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The Role of Internal Audit in CSR

Reporting Practices and the Ethical


Considerations

Barry Ackers
University of South Africa
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Presentation Structure

Introduction
King III
Accountability
Corporate Social Responsibility
CSR Assurance
Ethical Dilemmas
Ethics & Morality
Ethical Theories
Ethical dissonance
Empirical research
Conclusion

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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
independently assured
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 riskbased internal audit activity
Recommended practices 7.2.2. & 7.5.1.requires internal audit to be
independent and objective

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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.

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Accountability & CSR


... the willingness to take responsibility for action and outcome; delivering what
you promised to deliver; accepting good and bad outcomes; owning up to
shortcomings/mistakes; taking responsibility for ones actions; and honouring
obligations, expectations and requirements.
CSR is the process of providing information designed to discharge social
accountability

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Board of Directors
Agency Problem
Fiduciary responsibility to ensure all significant risks are identified,
accepted or mitigated against
Three lines of defence & assurance (through Audit Committee) from:
Management
Internal assurance providers
External assurance providers
Controlled by external members
Broader stakeholder accountability

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SIGMA Management Framework

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CSR means different things to different people

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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

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The Triple Bottom Line


Corporate governance is concerned with holding the balance
between economic and social goals and between individual and
communal goals the aim is to align as nearly as possible the
interests of individuals, corporations and society.
Sir Adrian Cadbury

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The CSR Business Case


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 social
factors 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.

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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)

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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 their
own 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 manner and 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

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Purpose of CSR reports

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What Matters and to Whom?


Stakeholders
Customers
Community

Impacts
Human Rights Technology Legislation Economic

Environmentalists
Regulators
Unions
Employees
Media
Competitors
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Safety

Environmental

Its about Balancing interests

Profitability

+-

++

Rolls Royce for the few

Keep right on truckin

End of the line

Lots of horsepower,
no fuel

--

-+
Social Benefit

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Eells Continuum of Social Responsibility


TRADITIONAL
CORPORATION
Economic Man

Direction of
minimum
responsibility

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SOCIAL/METRO
CORPORATION
Whole Man

Direction of
maximum
responsibility

Theoretical Frameworks

Shareholder primacy
Stakeholder theory
Instrumentalism
Legitimacy

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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.

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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

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Characteristics of CSR Assurance


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

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Internal audit
An independent, objective assurance and consulting activity designed to add
value and improve an organizations operations. It helps an organization
accomplish 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)

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Ethical Dilemmas
Steven Covey Train journey
Bowen McCoy The Sadhu
Nike Bangladesh
Ok Tedi BHP
Groucho Marx

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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

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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

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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)

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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
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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

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Leadership ethics

Ethical behaviour is not exerted by the


corporation, but by individuals
King III principle 1.1 requires the board to
provide effective leadership based on an
ethical foundation
Therefore initiated according to the
character of the corporate leadership
The board and the CEO determine
corporate values
Set the tone at the top
Walk the talk since employees emulate
management behaviour
Ethical trap management must choose
between behaving ethically and
succumbing to the situational pressures
towards engaging in unethical practices
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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 their
fiduciary responsibilities
Prudent altruism strategically controlling intrusive public policy
Ethical CSR
Altruism is both socially desirable and morally commendable
Instrumentalism transforms philanthropy beyond prudent altruism into
strategic tool to develop legitimacy, enhance corporate reputation &
exploit market opportunities

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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

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Research Approach & Methods


Objective to establish the role of the internal audit activity in
CSR assurance (in the context of the King III requirement for
independent 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.

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Types of CSR Assurance Providers (content)


2011/2

56%

2010/1

4% 4% 2%2%

62%

2007/8

5%

30%

5% 2%2%

78%

0%

10%

20%

30%

40%

Assurance by a Big 4 audit firm


Joint assurance by two Big 4 audit firms
Joint assurance by Big 4 audit firm & CSR Consultancy
Assurance by a certification body

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24%

6%

50%

60%

70%

2%

80%

Assurance by a Mid tier audit firm


Assurance by an internal audit activity
Assurance by a specialist CSR assuror

17%

90%

100%

CSR Assurance Provision 2007 2012 (content)


