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Audit and Society

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Some of the most trenchant insights into the ‘soul’ of a company come from finding out how it treats its people. Mazars’ James Kallman explains

Non-stop media and social networks have changed the way stakeholders connect with businesses. As well as looking for ‘reasonable’ profits, they now demand transparency in the way the business is actually run. A glossy corporate brochure with green elements will no longer suffice, as professional reporting on corporate social responsibility is also required. And regulators are already taking heed of what the public, the ultimate regulators, want.

In California, for instance, all retailers with a presence in the state and total global sales in excess of US$100m have to report their internal processes to ensure that forced or child labour is not associated with any of the goods they sell. In France too, regulators have defined new requirements for extra-financial reporting, covering the full scope of groups of companies, including social, environmental and societal parameters, which are to be certified by an independent third party.

Even more demanding are the recent rulings of the US Securities and Exchange Commission (SEC). The first ruling requires US-listed oil and mining companies to disclose all taxes and other fees they pay to foreign governments and is similar in nature to the Extractive Industries Transparency Initiative (EITI) requirements. The second ruling requires companies to disclose to their shareholders and the agency when any portion of their manufactured goods contains minerals such as tin, gold and tungsten mined in the Democratic Republic of Congo; it places companies under an even more powerful microscope.

This underlines a growing awareness that traditional financial reporting can only tell us so much of a company’s story – the skeleton of the business. It is an acknowledgment that other types of reporting are also required to flesh out the skeleton and add features to the face of a company.

Integrated approach

This is obviously leading towards the integrated reporting of financial and environmental, social and governance (ESG) information, human resources and key performance indicators with an over-arching integrated summary report. But such an approach has its own problems. Being exceedingly complex, it could take years to implement due to the lack of qualified auditors and service providers. Also, its complexity may well preclude direct overall comparison and, while some sectors could be comparable, simple conclusions could well be lost in the forests of detail.

What is needed right now is additional reporting that augments the bare financial figures and provides an insight into the soul of a company and how well it fits into the acceptable environment of today’s world. A comprehensive human rights audit readily fits the bill, for if we know how a company treats the familiar faces of its employees, community, environment and the people it does business with, then we should gain a pretty good idea of how it is likely to treat the numerous other faceless stakeholders whose futures are mortgaged to its operations. In the current climate of corporate scandals, such information is priceless.

For audit purposes, an expansive definition of human rights is required that includes the areas outlined in the boxout on this page.

The indicators must be set with care, and be benchmarked to all major international and local human rights laws, conventions, protocols and regulations. Once set, however, the areas to test are decided by the auditor based on statistical audit sample and risk analysis, rather than on what the company may wish to report, as is the case with many sustainability reports currently carried out in line with Global Reporting Initiative (GRI) guidelines. Moreover, by carrying this out on an unannounced basis, reliable information can be obtained that is in no way influenced by the company undergoing an audit. The whole audit process is both comprehensive and detailed and can take three to four months or even longer to complete.

Regional variations

The concept of human rights is not as universal as some might imagine but in part dependent on cultural norms. One company in Indonesia, for example, even permits children to join their mothers in the fields after school, which would be a no-no in most western countries. Yet this fits in with the culture in Indonesia with its strong mother-child-family bond, something that is common in Asian society in general. Indeed, human rights in Asia are more focused on the rights of society as a whole, whereas the western model is to protect the rights of the individual within society. It is essential to obtain direct Asian, as well as African and Latin American, input when it comes to setting standards for a human rights approach, as it is important that this not be seen as just another imposition by the western world.

Human rights auditing provides an immediate answer to the need for additional information on a company’s performance. It provides valuable knowledge on the relationships between the company and its stakeholders; allied to data on its financial position from traditional audit procedures, this will permit a reasonable diagnosis as to the company’s health and prospects. Moreover, a human rights audit is presented in such a manner as to readily allow a meaningful company-to-company comparison, something that is not always possible with other approaches.

Now that has to be of value, especially from a capital market viewpoint, not only in the short and medium term, but also in the long term, as it must surely form part of any integrated reporting package of the future.

Defining human rights

Human Rights Compliance with the UN’s Universal Declaration of Human Rights.

Labour Rights

The human right to work, with freedom of association, and without discriminatory, forced or child labour practices.

Environment

Conducting environmentally responsible operations to uphold the human right to a healthy environment in which both to live and work.

Anti-corruption

Combating all corrupt practices, including bribery and extortion, to ensure that only legal payments are made that will ultimately benefit the human rights of the whole of society.

The Mazars human rights audit methodology was recognised at the International Accounting Bulletin Awards in March 2012 when it was awarded Audit Innovation of the Year. The judges included ACCA technical director Sue Almond.

Leader of Mazars’ human rights audit and advisory practice worldwide, James Kallman is a 30-year veteran of emerging markets. He is president director of Mazars Indonesia.

This article first appeared in Accountancy Futures, Edition 6, 2013

Published: 22 Aug 2014