Environment and social

matters to auditors
khooshal Ramphul
Student id: 160169
Module: advanced auditing-Accf 2113
Sustainability, and within that the environment, is an
important concern, if not the most important concern, for
business and society today.

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Table of contents
1. Introduction to environmental matters 3
1.1.The Auditors' Main Considerations with Respect to Environmental Matters 3
1.2.Environmental Matters and their Impact on the Financial Statements 4
1.3.Environmental audit 5
2. What is Social Accounting? 6
2.1.Social audit vs other audits 6
2.2.Principles of social audits 8
2.3.Uses and functions of social audits 9
2.4.Benefits of social auditing 10
3. Conclusion 11
4. Reference 12

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 environment accounting, reporting and audit

1. Introduction to environment matters

Environmental matters are getting to be noticeably significant to an expanding number of
entities and may, in specific circumstances, materially affect their financial statements. These
issues are of developing enthusiasm to the clients of financial statements. The recognition,
measurement, and disclosure of these matters is the obligation of management.

For a few entities, environmental matters are not significant. Be that as it may, when
environmental matters are significant to a substance, there might be a danger of material in the
financial statements emerging from such matters: in these circumstances, the examiners need
to offer thought to environmental matters in the review of the financial statements
1.1. The Auditors' Main Considerations with Respect to Environmental Matters
The target of a review of financial statements is:

"...to enable the auditors to express an opinion on whether the financial statements are
readied, in every material regard, as per a recognized financial revealing structure."

The auditors' opinion identifies with the financial statements taken all in all and not to a
particular viewpoint. When arranging and performing review strategies and in assessing
and revealing the outcomes thereof, the auditors would need to perceive that
noncompliance by the element with laws and controls may materially influence the
financial statements. Be that as it may, a review can't be relied upon to distinguish
rebelliousness with all laws and controls. Specifically, as for the substance's consistence
with environmental laws and directions, the auditors' motivation isn't to design the review
to identify conceivable breaks of environmental laws and directions; nor are the auditors'
techniques adequate to make a determination on the element's consistence with
environmental laws and directions or the ampleness of its controls over environmental
matters.

In all reviews, when building up the general review design, the auditors survey
characteristic hazard at the financial explanation level. The auditors utilize professional
judgment to assess the components applicable to this evaluation. In specific
circumstances these elements may incorporate the danger of material misquote of the
financial statements because of environmental matters. The need to consider, and degree
of the thought of, environmental matters in a review of financial statements relies upon
the auditors' judgment regarding whether environmental matters offer ascent to a danger
of material error in the financial statements. Now and again, no particular review
methodology might be judged important. In different cases, in any case, the auditors
utilize professional judgment to decide the nature, timing and degree of the particular
strategies considered vital with a specific end goal to acquire adequate suitable review
prove that the financial statements are not materially misquoted. In the event that the
auditors don't have the professional competence to play out these systems, specialized

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 guidance might be looked for from authorities, for example, legal counselors, engineers,
or other environmental specialists.

To reason that an element works in consistence with existing environmental laws or

controls conventionally requires the specialized abilities of environmental specialists,
which the auditors can't be relied upon to have. Additionally, regardless of whether a
specific occasion or condition that goes to the consideration of the auditors is a break of
environmental laws and directions is a legitimate assurance that is normally past the
auditors' professional competence. Nonetheless, as with different laws and directions:
"...the auditors' preparation, experience and comprehension of the element and its
industry may give a premise to recognition that a few demonstrations becoming obvious
may constitute noncompliance with laws and controls. The assurance with reference to
whether a specific demonstration constitutes or is probably going to constitute
rebelliousness is for the most part in light of the counsel of an educated master fit the bill
to provide legal counsel at the end of the day must be controlled by a courtroom."

