Social and environmental auditing

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  • 1. Developments in Social and Environmentalassurance engagements
  • 2. ContentsPart A............................................................................................................................................................. 3 Introduction .............................................................................................................................................. 3 History ....................................................................................................................................................... 4 British Standard (BS 7750) .................................................................................................................... 6 Europe’s Eco management and audit scheme (EMAS) ......................................................................... 6 ISO 14001 .............................................................................................................................................. 6 Summary ................................................................................................................................................... 8Part B............................................................................................................................................................. 8Conclusion ................................................................................................................................................... 11Reference .................................................................................................................................................... 12Developments in Social and Environmental assurance engagements Page 2
  • 3. Part AIntroductionThe Social and environmental auditing refers to the auditing of organizations social andenvironmental reporting requirements and reporting thereon going beyond financial statementsauditing. In this case auditors are providing assurance services to the organizations social andenvironmental activities. This entire concept is called triple bottom line reporting, ie social,environmental and economical performances of the organizations are reported by themanagement. Under this triple bottom line reporting concept following areas are covered ineach reporting category.  Environmental Energy consumption and alternative energy sources Water consumption Carbon Emission Recycling activities Product content Biodiversity Organic foods  Social Community Investments made by the organization Working condition of the organization Human right conditions Health and nutrition Anticorruption and bribery  Economical Financial performance Corporate Governance Financial objectives Accountability and transparencyDevelopments in Social and Environmental assurance engagements Page 3
  • 4. HistoryThe development in social and environmental accounting and auditing started in mid 1980’s. Atthat time the shareholders of companies whose involved in manufacturing, mining, chemicaloperations draw attention to the fact that companies should report not only its financial resultsbut to account company’s impact to the social and natural environment also. However, asper the International chamber of commerce (ICC) a US consultancy firm, Auther D little wasconducting environmental audits around the world from 1920s.(Porter & Brenda,2003)This reveals that the social and environmental auditing has not just aroused in 1980s. However,fast growing requirement of the environmental reporting and auditing has resulted by theenvironmental disasters taken place due to the activities of the companies and relatedregulations in those industries.As per the survey conducted by KPMG from 1993 to 2002 following results were shown. Year survey carried out % of companies producing separate social and environmental report 1993 13% 1996 17% 1999 24% 2002 28%(Source: KPMG 2011)Accordingly over the past decade demand has increased to regulate corporate activities andthus such organizations are responsible for the social and environmental damage that theycause.In some companies, the bonuses of top level executives are linked to the sustainabilityreporting. Accordingly the bonus of the CEO of retail giant king fisher is directly linked to thesustainability reporting. (Reporting, 2012, Ernst & young global Limited, page 8)With the demand arising with this regard, countries all around the world has paid much attentionto the introduction of laws and regulations relating to social and environmental activities ofcompanies. As a result, In UK the environmental protection act was introduced in 1990 as theDevelopments in Social and Environmental assurance engagements Page 4
  • 5. first step to regulate the social and environmental activities of the companies while countriessuch as US has established “Congressional comprehensive environmental response,compensation and liability act” in 1980 and the “superfund amendment and reauthorization actin 1986.Amid the regulations imposed by the government and growing concerns of the share holders, inearly 1980s the companies of both countries started to carry out environmental audits whichgenerally focus following areas,  Health and safety requirements of relating to the occupation  Social and environmental requirements such as carbon emission which relates to obtain license to carry out the operations.  Laws and regulations related to production, storage and disposal of hazardous waste (nuclear waste).  Liabilities that may arise as a result of disposal of hazardous waste and substance made in the past. (Porter & Brenda, 2003)Until 1990s the environmental audits were aimed at specific requirements such as ensure tocompliance with regulatory requirement related to social and environmental activities and avoidany financial losses and liabilities. However in early 1990s the scope of those audits werechanged and as a result those audits were proactive in nature and the scope of the audits alsoincreased.From 1990s onward environmental audits were considered as valuable source of managementinformation and providing information relating to reputation of the company. Accordinglyestablishing various Environmental Management systems (EMS) was encouraged by theintroduction of several environmental certification methods. Those schemes are,  British standard (BS 7750) in UK  Europe’s Eco management and audit scheme (EMAS) in Europe  ISO 14001 in UK and USADevelopments in Social and Environmental assurance engagements Page 5
