The Role of Internal Audit in CSR Reporting Practices and the Ethical Considerations

7/25/2019 The Role of Internal Audit in CSR Reporting Practices and the Ethical Considerations

1/43

Insert Logo Here

The Role of Internal Audit in CSRReporting Practices and the Ethical

Considerations

Barry Ackers

University of South Africa


2/43

Insert Logo Here

Presentation Structure

Introduction

King III

Accountability

Corporate Social Responsibility

CSR Assurance

Ethical Dilemmas

Ethics & Morality

Ethical Theories

Ethical dissonance Empirical research

Conclusion


3/43

Insert Logo Here

King III in South Africa

King Code of Governance for South Africa 2009 (King III) 1st March 2010

Voluntary on an apply or explain basis.

Principle 9.3 Sustainability reporting and disclosure should be

independentlyassured

But recommended practice 3.4.4 requires the audit committee to

recommend the board to appoint an external assurance provider on

material sustainability issues

JSE regulations 7.F.5 and 8.63 JSE-listed companies should adopt King III

Principle 7.1 requires the board to ensure that there is an effective risk-

based internal audit activity

Recommended practices 7.2.2. & 7.5.1.requires internal audit to beindependent and objective


4/43

Insert Logo Here

King III (cont.)

1.3. The board should ensure that the companys ethics are managed effectively

1.3.1. build and sustain an ethical corporate culture 1.3.2. determine clearly articulated ethical standards which should ensure

that measures are taken to achieve adherence throughout the business

1.3.3. measure adherence to ethical standards

1.3.4. internal and external ethics performance is aligned around the same

ethical standards

1.3.5. ethical risks and opportunities are incorporated in the risk

management process

1.3.6. implementation of a code of conduct and ethics-related policies

1.3.7. compliance with the code of conduct is integrated into the operations

1.3.8. the companys ethics performance should be assessed, monitored,

reported and disclosed.


5/43


6/43


7/43

Insert Logo Here

SIGMA Management Framework


8/43

Insert Logo Here

CSR means different things to different people


9/43

Insert Logo Here

What is CSR?

Triple bottom line Business ethics

Environmental responsibility Corporate giving

Corporate social performance Sustainable development

Corporate sustainability Corporate governance

Corporate citizenship Corporate social investment

Corporate accountability Corporate philanthropy

Environmental, social & governance Community relations

Corporate community involvement Community affairs

Community development Corporate ethics

Stewardship Responsible business

Global citizenship Corporate societal marketing


10/43

Insert Logo Here

The Triple Bottom Line

Corporate governance is concerned with holding the balancebetween economic and social goals and between individual andcommunal goals the aim is to align as nearly as possible the

interests of individuals, corporations and society.Sir Adrian Cadbury


11/43

Insert Logo Here

There is no way to avoid paying serious attention to corporate citizenship: the costs

of failing are simply too high... There are countless win-win opportunities waiting to

be discovered: every activity in a firms value chain overlaps in some way with socialfactors everything from how you buy or procure to how you do your research

yet very few companies have thought about this. The goal is to leverage your

companys unique capabilities in supporting social causes, and improve your

competitive context at the same time. The job of todays leaders is to stop being

defensive and start thinking systematically about corporate responsibility.

The CSR Business Case


12/43

Insert Logo Here

The Global Reality USA resource consumption = 6 planets (WWF 2006)

UK resource consumption = 3.1 planets (NEF 2006) RSA resource consumption = 1.2 planets (WWF 2006)


13/43

Insert Logo Here

What is Corporate Social Responsibility?CSR is still evolving no universally accepted definition

Sustainable development is described as development meeting the needs of the

present without compromising the ability of future generations to meet theirown needs.

Generally, CSR is understood to be the way firms integrate social, environmental

and economic concerns into their values, culture, decision making, strategy and

operations in a transparent and accountable mannerand thereby establish

better practices within the firm, create wealth and improve society.Business has an ethical responsibility to contribute to economic development

while simultaneously improving the quality of life of its workforce, their

families, the local community and society at large


14/43

Insert Logo Here

Purpose of CSR reports


15/43

Insert Logo Here

What Matters and to Whom?

