Internal Audit

A Comprehensive Guide to Social Audit in India

Nowadays, the purpose of the corporate existence is not only limited to making profits but also extends beyond embracing society at large. Every established corporate entity/ business/ company mainly aims to create an impact on the environment, culture, and other parameters of the government.

The businesses conduct social audits to ensure compliance with the organization’s social purpose and manage emerging environmental or other associated issues.

A Brief Outlook on Social Audit

A social audit measures, understands, reports, and improves an organization’s social/ ethical performance. It ensures a formal review of the company’s endeavours, procedures, and well-established code of conduct. Simply, it is used to assess a company’s well-being and ensure its achievement of the goals or benchmarks for social responsibility. 

As SEBI (Securities Exchange Board of India) and MCA (Ministry of Corporate Affairs) pronounced the framework for the company’s social responsibility, India became the first country to legislate the requirement of social audit for companies. The Institute of Chartered Accountants of India (ICAI) and government regulators have facilitated companies mandatorily to have robust mechanisms for auditing CSR as per defined social audit standards.

Objectives of Social Audit

The main objective of conducting a social audit is to evaluate, monitor, and track (or audit) the company’s performance in consonance with corporate social responsibility (CSR). Some of the objectives of conducting a social audit are described below:

• Eliminate violation of human rights;
• Provide evidence regarding wrongdoings;
• Scrutinize various policy decision-making capacity;
• Strengthen accountability and transparency within the business;
• Strengthens trust & confidence in the democratic governance process;
• Ascertain, monitor and provide feedback on relevant improvements;
• To make a comparison between organizational goals & actual performance,
• Prevention of environmental degradation & corruptive practices;
• Evaluate and secure professionalism among the business & public resources;
• Increase efficacy and effectiveness of local development programmes.

What is the Scope of Social Audit in India?

Conducting social audits for businesses in India is wider in scope. Some of the activities included as part and parcel of the social audit are provided below:

• Conducted to access the schemes and programmes;
• Conducted to access the policies and laws;
• Authority to access the functioning of a public agency;
• Examines the projects/ programs/ project-based business activity;
• Recommend suggestions for improvement based on findings & analysis;
• Conducted to cover all relevant physical and virtual locations.

What are the Basic Principles of Business Social Audit?

The basic principle of performing a social audit is to evaluate the company’s social impact and ethical performance. Some of the basic principles of social audit are outlined below:

Transparency

The conduct of social audits must be based on a completely transparent administrative and decision-making process. The government is obliged, with suo moto authority, to access and disclose all relevant information.

Participation

Another principle that regulates social auditing in India requires the right-based participation of all affected persons in the decision-making and validation process.

Accountability

Ensuring companies’ immediate and public accountability and answerability is considered one of the basic principles for conducting social auditing in India.

Integrity

The standards of integrity are considered the main principle which governs the professionalism of the auditors conducting social audit programs to maintain competence and impartiality during auditing.

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Benefits of Conducting Social Audit in India

The social audit is crucial for evaluating socially responsible and sustainable business activities. Here’s the list defining some of the benefits of carrying out social audit in India:

Generates Awareness

The companies’ social audit generates a high level of awareness through sharing information/ financial documents regarding crucial aspects as defined under the NREGA. Awareness of NREGA rises by around 62% post-social audit.

Monitors the Implementation Processes

The social audit also ensures monitoring and cross-verifying the implementation processes with all the records (including muster rolls, financial records, passbooks, and measurement books).

Establishes Grievance Redressal

The social audit empowers the establishment of a grievance redressal mechanism to redress the loss suffered by wage seekers and other complainants. Also, the field assistant and other officials are called up to seek explanations for any audit complaints.

Secures Corrective/ Follow-Up Results

Social audits also ensure that corrective and follow-up results/ opinions are provided regarding any legal issue concerning society’s welfare.

Improved Social Performance

Social auditing is a powerful tool that monitors the gaps and leakages between scheme implementations to promote and improve companies’ social performance. It also ensures the evaluation of the corporate social responsibility (CSR) level to secure better performance.

Challenges While Conducting Social Audit in India

The challenges businesses face while conducting social audits for their business are influenced by various factors like lack of stringent penalties, awareness, knowledge, adequate staff, etc. Some of the reasons why businesses must avoid social audits in India are as pointed out below:

• Lack of standardization;
• Lack of awareness and capacity;
• Lack of well-established standards;
• Lack of transparent process;
• Lack of staff adequacy;
• Lack of significant penalties;
• Lack of qualified trainers and auditors;
• Lack of formal training;
• Lack of resources;
• Excessive political interference;
• Excessive complexity and time-consuming;
• Higher cost of outside resources;
• Exclusion of potential participants;
• Manipulating views of the organization.

Legal Framework for Regulating Social Audit in India

The legal framework on corporate social responsibility (CSR), as pronounced by the Securities Exchange Board of India (SEBI) and the Ministry of Corporate Affairs (MCA), ensures that companies act in a socially responsible manner. Some of the legislative support regulating the social audit system in India are as described below:

73rd Amendment of the Indian Constitution

The social audit for businesses gained significance through the 73rd amendment of the Indian Constitution. It provided a provision regarding the Panchayat Raj Institutions, empowering the Gram Sabhas to conduct social audits in addition to other functions of the legislature.

Right to Information Act, 2005

The Right to Information Act of 2005 is considered a crucial pillar supporting the social audit system in India. The Act supports the social audit system by disseminating and publishing computerized records/ information so that citizens have the minimum resources to request information formally.

National Rural Employment Guarantee Act (NREGA), 2005

Section 14 of the National Rural Employment Guarantee Act (NREGA) of 2005 provides a provision for social audit to maintain transparency and accountability in the NREGA scheme. Further, the Act also empowers the State Government to conduct social audits according to the pre-designed schedule.

Comparative Analysis of Social Audit and Financial Audit

The following table describes a comparative analysis of social audits and financial audits in India:

Social Audit	Financial Audit
It is a wider concept with a greater scope for measuring, understanding, and improving the social performance of an organization’s activities.	It is a narrow concept that mainly focuses on the scrutiny of financial records by an external auditor in accordance with accounting principles.
It provides an assessment of the impact of a department’s non-financial objectives.	It is directed towards recording, processing, summarizing, and reporting financial data.
Mainly focusses on matters concerning social and environmental aspects of the company.	Mainly focuses on matters concerning the financial background of the company.

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Conclusion

Social audit is a critical monitoring tool that involves both community and administrative agency platforms for the thorough review/ inspection/ verification of project progress, scheme implementation, etc. The phenomenon of social audit gained relevance after the enactment of NREGA, which incorporated provisions for carrying out social audits. The process of social audit promotes government accountability and justice for violated rights.

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