1.2. Environmental Matters and their Impact on the Financial Statements

"environmental matters" are defined as:

initiatives to prevent, abate, or remedy damage to the environment, or to deal with
conservation of renewable and non-renewable resources (such initiatives may be required
by environmental laws and regulations or by contract, or they may be undertaken
voluntarily);
consequences of violating environmental laws and regulations;
consequences of environmental damage done to others or to natural resources; and
consequences of vicarious liability imposed by law (for example, liability for damages
caused by previous owners).
Some examples of environmental matters affecting the financial statements are the
following:
a. the introduction of environmental laws and regulations may involve an impairment of
assets and consequently a need to write down their carrying value;
b. failure to comply with legal requirements concerning environmental matters, such as
emissions or waste disposal, or changes to legislation with retrospective effect, may
require accrual of remediation, compensation or legal costs;
c. some entities, for example in the extraction industries (oil and gas exploration or mining),
chemical manufacturers or waste management companies may incur environmental
obligation as a direct byproduct of their core businesses;
d. constructive obligations that stem from a voluntary initiative, for example an entity may
have identified contamination of land and, although under no legal obligation, it may
have decided to remedy the contamination, because of its concern for its long-term
reputation and its relationship with the community;
e. an entity may need to disclose in the notes the existence of a contingent liability where
the expense relating to environmental matters cannot be reasonably estimated; and

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f. in extreme situations, noncompliance with certain environmental laws and regulations
may affect the continuance of an entity as a going concern and consequently may affect
the disclosures and the basis of preparation of the financial statements.

1.3.Environmental Audit
"Environmental audits" are becoming increasingly common in certain industries. The
term "environmental audit" has a wide variety of meanings. They can be performed by
external or internal experts (sometimes including internal auditors), at the discretion of
the entity's management. In practice, persons from various disciplines can qualify to
perform "environmental audits". Often the work is performed by a multi-disciplinary
team. Normally, "environmental audits" are performed at the request of management and
are for internal use. They may address various subject matters, including site
contamination, or compliance with environmental laws and regulations. However, an
"environmental audit" is not necessarily an equivalent to an audit of an environmental
performance report. The auditors of the entity's financial statements may consider using
the findings of "environmental audits" as appropriate audit evidence. In that situation the
auditors have to decide whether the "environmental audit" meets the evaluation criteria
Important criteria to be considered are:
a. the impact of the results of the environmental audit on the financial statements;
b. the competency and skill of the environmental audit team and the objectivity of the
auditors, specially when chosen from the entity's staff;
c. the scope of the environmental audit, including management's reactions to the
recommendations that
result from the environmental audit and how this is evidenced;
d. the due professional care exercised by the team in the performance of the
environmental audit; and
e. the proper direction, supervision, and review of the audit.

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 social accounting, reporting and audit

2. What is Social Accounting?

Governments are facing an ever-growing demand to be more accountable and socially
responsible and the community is becoming more assertive about its right to be informed
and to influence governments' decision-making processes. Faced with these vociferous
demands the executive and the legislature are looking for new ways to evaluate their
performance. Civil society organisations are also undertaking "Social Audits" to monitor
and verify the social performance claims of the organisations and institutions.

Social Audit is a tool through which government departments can plan, manage and
measure non-financial activities and monitor both internal and external consequences of
the departments' social and commercial operations. Social Audit gives an understanding
of the administrative system from the perspective of the vast majority of people in the
society for whom the very institutional/administrative system is being promoted and
legitimised. Social Audit of administration means understanding the administrative
system and its internal dynamics from the angle of what they mean for the vast majority
of the people, who are not essentially a part of the State or its machinery or the ruling
class of the day, for whom they are meant to work.

Social Audit is an independent evaluation of the performance of an organisation as it

relates to the attainment of its social goals. It is an instrument of social accountability of
an organisation. In other words, Social Audit may be defined as an in-depth scrutiny and
analysis of the working of any public utility vis-a-vis its social relevance. Social Auditing
is a process that enables an organisation to assess and demonstrate its social, economic
and environmental benefits. It is a way of measuring the extent to which an organisation
lives up to the shared values and objectives it has committed itself to. It provides an
assessment of the impact of an organisation's nonfinancial objectives through systematic
and regular monitoring based on the views of its stakeholders. Stakeholders include
employees, clients, volunteers, funders, contractors, suppliers and the general public
affected by the organisation. Stakeholders are defined as those persons or organisations
who have an interest in, or who have invested resources in the organization.

