International Auditing: Environmental and Social Audits - Term Paper Example

International Auditing According to Deegan (2009), Social and environmental audit implies the auditing of organizations environmental and social reporting requirements and reporting thereon going beyond auditing of financial statements. Subject to this case, auditors provide assurance services to the social and environmental operations of the organization. The entire audition process thus becomes known as triple bottom line reporting; that is, environmental, social and economic performance of the organization as reported by the management (Deegan 2009). This paper provides a detailed explanation of environmental and social audits, its development, objectives and benefits. Ananda (2004) argues that, environmental auditing involves assessing whether the company is functioning in accordance with the requirements of environmental legislation. In addition, the audit intends to attain an independent external appraisal whether the management has formed proficient environmental policy and offered for satisfactory environmental approach. Environmental audits results to recommendations on how companies should reduce detrimental impacts to the environment in a cost-benefit and efficient approach, and how in the long term the company can save finances by via environmental friendly technology (Ananda 2004). According to Ananda (2004), social audit is the process of evaluating a company’s code of conduct, operating procedures and other factors to determine its effects on the society. Social audit is a formal assessment of a companys activities in social responsibility. It evaluates factors such as an organizations record of charitable giving, energy use, volunteer activity and work environment-transparency (Ananda 2004). Additionally, it assesses, worker pay and benefits to appraise what kind of environmental and social impact a company is having in its locations of operation. Social audits are not obligatory since companies can prefer whether to execute them and whether to make public the results or only use them internally only (Donald 2004). The Development of Social and Environmental Audits According to Anthony & Michael (2003), historically, public, corporate documentation of financial statements goes back to the 1850s. At that period, reporting on environmental and social matters was not so included in the corporate financial reports. The management included only financial accounting on their presentations on the financial statement information. The corporate entities focused on their economic activities only in their approaches to accounting. Such activities affected the economy through their operations in the market (Ananda 2004). According to ACCA (2004), the development of environmental and social, environmental auditing began in late 1970s to early 1980s in the Western Europe and the USA. In that time, the industrial countries were implementing the environmental legislation to reduce the detrimental consequences of the companies’ activities that had influenced the environment (Anthony & Michael 2003). The shareholders of such companies involved in mining, manufacturing and chemical operations realized the fact that apart from financial results, companies should also report and account their impacts on social surroundings and natural environment (Deegan 2009). Social auditing that until recently was assumed to hold close to environmental auditing attracted widespread and considerable attention during the early 1970s to mid-1980s. Academic and Professional accounting bodies considered the issue seriously; businesses experimented with it in many innovative ways and even apparently appeared to take the issue seriously (ACCA 2004). It is during this period that many remarkable social information requirements begun to enter company legislation acts. In the UK, systematic social accounting was not included into the Companies Acts while, in France, it achieved a legal standing (Ananda 2004). The period produced significant innovations from which present experiments could usefully draw and perhaps save resources to avoid of re-inventing wheels. Further, significantly, the activities of that period played down many of the standards that modern social accounting is still hopeful. In addition, the time established much of the expressions that are still used in the accounting and auditing field. Organisational-based social and environmental audits were developed, and guidance to companies was widely available. At least as importantly, the independent environmental and social audits became a feature of organisational and company’s life and produced many standards of operations (ACCA 2004). According to Anthony & Michael (2003), over the past two decades plus, the demand for social and environmental auditing has increased tremendously. Organizations have also become accountable to the environmental and social damage that they cause during their operations (Donald 2004). With the global rising demand of social and environmental auditing, countries have paid attention to introduction and implementation of regulations and laws of environmental and social activities of companies (Ananda 2004). The need for social and environmental audits Environmental and social audits focus on health and