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The Role of Internal Audit in CSRReporting 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
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
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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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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 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
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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
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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 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
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Purpose of CSR reports
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What Matters and to Whom?
Stakeholders Human Rights Technology Legislat ion Economic Safety Environmental
Customers
Community
Environmentalists Regulators
Unions
Employees
Media
Competitors
Impacts
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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
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Eells Continuum of Social Responsibility
Direction ofmaximumresponsibility
Direction ofminimumresponsibility
TRADITIONALCORPORATION
Economic Man
SOCIAL/METROCORPORATIONWhole Man
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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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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
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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 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)
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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 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
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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 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
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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 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.
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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
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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
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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
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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%
Agree Neutral Disagree
( )
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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%
Agree Neutral Disagree
R f i ti CSR ( )
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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 ( )
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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%
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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
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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 ðical base
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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)
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