Friday, July 21, 2006

Globalization and Auditors Responsibilities !

Dr.Gholamhossein Davani*

Globalization is an undeniably capitalist process. It has taken off as a concept in the wake of the collapse of the Soviet Union and of socialism as a viable alternate form of economic organization.
The sociologist, Anthony Giddiness, defines:
“Globalization as a decoupling of space and time, emphasizing that with instantaneous communications, knowledge and culture can be shared around the world simultaneously”.
Left critics of globalization define the word quite differently, presenting it as worldwide drive toward a globalize economic system dominated by supranational corporate trade and banking institutions that are not accountable to democratic processes or national governments. There is no agreed starting point, but understanding of globalization is helped by considering the World trade.
In the other hand OECD defines corporate governance as:
"Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance", OECD April 1999. OECD's definition is consistent with the one presented by Cadbury [1992, page 15].

The first great expansion of European capitalism took place in the 16th century, following the first circumnavigation of the earth in 1519 to 1521.

There was a big expansion in world trade and investment in the late nineteenth century. This was brought to a halt by the First World War and the bout of anti-free trade protectionism that led to the Great Depression in 1930. Some see this period as an interruption to the process of globalization commenced in the late 19th century.

A sense that the world was united was generated by the establishment of the International Date Line and world time zones, together with the near global adoption of the Gregorian calendar between 1875 and 1925. During that period, international standards were also agreed for telegraphy and signaling.

The end of the Second World War brought another great expansion of capitalism with the development of multinational companies interested in producing and selling in the domestic markets of nations around the world. The emancipation of colonies created a new world order. Air travel and the development of international communications enhanced the progress of international business.

The fall of the Berlin Wall and the collapse of the Soviet Union ended the cold war between the forces of capitalism and socialism with capitalism triumphant. The development of the internet made possible the organization of business on a global scale with greater facility than ever before.

One of the main sources of globalization is the view among activists that "international capitalism is nothing more than a byword for oppression, exploitation and injustice by rapacious multinationals. In their view, companies will stop at nothing to maximize profits even if it means degrading the environment, abusing workers, exploiting third-world markets and committing a host of other sins. “Social responsibility is defined as a framework of measurable corporate policies and procedures and resulting behavior designed to benefit the workplace and, by extension, the individual, the organization, and the community in the following areas (in alphabetical order):
Community , Diversity, Environment , Ethics , Financial Responsibility, Human Rights and Safety.

Since the 1980s, government and business have been called on to espouse a range of responsibilities viewed as important to society. These include corporate responsibility to stakeholders, auditors’ responsibility to clients and the greater public, responsibility to future generations in the form of sustainable development, and the more generic social responsibility. Where calls for such commitments coalesce, we find social responsibility accounting or social accounting. This form of accounting is meant to measure and report the social costs incurred and benefits provided by companies above and beyond the costs and benefits captured in the traditional financial statements.
Calls for social responsibility and reporting have both present and prospective elements. The present element is captured in studies that outline what companies have disclosed to stakeholders in both qualitative and quantitative terms. The prospective element is what can be accomplished in the future. However, what can be accomplished is highly dependent on those who implement such a system and the relevancy of the topic to society.
The currency and general relevance of social responsibility and sustainable development (SR/SD) to society is seen in such areas as investor interest in ethical mutual funds, government lists of threatened or endangered species, and pollution control mandates established by public policy setters. Indeed, business, government, and society are caught up in a debate over how this planet’s scarce resources are to be preserved and used. In the years since the summit, some action has been taken by accounting bodies to protect the environment or to report on the social responsibility of businesses and governments that are polluting the environment. These efforts include reports issued by the Financial Accounting Standards Board and the Canadian Institute of Chartered Accountants outlining how the present accounting system treats the potential future liabilities of enterprises that result from their current operations. Other reports dealing with aspects of environmental accounting have been published by the Institute of Chartered Accountants in England and Wales (ICAEW), the Organization for Economic Co-operation and Development (OECD), and the Canadian federal government. The disappointing fact is such efforts fall short on two dimensions, reporting and measurement. Also these efforts, by narrowly concentrating on the environment, fail to address the broader class of accounting and reporting issues covered under SR/SD.

