CGVE/U1 Topic 3 Social Responsibility of Corporates, Corporate Social Reporting
India is the first country in the world to make corporate social responsibility (CSR) mandatory, following an amendment to The Company Act, 2013 in April 2014. Businesses can invest their profits in areas such as education, poverty, gender equality, and hunger.
The amendment notified in the Schedule VII of the Companies Act advocates that those companies with a net worth of US$73 million (Rs 4.96 billion) or more, or an annual turnover of US$146 million (Rs 9.92 billion) or more, or a net profit of US$732,654 (Rs 50 million) or more during a financial year, shall earmark 2 percent of average net profits of three years towards CSR.
In the draft Companies Bill, 2009, the CSR clause was voluntary, though it was mandatory for companies to disclose their CSR spending to shareholders. It is also mandatory that company boards should have at least one female member.
CSR has been defined under the CSR rules, which includes but is not limited to:
- Projects related to activities specified in the Schedule; or
- Projects related to activities taken by the company board as recommended by the CSR Committee, provided those activities cover items listed in the Schedule.
Methodology of corporate social responsibility
CSR is the procedure of assessing an organization’s impact on society and evaluating their responsibilities. It begins with an assessment of the following aspects of each business:
- Communities; and,
The most effective CSR plans ensure that while organizations comply with legislation, their investments also respect the growth and development of marginalized communities and the environment. CSR should also be sustainable – involving activities that an organization can uphold without negatively affecting their business goals.
Organizations in India have been quite sensible in taking up CSR initiatives and integrating them into their business processes.
It has become progressively projected in the Indian corporate setting because organizations have recognized that besides growing their businesses, it is also important to shape responsible and supportable relationships with the community at large.
Companies now have specific departments and teams that develop specific policies, strategies, and goals for their CSR programs and set separate budgets to support them.
Most of the time, these programs are based on well-defined social beliefs or are carefully aligned with the companies’ business domain.
CSR trends in India
FY 2015-16 witnessed a 28 percent growth in CSR spending in comparison to the previous year.
Listed companies in India spent US$1.23 billion (Rs 83.45 billion) in various programs ranging from educational programs, skill development, social welfare, healthcare, and environment conservation. The Prime Minister’s Relief Fund saw an increase of 418 percent to US$103 million (Rs 7.01 billion) in comparison to US$24.5 million (Rs 1.68 billion) in 2014-15. The education sector received the maximum funding of US$300 million (Rs 20.42 billion) followed by healthcare at US$240.88 million (Rs 16.38 billion), while programs such as child mortality, maternal health, gender equality, and social projects saw negligible spend.
In terms of absolute spending, Reliance Industries spent the most followed by the government-owned National Thermal Power Corporation (NTPC) and Oil & Natural Gas (ONGC). Projects implemented through foundations have gone up from 99 in FY 2015 to 153 in FY 2016, with an increasing number of companies setting up their own foundations rather than working with existing non-profits to have more control over their CSR spending.
2017 CSR spends further rose with corporate firms aligning their initiatives with new government programs such as Swachh Bharat (Clean India) and Digital India, in addition to education and healthcare, to foster inclusive growth.
Corporate Social Reporting
Growth of corporate sector is the outcome of 20th century and number of corporations is rapidly increasing throughout the globe. Increased number of corporations not only domestic but global has led to the development of new type of financial reporting. The concept of scattered ownership gave birth to the concept of financial reporting whereas rapidly increased number of corporate sector particularly industrial corporate sector has given birth to the social corporate reporting.
Measurement and reporting of the social performance of profit oriented corporations form the core of social corporate reporting.
“The term corporate social performance reflects the impact of a corporation’s activities on the society. This embodies the performance of its economic functions and other actions taken to contribute to the quality of life. These activities may extend beyond meeting the letter of the law, the pressures of competition or the requirements of contracts.”
American Accounting Association committee on measurement of social costs supplement to the accounting review in 1974 has also emphasized on the role of corporate form of organisations in attaining their operational goals such as enhancement of profits by 8% p.a., increase in sales by 20%, a reduction in pollution levels by 30% and employee mix reflects the mix of minorities in working class where plants are located. General awareness among various classes of society has led to serious debate on social desirability of industrial units. Social accounting and reporting has emerged as contemporary accounting issues.