Stakeholders Human Rights Technology Legislat ion Economic Safety Environmental

Customers

Community

Environmentalists Regulators

Unions

Employees

Media

Competitors

Impacts


16/43

Insert Logo Here

Its about Balancing interests

+ - + +

- - - +

+ - + +

- - - +

+ - + +

- - - +

Social Benefit

Profitability

End of the line

Keep right on truckin

Lots of horsepower,

no fuel

Rolls Royce for the few


17/43

Insert Logo Here

Eells Continuum of Social Responsibility

Direction ofmaximumresponsibility

Direction ofminimumresponsibility

TRADITIONALCORPORATION

Economic Man

SOCIAL/METROCORPORATIONWhole Man


18/43

Insert Logo Here

Theoretical Frameworks

Shareholder primacy

Stakeholder theory

Instrumentalism

Legitimacy


19/43

Insert Logo Here

The Need for Assurance

How do stakeholders receive confidence about the veracity of CSR

reporting

The board of directors

King III

International Standards for the Professional Practice of Internal Auditing

Standard 2010 Planning risk-based audit plans Standard 2060 Reporting to Senior Management and the Board must

also include significant risk exposures and control issues

Standard 2110 Assess and make appropriate recommendations for

improving governance process Standard 2120 Evaluate the effectiveness and contribute to the

improvement of risk management processes.


20/43

Insert Logo Here

Benefits of Independent CSR Assurance

Assurance provides a monitoring mechanism to address agency problem

Assurance strengthens accountability while reinforcing trust and confidence in

corporate reporting

Statutory (financial) information is more credible than voluntary non-financial

information, since the former is subjected to audit, and the latter is usually not

Reduces the risk of greenwash

Improves the public perception (reputation management) about the reporting

company activities

Improves CSR-related controls and reporting systems

Enhances CSR report content;

Assists with legislative and regulatory compliance

Assists in risk identification and management Reduces the risk of substantial remediation costs, penalties and litigation

Facilitates eligibility for CSR reporting awards or schemes


21/43

Insert Logo Here

Measurable standards to assess CSR performance

Collection, evaluation and reporting of non-financial information

Competent assurance team

Independence and objectivity

Plan should cover all sites and operations

CSR progress report

Publication of engagement results to affected stakeholders

Characteristics of CSR Assurance


22/43

Insert Logo Here

Internal audit

An independent, objective assurance and consulting activity designed to add

value and improve an organizations operations. It helps an organizationaccomplish its objectives by bringing a systematic, disciplined approach to

evaluate and improve the effectiveness of risk management, control, and

governance processes.

Focuses on internal and not external stakeholders

Risk-based audit approach (IIA Standards and King III)

The internal audit activity must be independent and objective (Standards)


23/43

Insert Logo Here

Ethical Dilemmas

Steven Covey Train journey

Bowen McCoy The Sadhu

Nike Bangladesh

Ok Tedi BHP

Groucho Marx


24/43

Insert Logo Here

Morals and ethics

Used interchangeably

Synonymous Linguistic difference

Morality the collection of moral principles guiding individual choices,

decisions and actions

Ethics the cognitive, analytical, systematic, and reflective application of

moral principles


25/43

Insert Logo Here

Ethics The study of ethics involves the disciplined enquiry into the basis of morality

and law

Ethics provides the basis of for choosing between right & wrong; good & bad;acceptable & unacceptable actions

Economic CSR ethicality is based on compliance with the law

Moral CSR how society and the environment are treated

Situational ethics and relativity

Characteristics of ethics includes:

Honesty

Fairness

Prudence

Respect for and service to others

Keeping promises

Being truthful

Developing business relationships based on trust and integrity


26/43

Insert Logo Here

Ethical decision-making theories Utilitarianism (maximising satisfaction, individual rights and justice)