57%

60
50

50
40

40
29%

30

26%
21%
18

20

12%

11%

11%

9%

10

2011/2

2010/1

2007/8

UK

Japan

Number of CSR assurance reports

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Australia

Germany

Percentage

USA

Important CSR assurance elements (survey)


limitations on scope of assurance engagement

79%

the assurance standard (framework) utilised

3%

18%

84%

3%

13%

the audit opinion provided (i.e. qualified, unqualified or


disclaimer)

90%

the reliability (reputation) of the assurance provider

90%

5%

5%

the clarity of the assurance report

90%

5%

5%

the transparency of activities undertaken

92%

the depth of work undertaken

10%

20%

Agree

30%

40%

50%

Neutral

3%

8%

95%

0%

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7%

5%

60%

70%

80%

Disagree

90%

100%

Suitable CSR assurance providers (survey)


67%

Internal audit

49%

Certification bodies

Specialist CSR
assurance
consultancies

8%

10%

33%

44%

56%

Big 4 audit firms

0%

10%

20%

30%

Agree

15%

43%

85%

Other audit firms

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18%

23%

26%

40%

50%

Neutral

60%

5%

70%

18%

80%

Disagree

90%

100%

Reasons for providing CSR assurance (survey)


10%

90%

Provides verified CSR disclosures

Demonstrates improved stakeholder


accountability

74%

18%

8%

Demonstrates improved stakeholder


responsibility

74%

18%

8%

Demonstrates good corporate


citizenship

13%

82%

15%

70%

Required by King III

0%

Agree

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10%

85%

Demonstrates improved transparency

20%

40%

Neutral

60%

Disagree

80%

5%

5%

15%

100%

Reasons for resisting CSR assurance (survey)


Stakeholders do not rely on CSR
disclosures

3%

Other

5%

Stakeholders trust corporate


disclosures

55

No legal/regularity requirement to
do so

8%

Not considered important at this


stage

8%

Too time consuming

10%

Internal audit reviews CSR

10%

CSR disclosures are for information


only

10%

Little value will be added

13%

Too expensive

15%

Building capacity to do so in future

23%

Not applicable

51%

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10

15

20

25

Stakeholders that rely on CSR disclosures (survey)


35
82%

79%

30
69%

25
56%

20

54%

54%
49%

46%

44%
38%

41%

38%

15

10
13%

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Reasons for Selecting a CSR Assuror


External audit profession are experts at all types of audits

44%

20%

Prefer using the same auditors as for annual financial statements

51%

Global reach of the assuror

51%

Whether the assuror provides a "limited" or "reasonable" levels of


assurance

34%

7%

26%

74%

5%

18%

Assurance standard referenced by the assuror

77%

Ability of the assuror to complete the engagement within the required


timeframe

77%

Assuror specialises in CSR

10%

26%

69%

Aligned to the provision of certification services

8%

31%

67%

Can provide the necessary capacity building within our company

15%

41%

59%

Cost of the assurance engagement

36%

8%

23%
20%

82%

3%

13%

5%

Reputation of the assuror

87%

13%

Provides value added CSR-related advice during the assurance


engagement

87%

13%

Assuror has access to the necessary skills

Agree

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89%
0%
Neutral

20%

40%

8% 3%
60%
Disagree

80%

100%

Internal audits role in CSR matters


Has capacity to be active in
CSR

67%

Could be more active in CSR

33%

78%

Complies with Standard 2130

6%

89%

Assists external CSR assurors

11%

38%

Assists certification bodies

62%

25%

Recent CSR consulting role

75%

44%

Recent internal audit of CSR

56%

67%

Active CSR governance role

33%

80%
0%

10%

20%

30%

40%

Yes

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6%

20%
50%

Uncertain

60%

70%

No

80%

90%

100%

Conclusion

King III implementation is beginning to entrench the principles of good


governance, including CSR, into South African company practice (especially JSElisted 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 as
envisaged by King III recommended practice 7.3.1)
However, the company CSR approach is influenced by the philosophical, moral &
ethical base

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The journey of a thousand miles starts with a single step!!!


(Ancient Chinese Proverb)

Thank you!
Any Questions?
Barry Ackers
E-mail : ackerb@unisa.ac.za
Cell
: +27 12 429 8993
http://reference.sabinet.co.za/webx/access/electronic_journals/busman/busman_v46_n1_a2.pdf

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