As social stock exchanges seem imminent, auditors get ready with social audit standards

ICAI and ICSI issue social audit standards

– Sharon Pinto & Kaushal Shah (corplaw@vinodkothari.com)

Background

As we understand, the concept of Social Stock Exchanges (‘SSEs’) have been brought under the regulatory purview of Securities and Exchange Board of India (‘SEBI’) for listing and raising of capital by Social Enterprises, the details of which can be read in our article Social stock exchanges: philanthropy on the bourses as well as our other resources linked with the concept of SSEs and social sectors.

Social Enterprises are defined under regulation 292A (h) of the SEBI (ICDR) Regulations, 2018 (‘ICDR Regulations’) and are expected to be engaged in the specified activities provided therein. With the objective to assess the impact created by such social activities by the Social Enterprises, Self Regulatory Organisations (‘SRO’s) recognised under ICAI, ICSI and such other bodies as may be prescribed by SEBI have been considered to be eligible to act as platforms to register Social Auditors. ICAI has approved the formation of an SRO named ‘Institute of Social Auditors of India’ while ‘ICSI Institute of Social Auditors’ is the recognsied SRO under ICSI. Such auditors are also required to undergo a certification program conducted by National Institute of Securities Market (‘NISM’).

ICAI has recently sought interest for the initial empanelment of Social Auditors.^[1] The eligibility criteria for empanelment as a Social Audit firm requires having a track record of minimum three years of conducting social impact assessment. Further, average annual grants or expenditure of social enterprise of the last 3 financial years should be atleast Rs. 50 lakhs and the firm should have suitable human resources in the field of social development having experience of usage of relevant methodology of social audit. The disqualifications includes any individual or any of the partner/director of an entity being convicted for an offence of moral turpitude or declared as an undischarged insolvent/bankrupt or has been debarred by SEBI.  

To put it in simple terms, Social Auditors are required to conduct Social Audit of the activities carried on by Social Enterprises. To aid the Social Auditors in carrying out the Social Audit, both the SROs being ICAI and ICSI have rolled out the Social Audit Standards (‘SAS’) to assist and guide their empanelled auditors for the purpose of carrying out the audit in accordance with the SAS Framework. Looking at the imminence of SSEs to come into reality with SEBI granting in-principle approval to both BSE and NSE in December, 2022, SROs have rolled out SAS for the quick reference and guidance for their registered auditors.

In this write-up, we have covered the key takeaways from the SAS and its relevance, applicability as well as mapping with the global principles on social audit.

Social Audit – meaning and intent

The concept of Social Audit was put forth by the Technical Group (‘TG’) set up by SEBI on September 21, 2020^[2], basis the recommendations of Working Group (‘WG’) constituted on September 19, 2019^[3], where the WG had set forth the framework on SSEs, also shed light on the concept of social audit as well as the proposed framework and uniform reporting procedures. The TG was of the view that Social Audits have two components being : A Financial Audit and A Non-Financial Audit where the latter includes the task of measuring the social impact.

The basic intent behind the social audit exercise is to gauge/measure/ ascertain the impact made by the social enterprises through their activities. The same is to be done by analyzing whether the activities so implemented are creating the desired impact, if yes, then to what extent and if not, then what can be done to reach the desired level of impact. The Exposure Draft issued by ICSI also provides for a ‘Draft format of Annual Impact Report’ where the contents of the report have been provided. On carefully going through the contents of the reporting, one can deduce that the whole intention is to analyze and understand the impact made through the existing activities and at the same time, also to bridge the gaps, if any, in the existing approach and make meaningful changes to the cause of development.

Date of applicability

SAS issued by the ICAI^[4] have become effective from the date of publication of the Standards. Further, ICSI^[5] has currently issued draft SAS for Social Auditors to be empanelled by them. Public comments are sought on the said draft standards till January 31, 2023.

Having said that, while the SAS issued by ICAI has been made effective, however, the same will still take some time to be referred to mandatorily by the Social Auditors for auditing the activities undertaken by social enterprises registered with SSEs.

Stage of applying SAS

Social Enterprises which are registered on the SSEs or have raised funds through SSEs are required to furnish an annual impact report to the SSE or the stock exchanges as per Reg. 91E of the SEBI (Listing Obligations & Disclosure Requirements) Regulations, 2015. The said report is to be audited by a Social Audit Firms employing Social Auditors. Thus, the SAS would be applied while conducting the audit of activities that the Social Enterprises have already carried out.

