ENVIRONMENTAL AND SOCIAL AUDITING

Introduction As the companys primary objective is the maximization of shareholders wealth and in the accomplishment of its objective, company tends to focus on customers satisfaction. On the other hand customers not only expect desired quality and price of the companys product but also expect the welfare of the society and the environment in which they live. In this way environment and society are the indirect but important stakeholders of the company. Importance of Environment and the Society The following trends have contributed to the pressure on companies to operate in an economically, socially and environmentally sustainable way: Issues like environmental damage, improper treatment of workers, and faulty production that inconveniences or endangers customers are highlighted in the media. In some countries government regulation regarding environmental and social issues have increased. Some investors and investment fund managers have begun to take account of a corporations social and environmental policies in making investment decisions. Some consumers have become increasingly sensitive to the social and environmental performance of the companies from which they buy their goods and services. Implications for the Auditors Many companies now publish social and environmental reports. However, without independent audit and given public scepticism with regard to the aims of such reports they tend to lack credibility. In some cases the auditors are required whether under statutory requirements or otherwise for management purposes to verify and give opinion on managements Key Performance Indicators (KPIs) in respect of environmental and social regulations compliances. Examples of KPIs in respect of social compliances 1. To increases spending on staff training by 10% in the next 12 months. 2. To increase the monetary valuation of charitable donations by 10% in the next 12 months. Examples of KPIs in respect of environmental compliances 1. To reduce energy consumption by 10% over the next 2 years. 2. To increase the recycling of waste by 10% over the next 2 year.

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Matters to consider Are accountancy firms the right agent for such audit? It appears unlikely that an auditor would be able to measure carbon emissions or energy consumptions. There is a significant amount of subjectivity with regard to social and environmental reports, for example; the use of the term environmentally friendly. There are no formal agreed globally mandatory standards of reporting on such matters, which means directors can be selective in the reports they make. Other matters include: 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Who will the report be addressed to Who else will read it (and potentially rely on it) Can a liability disclaimer be included How detailed does the client want our work to be What evidence will be made available What format of report would they like How much assurance do they want us to provide Why is this assignment being done If we are to check something, against what criteria / standards are we to check Are there any professional guidance available for this type of assignment Who is responsible for the matter we are checking and reporting on

Contents of an assurance report on environmental issues There is no guidance in issue as to the contents of such report. The following items should be included as a minimum: 1. 2. 3. 4. 5. 6. Note of the objective of the review Opinions Basis on which those opinions have been reached Work performed Limitations to the work performed. Limitations to the opinion given

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December 207 Question 2(d) Sci-Tech Co receives funding from governmental health departments, as well as several large charitable donations. This funding represents on average 25% of the companys research and development annual expenditure. The amount of funding received is dependent on three key performance indicator (KPI) targets being met annually. All three of the targets must be met in order to secure the government funding. Extracts from Sci-Tech Cos operating and financial review are as follows: KPI target Pharmaceutical products donated free of charge to health care charities: 1% revenue Donations to, and cost of involvement with, local community charities: 05% revenue Accidents in the work place: Less than 5 serious accidents per year Draft KPI 2007 Actual KPI 2006

08% revenue

12% revenue

06% revenue

08% revenue

4 serious accidents

2 serious accidents

In addition to performing the financial statement audit, your firm is engaged to provide an assurance opinion on the KPIs disclosed in the operating and financial review. Required
(i) Discuss why it may not be possible to provide a high level of assurance over the stated key performance indicators; and (4 marks) Describe the procedures to verify the number of serious accidents in the year ended 30 November 2007. (4 marks)

(ii)

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Answer (i) The main reason why it may not be possible to provide a high level of assurance is that the KPIs are not defined precisely: The value of donated pharmaceutical products is compared to revenue to provide a percentage. However, it will be difficult to accurately value the donated products are they valued at cost, or at sales price? Are delivery costs included in the valuation? The intrinsic value may be lower than sales value as Sci-Tech Co may decide to donate products which are not useful or relevant to the charities they are donated to. The value of cost of involvement with local charities is also not defined. If the donations are purely cash, then it should be easy to verify donations using normal audit procedures to verify cash payments. However, the involvement with local charities is not defined and will be difficult to quantify as a percentage of revenue. For example, involvement may include: Time spent by Sci-Tech Co employees at local charity events Education and training provided to members of the local community in health care matters

Number of serious accidents is also difficult to quantify as what constitutes a serious accident is subjective. For example, is an accident serious if it results in a hospitalization of the employee? Or serious if it results in more than five days absence from work while recovering? In addition, the sufficiency of evidence available is doubtful, as such matters will not form part of the accounting records and thus there may be limited and possibly only unreliable sources of evidence available. Donated goods may not be separately recorded in inventory movement records. It may not be possible to distinguish donated goods from sold or destroyed items. Unless time sheets are maintained, there is unlikely to be any detailed records of involvement in local charities. (ii) Procedures to verify the number of serious accidents during 2007 could include the following: Review the accident log book and count the total number of accidents during the year Discuss the definition of serious accident with the directors and clarify exactly what criteria need to be met to satisfy the definition For serious accidents identified: review HR records to determine the amount of time taken off work review payroll records to determine the financial amount of sick pay awarded to the employee review correspondence with the employee regarding the accident.

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 Review board minutes where the increase in the number of serious accidents has been discussed Review correspondence with Sci-Tech Cos legal advisors to ascertain any legal claims made against the company due to accidents at work Enquire as to whether any health and safety visits have been conducted during the year by regulatory bodies, and review any documentation or correspondence issued to Sci-Tech Co after such visits. Discuss the level of accidents with representatives of Sci-Tech Cos employees to reach an understanding as to whether accidents sometimes go unreported in the accident log book.

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