what is actually done as against what has been planned
b) Financial Statements Format Social Audit
In this type, financial statements show conventional financial information plus information regarding social
activities. About associates a management consultancy firm proposed that the balance sheet should show a
list of social assets on one side and social commitments, liabilities and equity on other side. The income
statement should reveal social benefits, social costs and the net social income provided by the company
operations to the staff community, general public and clients. This approach has been criticized as many feel
that it may create confusion of complicating issues further and defying easy understanding.
c) Macro-Micro Social Indicator Audit
This type of audit requires evaluation of a companys performance in terms of social measures (micro
indicators) against macro social measures. The macro social factors include the social goals expected by
society in terms of health, safety, education, housing, accidents, pollution control measures, etc. The micro
social indicators are measures of the performance of the company in those areas measured by macro social
indicators.
One of the important problems with this approach is the non-availability of reliable macro social indicators.
Does an increase in family planning clinics indicate better medical facilities? Further it is not easy to specify
whether the individual actions initiated by a company have actually improved the quality of life of a
community, such individual actions may ultimately be labeled as irrelevant , insignificant and sometimes ,
even unnecessary. In any case this approach helps all companies to evaluate their contributions in improving
social life on a rational basis.
d) Social Performance Audit
In developed countries, several interests groups including church groups, universities, mutual funds,
consumer activists regularly measure, evaluate and rank socially responsive companies on the basis of their
social performance. Regular opinion polls are carried out to find companies that initiate social efforts in a
proactive manner and earn the goodwill of the general public.
e) Partial Social Audit
In this case, the company undertakes to measure a specific aspect of its social performance ( e.g. environment,
energy, human resources) because it considers that aspect to be very important or because its social efforts
for the time being are confined to the area:
Environmental Audit: In developed countries people protest violently if the companies try to pollute
the environment and the companies not only comply with regulations but also proactively explore
opportunities to recycle wastes into useful products. An internal group constituted by the unit
concerned prepares a report about the way the environmental issues of importance are being taken care
of. This report is generally re-examined by an outside auditor to see whether air/ water pollution
measures, release of toxic wastes, safety regulations have been complied with or not.
Energy Audit: to conserve energy sources, energy audits are undertaken to investigate how energy is
obtained, consumed and preserved.
Human Resource Accounting (HRA): The basic philosophy of HRA is that human resources are assets
and that the investment in acquiring, training, and developing these resources should be accounted for
as an asset. Conventional accounting methods write off investments in human capabilities and values as
operating expenses and thereby understate the profit. The current value of a companys human assets is
not considered while computing expenses/revenues and, as a result, the balance sheet does not portray
the true and fair picture of the companys state of affairs.
f) Comprehensive Audit
It tries to measure, verify and evaluate the total performance of the organization including its social
responsibility activities. It focuses mainly on management systems rather than on the actions or events which
are not so important. It aims at evaluating the quality of processes and the information on which
organizational decisions are taken.