Broad elements of SAS Framework

The Standards issued broadly contain guidance on the following elements:

1. Social Audit Process & Documentation

The Audit process shall include collection of data from various sources, interaction with the relevant stakeholders and reporting on the findings as detailed further below. As per the exposure draft of ICAI, the 5 elements of social audit engagement are as follows:

(a) A three-party relationship involving a social auditor, a responsible party, and intended users;

(b) Project/ Program/ Intervention to be covered;

(c) Project Monitoring Framework;

(d) Evidence; and

(e) A written audit report.

Like any other audit, defining the object and scope of the social audit shall be the first step. The main task of the Social Auditor is to ascertain what kind of impact has the Social Enterprise been able to create through its activities, intervention, programs or projects implemented during the reporting period.

Another key step is to identify stakeholders of the social audit. These shall mainly comprise those entities that are affected by the activities of the social enterprise or possess information, resources and expertise needed for the social audit. They may include the Social Enterprises themselves, beneficiaries, investors, intermediaries, regulators, society at large, etc.

2. Inspection, collection of data & assessment

The social auditors are to collect sufficient data from primary and secondary sources in order to report on the impact created by the activities. They may carry out an inspection of the area where the project was implemented, interview relevant stakeholders as well as conduct a desk review of the existing documents to gain further insight into the evaluation procedure and impact assessment.

A brief of indicative checkpoints provided under the activities is provided herein below. The standards also provide indicative evaluation questions to be considered by the Social Auditor while formulating his view on the impact created.

3. Challenges & limitations

As indicated herein, the objective of social audit is to also address gaps / areas of improvement. Based on the information collected, the social auditor shall determine challenges faced by the stakeholders and areas for improvement based on the suggestions and feedback received from them, which might have an influence on the impact assessment. The Standards also provide for possible instances of limitations of the assessment carried out by the auditor in cases of lack of response received, non-availability of respondents, change in contact details, etc. Both the formats of reports provided by the Institutes provide for stating limitations, gaps & challenges.

4. Reporting

The Social Audit Report shall include information about the objective set out at the beginning of the Social Audit, methodologies adopted, observations, findings and recommendations if any. It shall also include the gaps, challenges faced by the Social Enterprise while executing the activities. Respective formats of reports for Social Audit Firms empanelled by ICAI & ICSI have been prescribed under the respective standards.