2.1. Social Audit Vs Other Audits

Social Audit is often misinterpreted as another form of audit to determine the accuracy of
financial or statistical statements or reports and the fairness of the facts they present. A
conventional financial audit focuses on financial records and their scrutiny by an external
auditor following financial accountancy principles, whereas the concept of Social Audit
is more comprehensive, having a greater scope than that of traditional audit. In general,
Social Audit refers to a process for measuring, understanding and improving the social
performance

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of an activity of an organisation. Social Auditing is again distinct from evaluation in that
it is an internally generated process whereby the organisation itself shapes the Social
Audit process according to its stated objectives. In particular, it aims to involve all
stakeholders in the process. It measures social performance in order to achieve
improvement as well as to report accurately on what has been done.

Financial audit is geared towards verification of reliability and integrity of financial

information. Similarly, operation audit looks at compliance with policies, plan
procedures, laws, regulations, established objectives and efficient use of resources. On
the contrary, Social Audit examines performance of a department/programme vis--vis its
stated core values in the light of community values and the distribution of benefits among
different social groups reached through good governance principles. Social Audit adds
another dimension of key performance measurements in creating social wealth in the
form of useful networks and administration/ accountable and transparent to the
stakeholders. Creating social wealth is one of the key contributions of Social Audit. Thus,
Social Audit strengthens the legitimacy of the state, as well as trust between the state and
the civil society.

Financial audit Operational audit Social audit

Directed towards Establishing standards Social Audit provides
recording, processing, of operation, an assessment of the
summarizing and measuring impact of a
reporting of financial performance against departments non-
data . standards, examining financial objectives
and analyzing through systematic
deviations, taking and regular
corrective actions and monitoring on the
reappraising standards basis of the views of
based on experience its stakeholders.
are the main focus .

Social Audit is proposed as a supplement to conventional audit to help Government

departments/ public agencies to understand and improve their performance as perceived
by the stakeholders. Social Audit is to be done at different levels of the government and
the civil society. Social Audit is an ongoing process, often done in 12-month cycles that
result in the preparation of annual Social Audit document or report of an organization.

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2.2. Principles of Social Audit
The foremost principle of Social Audit is to achieve continuously improving
performances relative to the chosen social objectives. Eight specific key principles have
been identified from Social Auditing practices around the world.
Multi-Perspective/Polyvocal: Aim to reflect the views of all those people involved
with or affected by the organisation/department/ programme.
Comprehensive: Aims to report on all aspects of the organisation's work and
performance.
Participatory: Encourages participation of stakeholders and sharing of their values.
Multidirectional: Stakeholders share and give feedback on multiple aspects.
Regular: Aims to produce social accounts on a regular basis so that the concept and the
practice become embedded in the culture of the organisation covering all the activities.
Comparative: Provides a means whereby the organisation can compare its own
performance each year and against appropriate external norms or benchmarks; and
provide for comparisons to be made between organisations doing similar work and
reporting in similar fashion.
Verified: Ensures that the social accounts are audited by a suitably experienced person
or agency with no vested interest in the organisation.
Disclosed: Ensures that the audited accounts are disclosed to stakeholders and the wider
community in the interests of accountability and transparency.

These are the pillars of Social Audit, where socio-cultural, administrative, legal and
democratic settings form the foundation for operationalising Social Audit. The Social
Audit process is intended as a means for social engagement, transparency and
communication of information, leading to greater accountability of decision-makers,
representatives, managers and officials. The underlying ideas are directly linked to
concepts of democracy and participation. The application of Social Audit at the village
level holds tremendous potential for contributing to good local governance and increased
transparency and accountability of the local bodies.

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The following figure depicts the principles of Social Audit and universal values.

2.3. Uses and Functions of Social Audit

Social Auditing can be used as a tool to provide critical inputs and to correctly assess the
impact of government activities on the social well-being of the citizens, assess the social
costs and measure the social benefits accrued as a result of any programme
implementation. The performance of government departments is monitored through
various mechanisms, in different states. However, these practices do not capture
adequately the broader social, community and environmental benefits.
Therefore, to generate information on social relevance, costs, and benefits of a
programme/ activity, Social Audit can be used to provide specific inputs for the
following:
To monitor social and ethical impact and performance of the organisation;
To provide a basis for shaping management strategy in a socially responsible and
accountable way and to design strategies;
To facilitate organisational learning on how to improve social performance;
To facilitate the strategic management of institutions
To inform the community, public, other organisations and institutions about the
allocation of their resources; this refers to issues of accountability, ethics.