Deontology (principle of generalisability) Contractualism (agreement by individuals concerned)

Virtue ethics (in the context of personal relationships)

Consequentialism (principle of maximisation)

Egoism (self-interest)


27/43

Insert Logo Here

Ethics of CSR Changing paradigm requires deliberate moral

and ethical decisions

Voluntary nature of King III apply or explain Two paradigms :

Empiricism the is of economic affairs

Instrumental reasons: engaging in CSR

for the companys benefit

Normativism what organisations

ought to do

Moral reasons: the right thing to do

Corporate ethical responsibility along a

continuum of: Mandatory compliance: legal & regulatory

Desirable philanthropy: prudent or

voluntary


28/43

Insert Logo Here

Ethical approaches to management Immoral management decisions and actions in conflict with societys ethical

norms

Regulation is an impediment to the achievement of objectives

Moral management ethical behaviour complying with societys norms

Consider both the letter and spirit of the law

Amoral management may be oblivious to impacts of their decisions on

others

Guided by the letter of the law

Includes a group who believe that their ethical decisions affect their

personal and not business lives


29/43

Insert Logo Here

Leadership ethics Ethical behaviour is not exerted by the

corporation, but by individuals

King III principle 1.1 requires the board toprovide effective leadership based on an

ethical foundation

Therefore initiated according to the

character of the corporate leadership

The board and the CEO determinecorporate values

Set the tone at the top

Walk the talk since employees emulate

management behaviour

Ethical trap management must choosebetween behaving ethically and

succumbing to the situational pressures

towards engaging in unethical practices


30/43

Insert Logo Here

Altruism & Philanthropy Altruism voluntary contributions to society (possibly uncompensated or

costly)

Philanthropy discretionary transfers of wealth to stakeholders

Economic CSR

Discretionary altruism ill disciplined managers violating theirfiduciary responsibilities

Prudent altruism strategically controlling intrusive public policy

Ethical CSR

Altruism is both socially desirable and morally commendable

Instrumentalism transforms philanthropy beyond prudent altruism intostrategic tool to develop legitimacy, enhance corporate reputation &exploit market opportunities


31/43

Insert Logo Here

Ethical dissonance

Hard choices are often not between good

and bad but between good and good

or bad and bad

Good people will do bad things, when

facing threats to their livelihood

Individuals may hold particular beliefs, but

may act in ways that are inconsistent with

their personal values

Even the most morally upright individuals

could display dishonest tendencies under

certain circumstances

70% of 6 000 managers and executives had

experienced pressure to conform and

compromise their personal values


32/43

Insert Logo Here

Research Approach & Methods

Objective to establish the role of the internal audit activity in

CSR assurance (in the context of the King III requirement forindependent CSR assurance)

Although primarily conceptual it includes two empirical mixed

methods phases

Content analysis of annual/sustainability reports Survey responses

Purposive sample of the top 200 JSE-listed companies

(market cap)

53% of companies

99% of market capitalisation

Primarily interpretative and therefore not generalisable.


33/43

Insert Logo Here

Types of CSR Assurance Providers (content)

78%

62%

56%

5%

4%

5%

4%

6%

2%

2%

2%

2%

17%

24%

30% 2%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

2007/8

2010/1

2011/2

Assurance by a Big 4 audit firm Assurance by a Mid tier audit firm

Joint assurance by two Big 4 audit firms Assurance by an internal audit activity

Joint assurance by Big 4 audit firm & CSR Consultancy Assurance by a specialist CSR assuror

Assurance by a certification body


34/43

Insert Logo Here

CSR Assurance Provision 2007 2012 (content)

-

10

20

30

40

50

60

2011/2 2010/1 2007/8 UK Japan Australia Germany USA

50

40

18

26%

21%

9%

57%

29%

12%11% 11%

Number of CSR assurance reports Percentage


35/43

Insert Logo Here

Important CSR assurance elements (survey)