Among the myriad corporate citizenship initiatives around the world in recent years, eight have attained a high degree of recognition and a significant following. These are voluntary initiatives with a global constituency that can also be defined as multi-sect oral, in that they can be applied in a wide range of industries. They have all evolved through social partnerships involving some elements of business, governments, labor organizations and non-government organizations. They all take a multi-stakeholder approach to corporate citizenship issues. This is an indicative rather than an exhaustive list of global initiatives. It is also exclusive and there may be other initiatives that merit consideration, but we felt at this stage that the focus should be on these eight voluntary initiatives. Those included are voluntary and do not address issues of regulation, even though many derive some of their legitimacy by reference to international conventions and regulation. In this respect, they exemplify innovative organizational responses to the current socio-political business environment.

Each initiative is described below and compared with the others. Many of the initiatives have a common starting point: either convention of the International Labor Organization (ILO) and/or The UN Declaration on the Rights of the Child and/or the Universal Declaration on Human Rights. Most of the ‘Global Eight’ reflect a northern perspective. This is balanced only partially by the inclusion of ILO conventions, which are developed in a multilateral setting. While there are standards developed in the South, they tend to be national and/or regional in application.

The Global Reporting Initiative (GRI) was conceived in 1997 by the Boston-based Coalition on Environmentally Responsible Economies (CERES) in collaboration with the Tells Institute. Over the past five years, the GRI has evolved into a set of reporting criteria on all aspects of a company’s performance. The initial draft standard was ‘field-tested’ in 1999 by over 20 companies and released in June 2000. A revision was published in 2002.

In common with other corporate citizenship initiatives, this development has taken place through a new social partnership between non-state actors that include businesses, NGOs and accountancy organizations. The GRI has been adopted by the UN Environment Programmed (with funding from the UN Development Fund) and is becoming an independent organization. The GRI is built on a simple premise. By providing a broadly-agreed mechanism, reached through negotiation between the partners in the process, to measure environmental and social performance, the GRI aims to assist investors, governments, companies and the wider public to understand more clearly the progress being made towards sustainability. The use of a common framework is seen as a way to improve related analysis and decision making.

The Global Eight are:

1-The UN Global Compact

2- ILO conventions

3- The OECD Guidelines for Multinational Enterprises

4- ISO 14000 Series

5- Accountability 1000

6- The Global Reporting Initiative

7- The Global Sullivan Principles

8- Social Accountability 8000

These initiatives all share the principle that it is possible to reconcile a market economy with a good society, and that economic competition can coexist with social co-operation. The jury is out on whether, or how, this could be possible, but the ‘Global Eight’ profiled here are testimony to the wealth of activity and energy being devoted to what the UN Secretary General has described as ‘giving a human face to the global economy’ by corporations, labor organizations, non-governmental organizations, governmental and international institutions.

Principles and standards

The Global Eight may be divided into principles and standards. Principles are a set of overarching values that underpin behavior, and so by their very nature are non-specific in behavioral terms. Standards, on the other hand, are specific and advocate a set of benchmarks to be attained. There are several different types: process, performance, certification, and foundation:

• Process standards define the procedures a company should put in place, such as how to conduct stakeholder dialogue, how to communicate with stakeholders or to develop management systems.

• Performance standards define what a company should do or not do, such as pay a living wage or prevent discrimination.

• Foundation standards seek to lay the foundation for a new field, describing what constitutes best practice in an emerging area.

• Certification standards establish a system under which certificates of compliance are awarded to companies that comply and have passed an independent (third party) audit.

It is possible for standards to have several of these characteristics:

• Principles (Global Compact and Global Sullivan Principles)

• Standards (GRI, OECD Guidelines, SA8000, AA1000S, and ILO Conventions)

• Foundation (ILO Conventions, AA1000S)

• Process (SA8000, AA1000S, ISO 14000S)

• Performance (SA8000, OECD Guidelines, and ILO Conventions)

• Certification (SA8000 and ISO 14000 Series)

After Enron Clops some terminologies same Social audit (SA), corporate social responsibility (CSR) have been relief. These days, corporate social responsibility (CSR) is common currency but a “currency” that is rather devalued. The phrase is so over- and poorly used that it begins to lose any meaning. Any proper definition of CSR would require a categorical standard of values. This is lacking. In fact CSR now means many different things to many people.
It has often become a convenient vehicle for companies to boast of their
“Social achievements”, distributing awards to countless business heroes,
Trumpeting their contributions to charities and lauding their own “struggles”
For noble causes ranging from the elimination of child hunger to the preservation
Of endangered species – and even to the welfare of their employees.
The financial scandals in a number of major companies have led to demands
For “accountability” . In fact, various corporations have used CSR
for damage limitation and in order to avoid regulation, often through
public relations operations aimed at restoring their tarnished image. According
to a recent survey in the United States, only 18 per cent of Americans
still have confidence in their top executives. This is the biggest loss
of consumer and investor confidence since the Great Depression of 1929.
Corporate social responsibility is often about image. Yet it could be about
more than that. But for CSR to get beyond the stage of fine words and
good intentions, not to mention parts of marketing strategies, more will
have to be demanded of companies.
First, it must be clear that, despite all the talk about the voluntary nature
of CSR, companies do actually have binding responsibilities vis-à-vis
society, the countries in which they operate and the workers they employ.
International labor standards and labor legislation must be respected
by all companies, and governments have a duty to ensure their full implementation, including respect for the rights of workers.

