[Opinion] Understanding Social Audit in the Light of Latest Regulatory Changes

1. A Brief on the Concept of Social Audit

Over the last few decades, the Comptroller and Auditor General (CAG) of India has been conducting performance audits of socio-economic developmental programmes of the Central and various State Governments on:-

(i) National Rural Employment Guarantee Scheme;
(ii) National Rural Health Mission;
(iii) Sarva Shikska Abhiyan;
(iv) Mid-day Meals Scheme;
(v) Accelerated Rural Water Supply Programme;
(vi) Pradhan Mantri Gram Sadak Yojana and other developmental schemes.

Though the audit conducted on behalf of the taxpayers by the Comptroller and Auditor General of India is external in nature, in a broad sense, the CAG audit itself could be called a social audit. After the introduction of the Companies Act 2013, the concept of corporate social responsibility came into the legal framework for certain specified companies to contribute 2% of the average net profits of the preceding 3 years towards CSR. CSR is essentially a concept whereby companies integrate social and environmental concerns in their business operations and in their interaction with their stakeholders. The demand for social audit has grown in the past few years, especially with reference to CSR activities and this article is examining the concept of social audit, its objectives, benefits and other related matters.

2. Understanding of Social Audit

Social audit refers to a formal review of a company’s endeavours, procedures, and code of conduct regarding the company’s social responsibility and the company’s impact on society. A social audit is an assessment of how well the company is achieving its goals or benchmarks for social responsibility.

We can state the following as the key points of social audit:-

(i) It is a formal review of a company’s endeavours, procedures, and code of conduct regarding social responsibility and the company’s impact on society

(ii) It is an assessment of how well the company is achieving its goals or benchmarks for social responsibility

(iii) Ideally, companies aim to strike a balance between profitability and social responsibility.

3. History of Social Audit – International and National

Social audits are considered a relatively new concept in the business world. One could trace back the history of social audit globally and as well as in our country and the following are illustrative examples of the history of social audit. We can trace back to the year 1988 in Sweden, where the first social audit of an organization was carried out in Sweden and published, after a study of the country’s central bureaucracy. The three-year study heavily relied on interviews and questionnaires with many of the organization’s employees from all levels. It was focused on analysing the experiences of the senior management and junior staff compared to the stated objectives for the organization established beforehand. From the responses, the researchers were able to get a better understanding of the effectiveness of the organization and make recommendations for improvement as a result of the social audit.

In the year 1979, in the city of Jamshedpur (known as Tata Nagar), the Tata Group of companies is of our country’s oldest business empires brought out a lot of reforms. Tata Iron and Steel Company Ltd (TISCO) which is now known as Tata Steel was the first company to set up a social audit committee in the year 1979 for measuring its social performance and committee had a mandate to “examine and report whether and the extent to which the TISCO has fulfilled the objectives contained in its Articles of Association of the company regarding its social and moral responsibilities to the consumers, employees, shareholders, society and the local community.” The social audit committee reported that the social performance of the company has been of a high order and, in its magnitude, is perhaps unequalled in our country at that time.

Similarly in the early 1990s, in Rajasthan, a grassroots organisation in Rajasthan, Mazdoor Kisan Shakti Sangathan (MKSS) is believed to have started the concept of the social audit while fighting corruption in public works.

4. Recent Developments Relating to Social Audit

The following recent developments are worth taking note of, in respect of social audit.

(i) In the Union Budget of 2019-2020 the Hon’ble Finance Minister proposed to initiate steps towards creating an electronic fundraising platform – a Social Stock Exchange (‘SSE’) – under the regulatory ambit of SEBI.

(ii) A Working Group was subsequently formed on 19th September, 2019 to recommend possible structures and mechanisms for the Social Stock Exchange.

(iii) Subsequently, a working group was released in June 2020 that outlined a holistic approach to setting up the Social Stock Exchange.

(iv) On 1st June, 2020, the Working Group on Social Stock Exchange published its report for public comment. Further on September 28 2021, the board approved the creation of the Social Stock Exchange.

On 25 July 2022, SEBI introduced regulations pertaining to the Social Stock Exchange by amending the following regulations, namely:

a. The SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2018 (ICDR Regulations)

b. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations

c. The SEBI (Alternative Investment Funds) Regulations, 2012 (AIF Regulations).

d. As part of the amendments made to the above regulations, the Security Exchange Board of India introduced certain important concepts and definitions such as – Social Stock Exchange (SSE), social auditor, social audit firm, For-Profit Social Enterprise (FPSE), Social Enterprises (SEs), etc.

5. Objectives of Social Audit

The objectives of social audit are accurate identification of requirements, prioritization of developmental activities as per the requirements, proper utilization of funds coupled with the conformity of the developmental activity with the stated goals along with quality of service.

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