95%

92%

90%

90%

90%

84%

79%

5%

8%

5%

5%

7%

13%

18%

5%

5%

3%

3%

3%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

the depth of work undertaken

the transparency of activities undertaken

the clarity of the assurance report

the reliability (reputation) of the assurance provider

the audit opinion provided (i.e. qualified, unqualified ordisclaimer)

the assurance standard (framework) utilised

limitations on scope of assurance engagement

Agree Neutral Disagree


36/43

Insert Logo Here

Suitable CSR assurance providers (survey)

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Big 4 audit firms

Other audit firms

Specialist CSR

assuranceconsultancies

Certification bodies

Internal audit

56%

33%

85%

49%

67%

26%

44%

10%

43%

18%

18%

23%

5%

8%

15%


( )


37/43

Insert Logo Here

Reasons for providing CSR assurance (survey)

0% 20% 40% 60% 80% 100%

Required by King III

Demonstrates good corporatecitizenship

Demonstrates improved transparency

Demonstrates improved stakeholderresponsibility

Demonstrates improved stakeholderaccountability

Provides verified CSR disclosures

70%

82%

85%

74%

74%

90%

15%

13%

10%

18%

18%

10%

15%

5%

5%

8%

8%


R f i ti CSR ( )


38/43

Insert Logo Here

51%

23%

15%

13%

10%

10%

10%

8%

8%

55

5%

3%

0 5 10 15 20 25

Not applicable

Building capacity to do so in future

Too expensive

Little value will be added

CSR disclosures are for informationonly

Internal audit reviews CSR

Too time consuming

Not considered important at thisstage

No legal/regularity requirement todo so

Stakeholders trust corporatedisclosures

Other

Stakeholders do not rely on CSRdisclosures

Reasons for resisting CSR assurance (survey)

St k h ld th t l CSR di l ( )


39/43

Insert Logo Here

Stakeholders that rely on CSR disclosures (survey)

0

5

10

15

20

25

30

3582%

79%

69%

56%54% 54%

49%46%

44%

38% 38%

13%

41%


40/43


41/43

Insert Logo Here

Internal audits role in CSR matters

80%

67%

44%

25%

38%

89%

78%

67%

6%

20%

33%

56%

75%

62%

11%

6%

33%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Active CSR governance role

Recent internal audit of CSR

Recent CSR consulting role

Assists certification bodies

Assists external CSR assurors

Complies with Standard 2130

Could be more active in CSR

Has capacity to be active inCSR

Yes Uncertain No

C l i


42/43

Insert Logo Here

Conclusion King III implementation is beginning to entrench the principles of good

governance, including CSR, into South African company practice (especially JSE-listed companies)

Internal audit particularly important in developmental CSR maturity stage Standards require risk-based audit approach CSR presents a material risk

Not intended by King III (based on recommended practice 3.4.4)

Internal audit could form an integral part of the combined assurance model asenvisaged by King III recommended practice 7.3.1)

However, the company CSR approach is influenced by the philosophical, moral &ethical base


43/43

Thank you!

Any Questions?Barry Ackers

E-mail : [email protected]

Cell : +27 12 429 8993

The journey of a thousand miles starts with a single step!!!(Ancient Chinese Proverb)

http://reference.sabinet.co.za/webx/access/electronic_journals/busman/busman_v46_n1_a2.pdf
mailto:[email protected]://reference.sabinet.co.za/webx/access/electronic_journals/busman/busman_v46_n1_a2.pdfhttp://reference.sabinet.co.za/webx/access/electronic_journals/busman/busman_v46_n1_a2.pdfhttp://reference.sabinet.co.za/webx/access/electronic_journals/busman/busman_v46_n1_a2.pdfmailto:[email protected]

The Role of Internal Audit in CSR Reporting Practices and the Ethical Considerations

Documents

Transcript of The Role of Internal Audit in CSR Reporting Practices and the Ethical Considerations