Freedom of association and the right to collective bargaining, enshrined
in two of the fundamental Conventions of the ILO, are not mere options.
They are international obligations. Indeed, the ILO Declaration on Fundamental
Principles and Rights at Work, unanimously adopted in 1998,
makes clear that all ILO member States have an obligation, by the sole
virtue of their membership of the Organization, “to respect, to promote
and to realize” workers’ fundamental rights, defined as: freedom of association
and the effective recognition of the right to collective bargaining;
the elimination of all forms of forced or compulsory labor.
Corporate Social Responsibility (CSR) encompasses an organization’s commitment to behave in an economically and environmentally sustainable manner, while honoring the interests of direct stakeholders
The mission of the socially responsible organization (SRO) is to influence the process of developing, and advocating by example, socially responsible business practices which benefit not only the SRO and its employees, but also the greater community, the economy and the world environment. SROs seek to reshape the way business is done in both the for-profit and not-for-profit arena.
While what it is to be “socially responsible” is defined at many levels, there is an evolving core of minimum standards for corporate social performance. These standards represent an initial step in the full development of a socially responsible organization. The minimum standards are intended to be specific, documented, and measurable. They are also achievable and meaningful in terms of impacts on communities, employees, the environment and economic systems.
These standards are not about getting a “passing” or “failing” grade but are assessment tools for the SRO’ s current level of commitment to CSR. The standards assist in setting measurable and achievable targets for improvement and form the objective foundation for reporting to all direct stakeholders both the “talk” and actual “walk” of the SRO.
The dimensions covered by the minimum standards incorporate the concepts of community involvement, diversity, employee relations, environment, international relationships, marketplace practices, fiscal responsibility, and accountability. In this essay we explain detail of Scope of social s follow:
The identification of the stakeholders is generally the first task of an audit. However, a Social Auditor does not study each group of stakeholders separately. Stakeholders have to be considered as a whole, because their concerns are not limited to the defense of their immediate interest. As a result, the Social Auditor will work on the components of a company's Social Policy (Ethics, Labor, Environmental, Community, Human Rights, etc.), and for each subject, the Social Auditor will analyze the expectations of all stakeholders.

The Factors that affect understanding of audit social responsibility are as follow:

1- ETHICS: values the company vows to respect. Policies include the pledge not to participate in (nor engage in business with people involved in) a series of activities that are deemed offensive. This list of unacceptable activities often includes exploitation of children, unethical treatment of animals, damage to the environment, and dealings with undemocratic regimes or with "bad guy" industries (fur, tobacco, guns, etc.).

2- LABOR: creation of a working environment allowing all employees to develop their potential. Policies include training, career planning, remunerations and advantages, rewards linked to merit, balance between work and family life, as well as mechanisms that ensure non-discrimination and non-harassment.

3- ENVIRONMENT: monitoring and reduction of the damage caused to the environment. For instance, policies of reduction of emissions and waste.

4- HUMAN RIGHTS: making sure the company does not violate human rights nor appears as supporting human rights violators.

5- COMMUNITY: investment in its local community. Policies include partnerships with voluntary local organizations, with financial donations, donations in kind (computers for education, food and clothes for the poor), and employees involvement. The company may initiate or participate to a major project such as the regeneration of a poor neighborhood plagued with unemployment, poverty, low education and racial tensions.

6- SOCIETY: investment or partnership beyond the community. For instance, Cause Related Marketing (partnership with a charity to market a product while giving a small percentage of the sales to the charity).