safety requirements and social and environmental requirements like carbon emissions. Additionally, it focuses on the laws related to production, storage and disposal of harmful wastes and liabilities that arise from improper disposal of hazardous wastes. The concept of Environmental and Social Auditing is necessary especially in the business community (Anthony & Michael 2003). In addition, there is a need to assess the companies’ water consumption, waste recycling, biodiversity, human right considerations and energy consumptions. Moreover, the audits must encompass health and nutrition, corruption and bribery and the organizations working conditions (Deegan 2009). A good case of the importance social audit is the Enron scandal. Enron Corporation was an American commodity, energy, and Services Company found in Houston, Texas. Before its bankruptcy 2001, Enron employed around 20,000 personnel and was one of the worlds critical communications, natural gas, electricity, and pulp and paper companies (Ananda 2004). Towards the end of 2001, it was exposed that Enron’s reported financial situation was sustained significantly by a creatively, systematic, institutionally planned accounting fraud since known the Enron scandal (ACCA 2004). The Enron scandal has since afterwards become a famous example of willful corporate corruption and fraud. If the company management had carried out social audit, perhaps the scandal would never have arisen, and the company would still be in place with investor confidence (Basamalah & Jermiah 2005). Another example is the Northern Rock British Bank. The Northern Rock experienced an explosive increase in its market share over a short period. Its secret was to rely purely on wholesale markets rather than the retail deposits to fund most of its lendings. In 2008, the bank asked for liquidation and collapsed. The catastrophe has had three significant and unpleasant consequences (Donald 2004). A financial institution was been destroyed; the reputation of the central-bank governor was tarnished and trendy regulatory system that made London the worlds largest international financial centre fell into disrepute. There remained questions and puzzles, and if only a social audit to determine the social causal of reduced shares was conducted, the collapse might have been prevented (ACCA 2004). In November of 2004, General Motors Powertrain plant in Massena, New York was fined for six solemn safety breaches, including a blocked exit route, the failure to assess the requirement for personal protective gear for staff and insufficient protecting of moving machine parts (Basamalah & Jermiah 2005). There were extra fines for violations of recordkeeping, specifically underreporting illnesses and injuries and the total penalty accrued to $160,000. If efficient environmental and social audit were conducted and reported, the company would have saved the finances for other projects (Ananda 2004). Relevance of social and environmental issues to statutory audits Statutory Audit is a legally requisite of external audit annually conducted to meet a particular set of government requirements. It relies on the reports of internal audit, authentication of financial information, related stock validations and documents (Anthony & Michael 2003). The nature of the audit program is subject to financial institutions and governmental body specifications. All registered companies and enterprises are obligated to undertake statutory audit for the production of precise financial statements (Deegan 2009). According to Ananda (2004), in the midst of statutory audit are the social and environmental issues. The external auditors cannot ignore the Environmental and Social issues in the company. These issues may have potential impacts on the financial statements of the business (ACCA 2004). Environmental factors have increasing economic importance to organisations. These cases include such issues as contingencies, provisions, liabilities, stock and plant write-down. They are matters of risk and are therefore of increasing significance to the statutory auditor who wants to take formal steps to evaluate whether the organisation is exposed in these locales and has taken appropriate steps to identify and control such vulnerabilities (Anthony & Michael 2003). Companies must produce social and environmental information within or in conjunction with their annual audit reports (Ananda 2004). Much of this information includes employee data, charitable and political donations, and corporate governance statements among others and compulsory reporting requirement that must be addressed by the internal auditor (Donald 2004). The statutory auditor must confirm this information when assessing the truth and fairness of the organization’s financial statements. Misappropriation of the social and environmental information in an audit may tarnish the reputation of the company in question (Basamalah & Jermiah 2005). This may cause severe implication for principal company auditors, secondary independent auditors and joint audits in group-audit environment (Donald 2004). The information of the statutory independent auditor lends credibility to the organizations financial information to be used by third parties (Ananda 2004). The International Standard on Auditing places duty on auditors about