Social Benefits of Audit

Audit emerges because society needed. Auditing has been a regular feature of organized human activity from the earliest times. Indeed evidence suggests that formal audit procedures existed in the economic activities of the most of the early civilization. With the advancement of development, audit emerges as a separate discipline & contributes to the economic & social advancement. Audits serve a vital economic purpose and play an important role in serving the public interest to strengthen accountability and reinforce trust and confidence in financial reporting. As such, audits help enhance economic prosperity, expanding the variety, number and value of transactions that people are prepared to enter into. However, in recent years, and in the light of corporate scandals, we have witnessed ongoing global demands for improvements in audit quality. Changes have been taken place to promote greater transparency in the audit and accountability in auditors but there are continuing demands for further improvements to be made. Definition of audit: The availability and use of resources is strongly influenced by the type of economic policies that entities implement. Modern audit is concerned with citizen’s economic and social benefits. In the jargon of economics, government actions typically ‘distort’ the operation of economies, compared with the benchmark of a competitive market economy, and assumed to be able to operate without any government intervention. Such actions can only be justified by auditor if there are benefits stemming from the action that outweigh its costs. Here is an example of such logic applied to education: To finance better-quality schooling for those who have the least educated parents, and who attend the worse schools, it may be necessary to raise taxes on other people. The basic economic insight that such taxation distorts incentives remains valid. Such policies should be implemented only to the extent that the (present) value of the long-run benefits of greater equity exceed the efficiency costs of funding them. [World Bank, World Development Report 2006 (Washington DC: World Bank, 2006) at page 22. Benefits and costs are typically measured using a money-metric. Education is typically valued in terms of additions to a person’s expected future lifetime earnings, placing a low value on education of people whose expected future lifetime earnings are low, and no value on people for whom such earnings are zero. The same tension can be found if we look at the economy as a whole. Neoclassical economics judges the benefits of economic policies in terms of maximizing the output of goods and services, as measured by the level and rate of growth of the country’s Gross Domestic Product (GDP). It is assumed that rapid economic growth will lift people out of poverty, and that private ownership and market competition are likely to be the best mechanisms for maximizing economic growth. (This belief is what underpins the advocacy of privatization of public enterprises and services, and liberalization of markets). If some people are left behind, or indeed made worse-off, by policies aimed at maximizing national output, then it is assumed that ‘winners’ can compensate ‘losers’, for instance via taxation and public expenditure ( though these instruments must be used in a way that minimizes so-called ‘distortions’). This might be described as a strategy of ‘first maximize the size of the pie, then hope that it will be sliced up in such a way that nobody is made worse off’. Note that this approach is indifferent as to whether the losers are people who are already very rich, or very poor. Each is equally deserving of compensation. Nor does it pay much attention to the likelihood of compensation actually taking place. If the policy measures are expected to produce the maximum possible extra output, then auditor will express opinion that is enough for them to be judged ‘optimal’. States enjoy a margin of discretion in selecting the means to carry out their obligations. However, in discharging their obligations for the realization of economic and social rights, states must pay regard to the following key points: the requirement for progressive realization; the use of maximum available resources; the avoidance of retrogression; the satisfaction of minimum essential levels of economic and social rights; non-discrimination and equality; and participation, transparency and accountability. These principles can be used as a framework for auditing economic policy. Role of audit to the social perspective: Governments are facing an ever? growing demand to be more accountable and socially responsible and the people are becoming more assertive about their rights to be informed and to influence governments? decision? making processes. Faced with these demands, the executive and the legislature are looking for new ways to evaluate their performance. Civil society organizations are also undertaking ? Social Audits? to monitor and verify the social performance claims of the organizations and institutions. Social Audit is a tool with which government departments can plan, manage and measure non? financial activities and monitor both internal and external consequences of the department/organization’s social and commercial operations. It is an instrument of social accountability for 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 Audit has significant role in social development. Purpose of the Social Audit The purpose of conducting Social Audit is not to find fault with the individual functionaries but to assess the performance in terms of social, environmental and community goals of the organisation. 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 organisations non-financial objectives through systematic and regular monitoring, based on the views of its stakeholders. Salient Features The foremost principle of Social Audit is to achieve continuously improved performances in relation to the chosen social objectives. Eight specific key principles have been identified from Social Auditing practices around the world. They are: 1. Multi? Perspective/Polyvocal. Aims to reflect the views (voices) of all those people (stakeholders) involved with or affected by the organisation/department/programme. 2. Comprehensive. Aims to (eventually) report on all aspects of the organisation? s work and performance. 3. Participatory. Encourages participation of stakeholders and sharing of their values. 4. Multidirectional. Stakeholders share and give feedback on multiple aspects. 5. 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. 6. 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 with organisations doing similar work and reporting in similar fashion. 7. Verification. Ensures that the social accounts are audited by a suitably experienced person or agency with no vested interest in the organisation. . Disclosure. Ensures that the audited accounts are disclosed to stakeholders and the wider community in the interests of accountability and transparency. The following figure depicts the principles of Social Audit and universal values: These are the pillars of Social Audit, where socio? cultural, administrative, legal and democratic settings form the foundation to operational 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? akers, 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. Applying the Tool The six steps of Social Auditing are: 1. Preparatory activities 2. Defining audit boundaries and identifying stakeholders 3. Social accounting and book? keeping 4. Preparing and using social accounts 5. Social audit and dissemination 6. Feedback and institutionalization of social audit Stakeholder consultation, involving department functionaries and civil society, would be the forum for sharing the Social Audit plan. This consultation would clarify the issues important for Social Auditing, role of stakeholders, as well as commitments from them. The outcome of the consultation would be fed into the process of detailing out: the indicators to be monitored; which existing records are to be used; and how additional information would be collected. The next key step is to fix responsibilities for various activities. The activities include preparing formats for social account? keeping, compilation of data and reporting the same on a monthly basis (internal use). Managers of the department/programmes can use this information for monitoring as well as providing feedback for improving performance and overcoming bottlenecks. Ideally, Social Audit should be conducted regularly, and the method should be developed through a participatory relationship between the auditor and the organisations/departments. The following figure depicts the detailed steps followed in the social audit cycle.