7- COMPLIANCE: Identification of all legal obligations and of the means to comply. Policies must deal with changing rules related to its work force (Labor), its products (Health, Environment, Intellectual property, specific regulations), its administration (Business, Tax), its dealings (supplier and customer liability, Criminal actions).
The phenomenal growth of Socially Responsible Funds (now 20% of funds invested in the US), the growing difficulty to attract qualified employees, and the rise of non-governmental organizations able to sue or boycott unethical businesses, demonstrate the vital importance for any business of a well designed Social Policy.

The Ethics Policies will attract long-term investors, increase market shares for the ethical product, strengthen partnerships, and make the employees proud.

The Labor Policies will attract and keep a qualified workforce, and increase productivity, while opening new markets (ethnic minority customers are sensitive to the anti-discrimination policies in the work place).

The Environmental Policies will attract customers interested in the protection of the environment, and investors who fear the risks linked to bad environmental practices, while sometimes reducing the costs with cost-effective modifications of production processes. As for most other components of the Social Policy, serious Environmental Policies will attract Socially Responsible Funds and a qualified workforce (nobody likes polluters!).

The Human Rights Policies, also, will attract Socially Responsible Funds and a qualified workforce. Its most important role, however, is defensive: to prevent boycotts or campaigns of protest that could seriously tarnish the reputation of the company accused of practicing (or being an accomplice of) human rights abuses, and the resulting falling stock prices, loss of market shares, and low-moral work force.

The Community Policies will not only create roots in a local base for the company, it will also increase the productivity of the work force involved in the projects (by developing their leadership and customer service skills, building pride and loyalty with the feeling of being useful).

The Society (or Extra-Community) Policies boost not only the products linked with the policy but also the image of the company. Cause Related Marketing is extremely appreciated by customers because it makes them feel good (allowing them to support charities without spending their time or money), as long as the charities are well chosen and the percentage is not too small (or the ceiling too low).

The Compliance Policies are part of the Social Policy for two reasons. First, by complying with the law, the company demonstrates it is socially responsible. More importantly, Compliances Policies often go beyond the legal requirements, in order to show concerns for social matters (health, labor, environment, etc.). In many cases, companies build their social image by doing only slightly more than what is required by the law.
Corporate Governance in the UK

The publication of a series of reports consolidated into the Combined Code on Corporate Governance (The Hampel Report) in 1998, has resulted in major changes in the area of corporate governance in the United Kingdom. The corporate governance committees of the last decade have analysed the problems and crises besetting the corporate sector and the markets and have sought to provide guidelines for corporate management. The key practical issues and concerns driving the development of corporate governance over the last decade are highlighted by studying the subject matter of the corporate codes and the reports produced by various committees.
The main committees, known by the names of the individuals who chaired them, are:
• The Cadbury Committee – set up in May 1991 to report on the financial aspects of corporate governance. Set up by The Financial Reporting Council, the London Stock Exchange and various members of the accounting profession.
• The Greenbury Committee – set up in January 1995 to identify good practice by the CBI (Confederation for British Industry), in determining directors’ remuneration and to prepare a Code of such practice for use by UK plcs (public limited companies).
• The Hampel Committee – set up in November 1995 to promote high standards of corporate governance both to protect investors and preserve and enhance the standing of companies listed on the Stock Exchange.
• The Turnbull Committee – set up by the ICAEW (Institute of Chartered Accountants in England and Wales) in 1999 to provide guidance to assist companies in implementing the requirements of the Combined Code relating to internal control.
The OECD Principles of Corporate Governance cover five sections:
1. The rights of shareholders
The corporate governance framework should protect shareholders’ rights.
2. The equitable treatment of shareholders
The corporate governance framework should ensure the equitable treatment of all shareholders, including minority and foreign shareholders. All shareholders should have the opportunity to obtain effective redress for violation of their rights.
3. The role of stakeholders
the corporate governance framework should recognize the rights of stakeholders as established by law and encourage active co-operation between corporations and stakeholders in creating wealth, jobs, and the sustainability of financial sound enterprises.
4. Disclosure and transparency
the corporate governance framework should ensure that timely and accurate disclosure is made on all material matters regarding the corporation, including the financial situation, performance, ownership, and governance of the company.
5. The responsibility of the board
the corporate governance framework should ensure the strategic guidance of the company, the effective monitoring of management by the board, and the board’s accountability to the company and the shareholders.
These principles can be used by a nation state to design its own corporate governance rules. Auditors may use them to assess the adequacy of any corporate governance regime in the absence of more immediate standards.

Creation of a Social Policy.