3.6 BENEFITS OF SOCIAL AUDIT

There are several benefits that Social Audit can bring to an organization. Some of them are as follows:
a) Enhanced credibility: Social Audit enhances the credibility of an organization with its stakeholders. For
a corporate enterprise it could mean enhancement of the brand image which could result in higher
equity with stakeholders. In case of a positive report from the Social Audit, the value added to the
owners financial capital could far outweigh the auditing cost incurred.
b) Helps in policy decision: Based on the Social Audit findings, the policymakers of the organization could
re-strategize for course corrections to ensure that its social impact is as intended.
c) Positive support from stakeholders: Organizations that emerge with a positive Social Impact through
their objectives and actions tend to have a higher sustainability as they enjoy the support of the social
environment in which they operate.
d) Increased social focus tool for risk management: Organizations can better manage its risks, as it can
enhance its social focus by covering any adverse social impacts highlighted by it in a social audit report.
SPECIAL BENEFITS FOR GOVERNMENT DEPARTMENTS
The following are the benefits of social audit especially for government departments.
a) Enhances reputation: The information generated from a social audit can provide crucial knowledge
about the departments/institutions ethical performance and how stakeholders perceive the services
offered by the government. The social angle in the delivery of services, real or perceived, can be a major
factor adding to the reputation of the department and its functionaries. In an era where all the services
are benchmarked against and citizens are becoming more aware about the services through citizens
charters, the government departments are also aiming towards building their reputations. Social auditing
helps the legislature and executive in identifying the problem areas and provides an opportunity to take a
proactive stance and create solutions.
b) Alerts policymakers to stakeholder trends: Social auditing is a tool that helps managers understand and
anticipate stakeholder concerns. This tool provides essential information about the interests,
perspectives, and expectations of stakeholders, facilitating the interdependency that exists between the
government and the community.
c) Affects positive organisational change: Social auditing identifies specific organisational improvement
goals and highlights progress on their implementation and completeness. Also, by integrating social
auditing into existing management systems, employees responsible for day-to-day decision making can
more effectively consider stakeholders issues and concerns.
d) Increases accountability: Due to the strong emphasis on openness and accountability for government
departments, the information disclosed needs to be fair and accurate. Social auditing uses external
verification to validate that the social audit is inclusive and complete. An externally verified audit can add
credibility to the departments efforts. But the greatest demonstration of a social audits authenticity
must be seen in how the performance of the department improves over time in relation to its mission,
values and objectives.
e) Assists in reorienting and refocusing priorities: Social auditing could be a useful tool to help the
departments reshape their priorities in tune with peoples expectations.
f) Provides increased confidence in social areas: Social audit can enable departments/institutions to act
with greater confidence in social areas that have been neglected in the past or have been given a lower
priority.

3.7 LEGAL REQUIREMENTS OF SOCIAL AUDIT


Social auditing is the term used to describe the process of examining, measuring and reporting on an
organizations social and ethical performance.
It is a legal requirement that qualified, independent auditors audit the financial affairs of incorporated,
organizations. Financial auditors inspect documentation relating to financial transaction within, the
organisation (the accounts) to determine whether the accounts provide a true and fair view of profit and
loss for the year. They check the financial soundness of the organisation, they aim to detect fraud, they
examine the efficiency and effectiveness of expenditure and business activities, and they make suggestions for
improvement.
While the focus of social audit is different to that of a financial audit, the process is in fact, quite similar.
During a social audit, the auditors will critically examine a number of key areas relating to the social aims and
mission of the social enterprise, through dialogue with the entire relevant stakeholders group in order to:
Look at what the social enterprises is doing.
Compare actual performance to the organizations goals.
Determine where improvements need to be made, and what those improvements should be.
The key focus of the social audit is the extent to which the organisation is achieving its social aim/mission.
Social audit is legally required in following areas to determine whether all the activities under the business
are done properly or not:
(i) Ethics: In it, social Audit is required to check what the organizations policies are, whether or not they
are being upheld or undermined by the enterprises day-to-day activity
(ii) Staffing: Social Audit is required to verify how the enterprises rewards trains and develops its staff, as
well as the way in which the enterprise ensures that it is non- discriminatory fair and equitable to
everyone working there.
(iii) Environment: Social Audit is required to check the enterprises policies relating to caring for the
environment, waste management and disposal, and damage reduction, and whether or not the
enterprise is adhering to these policies
(iv) Human Rights : Audit is required there to check how it ensures that it does not violate human rights,
or deal, trade with or support any organisation that violates human rights.
(v) Community: Audit is required to check whether the organisations policies relating to the local
community and community involvement these policies might, for example cover community
partnership, or community projects and checks will be made during the social audit to ensure that
agreements are being upheld.
(vi) Society: Audit is also required legally to check how the organisation to check whether the organisation
policies relating to society as a whole, and the way in which the enterprise seeks to improve or benefit
society.
(vii) Compliance : Audit is also required legally in it to check how the organisation complies with statutory
and legal requirements, such as health and safety, employment law, environments law, criminal law
and, of course, financial and tax laws. 16
All of the above policies, ethics, staffing environment, human rights, community, society and compliance
together, create an enterprises is social policy, thats why to check whether all the areas work properly or not,
there is a requirement of social audit for the benefit of society as well as enterprise.