  • 6. British Standard (BS 7750)This is the first Environmental Management system introduced in UK in 1990 as a voluntaryscheme of environmental management and audit. According to this scheme companies arerequired to obtain a certification. Subsequently this was amended in 1994 and withdrawn in1997 with the introduction of ISO 14001 in 1996.Europe’s Eco management and audit scheme (EMAS)EMAS was introduced in 1993 as a mandatory social and environmental management and auditscheme in several specific industries. However this was subsequently changed to voluntaryscheme which applicable to all companies. Under this scheme companies are required topublish a audited environmental statement annually.ISO 14001ISO was introduced in 1992 as a result of RIO earth summit where participants agreed to takesteps to protect environment. Under this scheme companies or parts of companies are requiredto obtain a certification.Environmental audit is a crucial part of the Environmental Management System (EMS) it helpsto function the EMS effectively and to achieve improved performance related to social andenvironmental activities.At the beginning of the new millennium it was revealed that the companies were under severepressure to disclose social and environmental information. Such pressure was exert by followingareas,  Due to the development in the information technology, the activities of the companies were revealed to the general public than those previously and this has led companies held more responsibilities and increase performance disclosures relating to social and environmental.  The investors of the companies expected information relating to the company’s social and environmental behavior. As such companies were under pressure to disclose such information expected by the shareholders. In USA, at the annual general meeting ofDevelopments in Social and Environmental assurance engagements Page 6
  • 7. British Petroleum (BP) and Coca Cola share holders raised their concerns over climate changing and recycling of bottles and cans.  The potential share holders were interested in investing in socially and environmentally friendly organizations. Accordingly, in 2002 UK FTSE was created a new index which comprises leading ethical companies which called FTSE4good. Out of 350 FTSE companies 176 companies were listed in FTSE4good index which shows the company’s’ trend towards social and environmental friendly behavior Further more in USA ethical investment funds were growing rapidly and were established well. Accordingly it was revealed that in 1999 funds invested in such funds were amounted to US$ 2 trillion.  The potential environmental liabilities arise as a result of the activities of the companies which breach environmental laws and regulations.Accordingly it can be noted that the both in UK and USA there was a gradual development insocial and environmental reporting and auditing.Furthermore companies in USA operated in oil, steel, automobile and paper industry cameunder severe pressure from Environmental Protection Agency (ERA) to disclose severalinformation in the internet. In UK the institutional investors requested organizations such asBritish Insurers Association to consider social and environmental information of the companiesas well apart from financial information when making investment decisions.When reporting such social and environmental information companies were face severedifficulties due to the lack of guideline and proper reporting mechanism. To overcome this,Global Reporting Initiative guidelines (GRI) were developed and this provide a comprehensivemethod of reporting social and environmental information of the organization. Currently GRI isused by more than 60 countries by more than 3000 private and public companies in varioussectors.Both in UK and USA companies were adopting GRI and thus auditing of social andenvironmental activities and information has became more systematic and comprehensive dueto the efficient and effective reporting of information according to the GRI.Under the European Eco Management Audit Scheme (EMAS) also the companies are requiredto obtain an external certification on the social and environmental information and accordinglythe scope of the audit was decided by the requirements stipulated in EMAS.Developments in Social and Environmental assurance engagements Page 7
  • 8. SummaryIt can be noted that both in UK and USA the requirement for reporting of social andenvironmental information was arises in 1980 s and In USA even from 1920s. Thereafter suchgrowing concern led regulators to impose laws and regulations in relation to the social andenvironmental activities of the organizations and this has developed further by the regulatorsrequiring to disclose such social and environmental information to public. With theserequirements the companies were raised their concern over lack of proper reporting frameworkand this has fulfilled by introducing Global reporting initiative (GRI), European Eco ManagementAudit Scheme (EMAS) and United Nations Global Compact. Concerns were raised as to thecredibility of those reporting and readers required independent auditors to audit those reportingand issue independent report on the same. With this requirement the audit in social andenvironmental information has developed and it will continue to develop in the future as wellsince climate change and social and environmental impact from companies is a growingconcern of the stake holders of the companies.Part BIn the early 21st century the world has experience lot of environmental catastrophes such asTsunami tidal waves in 2004, continuous global warming, Earth quake in Mexico and veryrecently the earth quake and tsunami in Japan and the Fukushima nuclear power plant tragedy.More specifically BP oil spill took place in Gulf of Mexico has resulted severe impact to theperson living in two states and to the natural environment and living species in the surroundingarea. These have raised the concerns of community over the activities of the organizationwhich will in turn affect to the society and environment such as carbon emission, globalwarming, water air and sound pollution, health and safety of the community ect.Although the activities of the companies affect to the adverse environmental outcomes such ascarbon emission and global warming, such activities cannot be stopped as the businessactivities of the organizations needs to be carried out to achieve its corporate objectives. Forexample though the BP oil rigging and refinery activities may harm to the environment suchDevelopments in Social and Environmental assurance engagements Page 8