Most companies (if not all) already have elements of Social Policy. Often, these are independent pieces of regulation and practices. Most of the time, they are not part of a unique strategy, they are not managed by powerful senior executives, they are not reviewed before any business decisions are made, and they are not used in ways that would produce their full benefits.

The first step is to have an Independent Social Audit, either Defensive (to prevent lawsuits and boycotts), or Productive (to increase productivity, market shares and long term investment). The audit will identify the stakeholders, clarify the components of a Social Policy that would address the concerns of these stakeholders at either the Defensive or Productive level, and make recommendations on the necessary measures to build the Social Policy.

The company must be totally involved in the Audit. The Independent Social Audit is neither an inspection (for which the company would dissimulate important pieces) nor is it a situation where the Auditor brings his "one size fits all" solutions. The Auditor is only the coach of a team, composed of senior executives of the company who are working at gathering the information and finding solutions. The Auditor provides the directions, merges the information to create a whole picture of the social situation, and gives advice on the method used by the company to build its Social Policy and on its different aspects. Ultimately, it is the leadership of a company who builds its Social Policy, and then decides on the best way to run the policy (for instance, nomination of a person or creation of a department dedicated to Social Policy issues).


Building a Social Policy is not an easy task. While some rules are clear and must always be followed, others depend on the specific situation of the company, and finally, in a few cases, there are no solutions! A few examples will illustrate this point.

An example of a clear rule that must always be followed is the integration of the Social Policy into all stages of business planning, and its management by powerful senior executives. If the Social Policy is not taken into account in the making of all business decisions, it will not produce the positive effects (defensive or productive), and is even likely to backfire, as expectations from stakeholders have been raised.

Other basic rules include the need to be committed to its own Social Policy (there is no turning back), and the need to be coherent in the respect for the elected values.
Subject to above explanation, in the globalization area auditors responsibilities have changed and corporate social responsibility

Subject to above explanation, in the globalization area auditors responsibilities have changed to corporate social responsibility that main basic is related to Ethics.
The findings of the audit give a snapshot, a view at a particular point in time, of the company's ethics. In the case of a first audit, they will necessarily be of less value for comparison purposes than would future audits, but they ought to give a clear picture of both values and vulnerabilities. An audit report is a factual document. Obviously it reaches a judgment, but it is not intended to be judgmental, in the sense of condemning a company for moral failure. The assumption which EIBE would make is that any company which commissioned an ethical audit is concerned about its moral standing and therefore intends to take action, where necessary, if moral failings become apparent. This is a stance which is praiseworthy and should be supported: the report's findings will give the company the knowledge necessary to take appropriate action. In this respect, the EIBE ethical audit is very far removed from the original social audits which were carried out on companies in the 1960s. These were undertaken by outsiders critical of company behavior, who were seeking ammunition to bring external pressure on the company to change.
• We believe that ethical audit will have particular benefits for multinational companies, but it could also be of great value in take-over and merger situations, especially ones which involve partners from different countries where there may be conflicting value systems. Other benefits include enhanced corporate reputation, making the company fraud resistant, and improving staff morale and motivation.
• The technology of ethical auditing is still in its infancy. The full payback is not yet known. The benefits listed here derive from a number of experiences of consultancy work by members of the European Institute for Business Ethics, plus benefits about which we have been told by colleagues elsewhere. Our experiences have convinced us that this is one of the most exciting developments in management in decades - and that it is not simply another fad. Values are the basis of all organizational behavior, and focusing on values will enable management to create an organization which is excellent in every possible sense.

* Dr.Gholamhossein Davani
B.SC. Cost Accounting
EM.B.A , PHD Business Administration
Dr. Gholamhossein Davani, BA, MBA and PHD in Business administration, is member of High Council of Iranian Association of Certified Public Accountants( AICPA) and a member of the Iranian Institute of Certified Public Accountants(IICA) and the IMA,AAA,BAA,EAA,IIA,AFA and CAAA. Mr. Davani is manager of Tax & Management services of “Dayarayan auditing & Financial Services Firm”. He was formerly a Managing director of Petrochemical Auditing & Management Services Firm (Hessam). Dr.Davani has published more than 13 books in a variety of accounting and finance, including the Tax accounting, tax act, commerce act, Social insurance &Labor Law, Foreign investment Law & regulation ,corporate accounting and Stock Exchange and share assessment. He had been editor of Accountancy magazine for four years.

Saturday, March 18, 2006

Our Vision is to reach to Worldwide Accounting Association through strong relationship among especialist ( persian & nopersian) requesting for kind assistance in this respect .