the social and environmental laws and regulations. These standards assume that the laws governing the social and environmental entities of the company are equally important as other laws and regulations governing the auditing body (Anthony & Michael 2003). Therefore, non-compliance to such laws may substantially affect the financial statements of the organization. Precisely, the standard places the responsibility on statutory auditors to detail any of the entity’s activities that have potentially harmful impact on the environment. This information is gained from the reports of the principal auditors (Deegan 2009). The standard obliges the auditor to plan and execute an audit on such social and environmental items with an approach of professional scepticism that recognises that situations such as environment issues may exist that, may cause significant misstatement of the financial statements (Donald 2004). Ananda (2004) outlines that; the standards impose that the auditors must be attentive to the risk of the activities of a client’s business having potentially detrimental environment impacts (ACCA 2004). Possible impediments to in execution of social and environmental audits Environmental and social audits are not obligatory hence; companies carry them out at will. The business environment on the other hand demands for information on the environmental and social audits. Because companies operate under the business environment, they are obliged to perform the audits. However, performing the social and environmental audits may face several obstacles among which include the following (Ananda 2004). Organizations may have inadequate and weak internal control systems including weak internal audit that may lead to the internal audit function providing the audit committee with insufficient information (Donald 2004). The insufficient information may further influence the reports of the statutory auditors (ACCA 2004). The auditors may encounter lack of independence as they are employees of the management and only put to public what the management considers beneficial to the business that consequently provide wrong information to the public (Anthony & Michael 2003). Social and environmental review, being non-obligatory may lack properly established auditing standards and norms to guide the auditors (Basamalah & Jermiah 2005). The auditors might also experience insufficient data and noncooperation from the company employees. Moreover, there might be insufficient national monitoring and evaluation techniques to support the social and environmental auditing (Ananda 2004). Benefits of social and environmental auditing to companies Companies are likely to obtain substantial benefits from submitting their environmental and social auditing reports. The audits provide reputational enhancement purposes to the company. Miles et al. (2002) argue that once a company has begun reporting on social and environmental issues in its annual reports there is increase in number of perceived benefits such as enhanced organization’s picture, external acknowledgment through ranking or awards and increased staff morale (ACCA 2004). There is also moral performance benefits associated with social and environmental audits. Many customers make a decision to utilize services and product of manufacturers based on the ethical performance of the organizations and the influence of its activities on customer environment (Anthony & Michael 2003). Businesses also benefit from environmental and social audits through compliance. Market issues such as compliance of services and products with environmental laws and legislation and customer perception of business environmental friendliness affect some business organizations. Such business organizations, achieve compliance with the environmental laws and regulations central to their business procedure and activities (ACCA 2004). Moreover, social and environmental audits contribute to investor confidence. Where organizations publish plausibly, properly audited and certified environmental and social reports investors are encouraged to increase trust in the company (Anthony & Michael 2003). Types of internal audits There are four major types of Internal Auditing in business organizations namely financial, operational, compliance and informational technology (ACCA 2004). Financial Audits entail the assessment of internal control processes over expenses and revenues, and the precision of their reporting in agreement with rules, laws and internally developed procedures and policies (Anthony & Michael 2003). Operational auditing scrutinizes the use of the organizations resources to assess the efficiency of their usage to satisfy the vision, mission and goals of the company. These are sometimes known as performance audits. The performance audit may include essentials of both compliance and financial audit (ACCA 2004). Compliance audits review both operating and financial transactions and controls to observe how soundly they conform to established standards, laws, regulations and procedures. Moreover, the audit may identify gaps between regulations and business procedures, and consequently, would suggest follow-up and training course to ensure personnel employees are informed about compliance needs adequately. Information technology audits, on the other