Problems and Prospects Concerning Social Corporate Reporting:
1. Interaction of Business with Society at Large:
A strong belief is that business carries out only economic functions of the society. Business units have some type of social responsibility to society. Cannon chairman of Marks and Spencer has rightly said that “Business only contributes fully to society if it is efficiently profitable and socially responsible” Business should undertake social activities with a business benefits is not a new concept. Wood another author has rightly said that “The basic idea of corporate social responsibility is that business and society are inter-woven rather than distinct entities.”
2. Issues of Environments and Package of Financial Statements:
In past, only social accounting was prevalent and emphasis was only on social disclosures. But in current global scenario, emphasis has shifted from social accounting to green accounting. Earlier the financial statements were being prepared for owners only, but now-a-days package of financial statements is prepared for stake holders. Those stakeholders have not just interest in the affairs of corporate unit, rather they also have keen interest on degree of influence over the shaping of those affairs.
3. Transparency and Accountability:
The concept of accountability is not fully understood by managers and few of them agree to the wider context within which the word accountability has been used business, law, government, politics and morality. The notion of accountability is commonly described in regard to organisation’s legal compliance and its financial reporting to shareholders and governmental agencies.
Thus accountability is concerned with responsibility of supplying information and the right to receive. Social responsibility is part of the reason for seeking greater accountability from corporate management. This responsibility keeps on changing and developing with the passage of time.
Nevertheless just because the natural responsibilities are difficult, if not impossible to account for with accurate figures does not mean that such issues have to be neglected. An accountable organisation has to bring transparency by supplying financial and non financial information to all the stakeholders particularly other than shareholders.
4. Stock Markets and Social or Environmental Disclosures:
Stock Markets throughout the world are playing a very dominant role for economic development particularly in developed economies like Japan, UK, USA, etc. Institutional investors are also playing their major role for fluctuations in share markets indices. Market prices of shares of every corporate unit reflect financial condition of corporate unit.
In most of the developed countries social and environmental disclosures in annual reports do play very crucial role in quoting the market price of shares. Any corporate unit cannot be run successfully without its concern for society in form of social desirability of the corporate unit.
5. Accounting and Sustainability:
The central to any discussion of accounting and the environment is very challenging and debatable question: Do we believe that the corporate unit which accounting serves and supports can deliver environmental security and sustainability? Sustainability relates to both present and future generations. Geno a famous author has argued that sustainability is corner stone of green accounting.
6. Social and Green Accounting:
Social Accounting literature concentrated only the questions of how a corporate unit should report on its social performance and how its performance should be assessed. Now standards are being issued on social accounting and reporting for instance, Global Reporting Initiative. Global warming is a burning issue for the whole world and that has given birth to the Environmental or Green reporting. Both country specific and comparative studies have recorded upward trend in environmental disclosures through annual reports.
7. Environmental Issues and Auditing Practices:
Grey, a prominent author has identified an increasing concern amongst auditors about potential risk exposure they face as a consequence of the environmental impact on the business. There are growing demands upon auditors to include environmental reports/data in their attestation of the financial statements. The main problem which auditors face while doing audit practices is standards. Every, accountant needs standards to do the audit concerning corporate social responsibility.
8. “Environmental Influence” on Corporate, Managers, and Accountants:
Research studies have .identified a number of reasons why corporate might be influenced to adopt more socially and environmentally responsible attitudes and behaviour. Generally external pressures from stakeholders like customers, competitors, environmentalists, NGOs, Governmental agencies etc. is there.
Corporate do environmental disclosures so as to satisfy needs of those stakeholders. Researches have also identified number of reasons why corporate might not be influenced to adopt environmental and social attitudes. One reason may be additional costs involved for such social and environmental activities and other reasons may be gathering of data, lack of understanding of the concepts of environmental accounting.
9. Accounting Education:
A lot of research is still needed in the field of accounting education in general and social and environmental in particular. Accountants themselves do not have accounting knowledge and -practice particularly in environmental accounting.” Another reason may be negative role being played by accounting teachers in the area. Every business is an open system Corporate units have specific interaction with, society. Corporate social responsibility is a part of the reason for seeking greater accountability and transparency from corporate managements.