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2.4. Benefits of Social Auditing
The following are the benefits of Social Audit:
1. Enhances reputation: The information generated from a Social Audit can provide
crucial knowledge about the departments/institutions ethical performance and how
stakeholders perceive the services offered by the government. The social angle in the
delivery of services, real or perceived, can be a major factor adding to the reputation of
the department and its functionaries. In an era where all the services are benchmarked
and where citizens are becoming more aware about the services through citizens' charters,
the government departments are also aiming towards building their reputations. Social
Auditing helps the legislature and executive in identifying the problem areas and provides
an opportunity to take a proactive stance and create solutions.

2. Alerts policymakers to stakeholder trends: Social Auditing is a tool that helps

managers understand and anticipate stakeholder concerns. This tool provides essential
information about the interests, perspectives and expectations of stakeholders facilitating
the interdependency that exists between the government and the community.

3. Affects positive organisational change: Social Auditing identifies specific

organizational improvement goals and highlights progress on their implementation and
completeness. Also, by integrating Social Audit into existing management systems,
employees responsible for day-to-day decision making can more effectively consider
stakeholders' issues and concerns.

4. Increases accountability: Due to the strong emphasis on openness and accountability

for government departments, the information disclosed needs to be fair and accurate.
Social Auditing uses external verification to validate that the Social Audit is inclusive
and complete. An externally verified audit can add credibility to the department's efforts.
But the greatest demonstration of a Social Audit's authenticity must be seen in how the
performance of the department improves over time in relation to its mission, values and
objectives.

5. Assists in re-orienting and re-focusing priorities: Social Auditing could be a useful

tool to help departments reshape their priorities in tune with people's expectations.

6. Provides increased confidence in social areas: Social Audit can enable departments/
institutions to act with greater confidence in social areas that have been neglected in the
past or have been given a lower priority.

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3. Conclusion

The general conclusion from the study is that environmental and social auditing has been
embraced considerably over recent years. The concept appears to have been driven by
management in meeting their regulatory requirements and perceived benefits gained by
various stakeholders of the entity. However, because of its voluntary principle in nature
on the part of the auditor, the concept is valuable but appears not sufficient in fulfilling
the intended purposes. This is because corporate auditors are not under any obligation to
report to stakeholders of the entities the impact of social and environmental issues such as
health and safety of employees, global warming and climate change. Regulators of the
accountancy profession therefore have more pressing issues to deal with especially with
the recent concerns of global warming resulting from the environmental related issues. It
is therefore important that they set prescribed and dedicated standards on social and
environmental issues for auditors when conducting such audit. They must ensure that the
business case aligned with social and environmental auditing is properly regulated to
ensure the fruitful outcome of its implementation.

However, in developing a regulatory standard, the duties of management of the

organization with regard to the growing body of environmental laws and regulations
should be the same as any other laws and regulations where non-compliance may
materially affect the auditors report. Until a concrete regulatory standard is developed
and embraced by all stakeholders and auditors, it does not mean that companies should
ignore the social and environmental issues in their reporting, neither should corporate
auditors ignore the issue while conducting statutory audit. Rather, the current existing
voluntary standards, if vigorously pursued can bring real benefits to the organisation and
will be a good preparatory ground before regulatory social and environmental reporting
standards become mandatory in the future.

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4. Reference
ACCA. (2004). Towards Transparency: Progress on Global Sustainability Reporting. London: Certified
Accountants Education Trust.

ACCA (2009). Advanced Auditing. London: Kaplan Publishing.

INTERNATIONAL AUDITING PRACTICE STATEMENT 1010 the consideration of environmental matters in

the audit of financial statements

Integrated Environmental Management Information Series- Environmental Auditing

Department of Environmental Affairs and Tourism

Social Audit: A Toolkit- A Guide for Performance Improvement and Outcome Measurement CENTRE FOR
GOOD GOVERNANCE

https://www.researchgate.net/publication/260882658

Current Developments and Trends in Social and Environmental Auditing, Reporting & Attestation: A Personal
Perspective- Rob Gray

The institute of charteres accountants- ENVIRONMENTAL ISSUES AND ANNUAL FINANCIAL

REPORTING

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