hand, assess the business internal controls linked to the management of IT environments and related infrastructure, data and applications (Ananda 2004). Objectives of internal Auditing The role of internal audit in an organization is to offer independent assurance that the organization’s governance, risk management and other internal control processes are in a state of effective and efficient operation (Basamalah & Jermiah 2005). Internal auditors work across all areas of the organization to assess their efficacy in operations (Deegan 2009). The auditors deal with issues and elements that are fundamental to the organization for its prosperity and success. Unlike external audits, internal audits gaze beyond financial statements and risks to consider wider issues like the organisations growth, reputation, employees’ treatment and its impact on the environment. It objectively evaluates examines and reports on the sufficiency of internal control as a contribution to the economic, proper and efficient use of the organizations resources. It helps organizations succeed in their operations (ACCA 2004). Differences between internal and external audit While External auditors center on the accuracy of the annual financial statements and report, the internal auditor examines anything that might be significant to the success of an organization. The internal auditor reports to the management of the organization while the external auditor reports to the shareholders of the organization. The internal auditor has the responsibility objectives to evaluate and improve the efficiency of control processes, governance and risk management in the organization (Deegan 2009). The external auditor, on the other hand, has a duty to add reliability and credibility to the organization’s financial reports to its stakeholders with his opinion (ACCA 2004). Role of internal auditing in risk Management and compliance with social and environmental review commitments The standards internal auditing requires the function to determine the efficiency of an organizations risk management activities (Basamalah & Jermiah 2005). The Management must assess risks as part of the regular course of business activities such as marketing planning, strategic planning, budgeting, capital planning, hedging, credit/lending practices, incentive, payout structure, strategic partnerships, mergers and acquisitions, legislative changes and conducting business abroad among others (Campbell 2009). Internal auditors must evaluate every activity and focus on the processes used to manage risks business-wide (ACCA 2004). Internal auditors can also evaluate and report on whether the stakeholders and the board and can have rational assurance that the management team of the organization has applied an efficient risk management program (Deegan 2009). According to Campbell (2009), in doing this, the internal auditors ensure that the management considers only the strategies that comply with social and environmental laws and regulations to ensure an active social corporate responsibility (ACCA 2004). In addition, the internal auditors ensure that the management and other stakeholders have assurance in their ventures. Such assurance may lead to the positive reputation of the organization to the customers and the government (Campbell 2009). A social and environmental review is a potential tool in risk management and helps in assessing compliance with social and environmental laws and legislation. Deegan (2009) argues that the audit can help a business to avoid risk of fines and prosecution resulting from the potential breaches of environmental regulations and laws. In conclusion, antenatal auditing helps organizations achieve their objectives (Donald 2004). The development of social and environmental auditing has led to more transparent reporting of business organizations. The idea emerge show the management meeting it as a prerequisite to their regulatory requirements and apparent benefits gained by different stakeholders of the organization (Basamalah & Jermiah 2005). However, due to its perceived voluntary principle on the side of the auditor, the concept of environmental and social audit is important but appears not satisfactory in fulfilling the anticipated purposes. References Ananda, E. A. G. (2004). Getting Started: Beginning an Environmental Auditing Initiative in Sri Lanka, International Journal of Government Auditing, Vol. 32, No.2, pp. 28-29. Anthony, R.T. Emery and Michael, W (2003) Eco-Auditing and Environmental Liability: an International Perspective. Managerial Auditing Journal 18/8 (2003), pp. 631-636. Association of Chatered Certified Accountants (ACCA) (2004). Towards Transparency: Progress on Global Sustainability Reporting. London: Certified Accountants Education Trust. Basamalah, A. S. & Jermiah, J. (2005). Social and Environmental Reporting and Auditing in Indonesia: Main Training organisational Legitimacy? Gadjah Mada International Journal of Business, 7(1), 109– 127. Campbell, D. (2009). Risk and environmental auditing. ACCA student accountant. Deegan, C. (2009). Financial Accounting Theory. (3rd ed.). Sydney: McGraw Hill. Donald, R. Drach (2004) International Organisation of Supreme Audit Institution, International Journal of Government Auditing, April 2004, Vol. 32, No. 2, pp. 01-44. Read More