3.8 SUMMARY
Social Audit in business intends to examine an organizations efforts in enriching the general welfare of the
whole community and the whole society. In modern times, the objective of business is to provide benefits to
others and the society expects businesses to share the fruits of progress and growth. Corporate accountability
encompasses the systems which a company establishes in order to develop policies, indicators, targets and
processes to manage the full range of its activities towards society. Demand for increased corporate
accountability today comes from all sectors and various types of social audit system is being developed in
order to take such accounts. Few key developments enabled by technology and information revolution has
broadened the scope for such an audit to be made within organizations and shared in public.

QUESTIONS

1. Explain the meaning of social audit


2. State the scope and objectives of social audit
3. Emphasize the need for social audit
4. Identify different types of social audit
5. What is social audit and what is its relevance for business organization?
6. How social audit specially beneficial to the Government?
7. How do you differentiate between Partial social audit and Comprehensive audit?
8. What are the legal requirements of social audit?

HUMAN RESOURCE (HR) AUDIT


Meaning:
HR audit is an important management control device. It is a tool to judge organisations performance and
effectiveness of HR management. According to Dale Yoder, Personnel audit refers to an examination and
evaluation of policies, procedures and practices to determine the effectiveness of personnel management.
It is an analytical, investigative and comparative process. It gives feedback about HR functions to operating
managers and HR specialists. It enables to know about the effectiveness of personnel programmes. It further
provides feedback about how well managers are meeting their HR duties. It provides quality control check on
HR activities. It refers to determine the effectiveness and efficiency of HRM.
Features:
The essential features of HR audit are:
(1) The measurement and effectiveness HR managements mission, goals, strategies, policies, programmes
and activities, and
(2) To determine the action plan for future in response to the results from such measurement.
According to R.D. Gray, the primary purpose of audit is to know how the various units are functioning and
how they have been able to meet the policies and guidelines which were agreed upon; and to assist the rest of
the organization by identifying the gap between objectives and results for the end product of an evaluation
should be to formulate plans for corrections or adjustments.
Objectives:
Objectives of HR Audit:
(1) To review every aspect of management of HR to determine the effectiveness of each programmes in an
organisation.
(2) To seek explanation and information in respect of failure and success of HR.
(3) To evaluate implementation of policies.
(4) To evaluate the performance of personnel staff and employees.
(5) To seek priorities, values and goals of management philosophy.
Need for Human Resource Audit:
Though there is no legal obligation to have HR audit as in case of financial accounts but the managements
have realized its need and usefulness. Therefore they have taken up HR audit voluntarily.
It is done to fulfill the following needs:
(1) The managements of organisations have realized the need for HR audit because of powerful influence on
motivation of employees at work due to participation of employees in decision making.
(2) Growth of organisation needs HR audit. Large organisation requires continuous feedback for
improvement in performance of its employees.
(3) Mounting pressures from trade unions of employees and their participation in formulating employment
policy and questioning of managerial competence have raised the need for HR audit.
(4) An effective two way communication system has also facilitated the need for HR audit.
(5) Many plants are located at large distances. This also made the HR audit compulsory.
(6) The HR audit becomes essential because of delegation of authority and decentralization of power.
Approaches to HR Audit:
According to William Werther and Keith Davis, there are five approaches for the purpose of evaluation.
These are briefly outlined as under:
(1) Comparative Approach:
Under this approach auditors identify one model company and the results obtained of the organisation under
audit are compared with it.
(2) Outside Authority Approach:
In outside authority approach a benchmark is set to compare own results. A standard for audit set by outside
consultant is used as benchmark.
(3) Statistical Approach:
Under statistical approach the statistical information maintained by the company in respect of absenteeism,
employee turnover etc. is used as the measures for evaluating performance.
(4) Compliance Approach:
Under compliance approach the auditors make a review of past actions to determine to see whether those
activities are in compliance with the legal provisions and in accordance with the policies and procedures of
the company.
(5) MBO Approach:
Under MBO approach specific targets are fixed. The performance is measured against these targets. The
auditors conduct the survey of actual performance and compare with the goals set.