  • 9. activities cannot be stopped since those activities needs to be carry out to achieve its corporateobjectives as well as those activities are essential to carry out day to day activities of the worldas a whole. Therefore the companies are required to take necessary steps to reduce thenegative impact to the environment by alternative means such as carrying out operations inenvironmental friendly manner as per the globally accepted best practices and industry norms.For Example a BP company may not eliminate the environmental impact it cause to theenvironment but company can take steps to minimize the impact and apply modern techniquesand industry best practices in-house to reduce the impact to the environment. Further it canallocate resources to rebuild or restate environment which affected by its activities.Further explaining, currently due to the manufacturing activities and from the vehicles it producethe impact made by the Toyota company to the environment all around the world is very highhowever by introduction of Hybrid vehicles which reduce the fuel consumption and therebyreducing carbon emission the company taken steps to control the negative impact to theenvironment and contribute to the sustainable development. Furthermore the company has setup eco friendly manufacturing plants all around the world instead of manufacturing plant whichadversely affects to the society and environment.Carbon emission refers to the phenomenon of emit of large amount of carbon dioxide to theenvironment which happens by burning fossil fuels and other activities. Carbon emissionschange the climate of the earth and affects to the each and every living being on the earth. Inthe recent past countries all around the world experienced unexpected and extreme weatherconditions which resulted due to the climate change. Therefore companies involved inindustries such as oil and gas, mining, nuclear activities, chemical manufacturing industry hasmore social responsibility towards society and environment by carrying out their operations inmore social and environmental friendly manner.Moving towards the development in the technology in the 21 century, the operations of thecompanies also became more complex and severely affecting to the social and environmentwell being . Therefore the much attention needs to be paid to the social and environmentalreporting made by the company as that is the only source of information that the public canobtain information about the social and environmental activities of the company.In the fast moving world the competition of the companies has became to the highest level sincethe target segment is becoming limited day by day and profit margins of the companies areDevelopments in Social and Environmental assurance engagements Page 9
  • 10. reducing day by day. Further the management of the companies are severely under pressurefrom the share holder to achieve corporate objectives through sustainable development whileregulators and environmental friendly groups pressure the company to carry out its operations ina environmental friendly manner. Amid the pressure on the operational activities of thecompanies, they are required to comply with highly strict social and environmental rules andregulations as well. In this circumstance the most possible outcome will be that themanagement of those companies may try to achieve their corporate objectives at the cost ofsustainability development. That is the management will pay attention to the achieving of profitgoals without considering best environmental practices and industry norms which may harm toits profit targets. Therefore companies may tend to manipulate the social and environmentalinformation that they make available with the public and pretend that they are compliance withthe relevant social and environmental laws and regulations.As a example if the management of the BP is under pressure to achieve its profit goals from itsshare holders and if they are suppose to carry out their oil mining activities under strictlyregulated and environmental friendly manner which in turn will affect to the profits of thecompany adversely, due to the pressure from share holders management may take steps tocarry out its operations in a more profitable manner by which harm to the environment andviolating rules and regulation relating to social and environmental activities and best industrypractices. Thereafter company may manipulate its social and environmental information andactivities which they made public to pretend that it has operated in a social and environmentalfriendly manner which will minimize the impact to the society and environment.Having identified this, most of the influential groups including corporate investors raised theirconcern over independent review of these social and environmental reporting and activitiescarried out by the companies.To avoid such manipulation and improve the reliability of the social and environmentalinformation published by the companies, social and assurance engagements are essential.Moreover since social and environmental reporting is in developing age it will helps theorganizations to improve their reporting activities by engaging external party who carry out auditof such information. Those firms may have expertise in specific industry area where thecompanies can be benefitted.Developments in Social and Environmental assurance engagements Page 10
  • 11. Further if the assurance report provide by the auditors is qualified or raised concerns over theinformation provided the shareholders and other pressure groups can take necessary steps toimprove those areas.However attention needs to be given as to whether personnel who is having appropriateexperience and expertise in the relevant industries and technologies carries out the audits.In this context the social and environmental assurance engagement plays a major role toprovide community with reliable information and help stake holders to take effective decisions.ConclusionTherefore it can be agreed to the statement “with the current emphasis on carbon emissionsand damage to the environment that businesses cause and an awareness of social issues, therole of auditors in providing social and environmental assurance engagements is likely toincrease as we enter into the 21st Century.”Developments in Social and Environmental assurance engagements Page 11
  • 12. Reference  Ernst & Young 2011,climate change and sustainability shareholder press board on social and environmental risk are you ready, Ernst & young global Limited, UK,viewed 04 January 2012, < http://www.ey.com>  Porter & Brenda,2003,Principles of external auditing, John wiley,NJ USA  Arens,Elder and Beasley,2011,Auditing and Assurance services, prentice Hall,NJ USA  Ernst & Young 2011,reporting, Ernst & young global Limited, UK,viewed 04 January 2012, < http://www.ey.com>  KMPG 2011,KPMG international survey of Corporate social responsibility reporting 2008, KPMG international ,USA ,viewed 4 January 2012, < http://www.kpmg.com/global/en/Pages/default.aspx>  Association of Certified chartered Accountants 2011, Association of Certified chartered Accountants, viewed 4 January 2011, < http://www.accaglobal.com/en.html  Pricewaterhousecoopers, 2011, Pricewaterhousecoopers, UK,viewed 04 January 2011.< http://www.pwc.co.uk/>Developments in Social and Environmental assurance engagements Page 12