SAS – Key Takeaways from each standard

SAS No	Particulars of SAS	Indicative list of evaluation criteria provided under SAS
ICAI – 100 ICSI – 01	Eradicating hunger, poverty, malnutrition and inequality	Quantitative ●    Number of meals, free food provided ●    Demographic of beneficiaries covered ●    Number of jobs created ●    Initiatives undertaken to promote urban farming, nutrition programs ●    Skill development programs conducted Qualitative Increased standard of living
ICAI – 200 ICSI – 02	Promoting health care including mental healthcare, sanitation and making available safe drinking water	Quantitative ●     Number and amount spent on medical institutions, key equipments, staff, etc ●     Initiatives to reduce mortality rates ●     Amount spent on water purification plants ●     Initiatives taken to protect and restore water-related ecosystems Qualitative ●     Reduced illness, malnutrition ●     Availability of portable water Availability of hygienic sanitation facilities
ICAI – 300 ICSI – 03	Promoting education, employability and livelihoods	Quantitative ●     Number of schools/colleges set up by SEs and their location, ●     Career counseling initiatives taken up to guide the students, provide training/ practical experiences   ●     Sports & extracurricular activities ●     Ratios of student to teacher & student to classroom  Qualitative ●     Target population has access to quality education ●     Placement drives undertaken ●     Training for teachers & staff
ICAI – 400 ICSI – 04	Promoting gender equality, empowerment of women and LGBTQIA+ communities	Quantitative ●     Rate of crimes against women ●     Sex ratio at birth ●     Ratio of female to male Labour Force ●     Literacy rates, dropout rates ●     Areas working in for LGBTQIA+ community Qualitative ●     Indicators of eradication of discrimination ●     Counseling & legal awareness ●     Types of training programmes initiated
ICAI – 500 ICSI – 05	Ensuring environmental sustainability, addressing climate change including mitigation and adaptation, forest and wildlife conservation	Quantitative ●     Awareness programmes conducted for promoting environmental sustainability ●     No. of targeted beach areas with litter and marine pollution ●     Sustainable development initiatives in protected areas in forests, mountains etc., air pollution hot spots ●     No. of cities/units to initiate solar power system, zero carbon emission, electric vehicles, etc Qualitative ●     Improvement in environmental conditions ●     Increase in awareness ●     Conservation, restoration and sustainable use of ecosystem
ICAI – 600 ICSI – 06	Protection of national heritage, art and culture	Quantitative ●     Training/awareness programmes carried out for conservation of national heritage, art and culture ●     Number of activities of heritage digitization ●     Increase in footfalls, revenue Qualitative ●     Cultural Employment ●     Policy and Institutional Framework for Culture ●     Diversity of fictional content on public television
ICAI – 700 ICSI – 07	Training to promote rural sports, nationally recognised sports, Paralympic sports and Olympic sports	Quantitative ●     Assistance/scholarship provided to candidates ●     Development of sports infrastructure ●     Events organized at various levels eg district, state, national, etc. ●     Access to training facilities  Qualitative ●     Extent of inequalities and discrimination faced ●     Representation of women, sports professionals from Rural areas and marginalized communities, etc
ICAI – 800 ICSI – 08	Supporting incubators of Social Enterprises	Quantitative ●     Quantum of grants disbursed to the incubatees ●     Percentage of successfully graduated incubatees ●     Number of patents filed Qualitative ●     Evidence of increased organizational capacity ●     Evidence of operational excellence ●     Increase in organization resilience
ICAI – 900 ICSI -09	Supporting other platforms that strengthen the non-profit ecosystem in fundraising and capacity building	Quantitative ●     Number of non-profit entities incubated ●     Financial/non-financial resources mobilized ●     Survival rate of supported start-ups Qualitative ●     Contribution to building new knowledge
ICAI -1000 ICSI – 10	Promoting livelihoods for rural and urban poor including enhancing income of small and marginal farmers and workers in the non-farm sector	Quantitative ●     Literacy Levels ●     Income distribution of the target beneficiaries ●     No. of individual engaged in the farm and non-farm activities Qualitative ●     Create awareness about government’s social benefit schemes ●     Imparting education & skills to rural & urban youth ●     Imparting vocational training & creating employment Financial & Technical assistance given for farming & other allied activities
ICAI – 1100 ICSI – 11	Slum area development, affordable housing and other interventions to build sustainable and resilient cities	Quantitative ●     Number of Slum area development projects  undertaken ●     Affordable house created & allocated, ●     Improvement of lifestyle Qualitative ●     Develop cities that adapt to changes and are sustainable ●     Sustainable public transport & Proper waste management
ICAI – 1200 ICSI -12	Disaster management, including relief, rehabilitation and reconstruction activities	Quantitative ●     Developing Disaster Management skills at the community level ●     Putting in place effective infrastructure ●     Formulation of emergency plans Qualitative ●     Distribution of essential items in affected areas Providing medical facilities & rescue operations
ICAI – 1300 ICSI – 13	Promotion of financial inclusion	Quantitative ●     Encouraging people to open Bank account ●     Promote Financial Literacy ●     Access to finance Qualitative ●     Creating awareness about PMJDY, APY etc ●     Assistance in obtaining government documents and benefits from gov schemes
ICAI – 1400 ICSI – 14	Facilitating access to land and property assets for disadvantaged communities	Quantitative ●     Efforts to reduce income inequality ●     Assistance to parties in litigations    Qualitative ●     Creating awareness amongst masses about their rights ●     Measures for landless tenants and Labors
ICAI – 1500 ICSI – 15	Bridging the digital divide in internet and mobile phone access, addressing issues of misinformation and data protection	Quantitative ●     Increasing digital literacy ●     Development of infrastructure to aid access to information ●     Provide with genuine and true news Qualitative ●     Awareness about data protection and its importance ●     Importance of Personal Data      ●     Efforts taken to enhance awareness about rights
ICAI – 1600 ICSI- 16	Promoting welfare of migrants and displaced persons	Quantitative ●     Medical facilities for Migrant & displaced workers ●     Educating employers Qualitative ●     Ensuring social security ●     Availing benefits of government schemes

International Mapping

Carbon Disclosure Project

CDP (Carbon Disclosure Project) , a non-profit charity that has provided reporting disclosures for measuring environmental impact, has specified the following criteria for third-party verification standards:

It also specifies a list of accepted verification standards, including the AA1000AS. However, it is to be noted that these are sustainability assurance standards. Thus, they are wider in scope in comparison to SAS. While the Assurance Standards do not provide for evaluation questionnaires and criteria at a granular level as provided under the SAS, they provide a broad framework of the methodology to be followed. The audit plan and process is on similar lines as the SAS as stated below:

• Objectives of the engagement
• Deliverables
• Assurance standard(s) to be used
• Roles, responsibilities, and relationships
• Competencies and capabilities
• Scope of the engagement
• Criteria to be used
• Type and level of assurance
• Assurance strategy (including risk assessment and evidence requirements)
• Tasks and activities (including gathering methods, resource requirements, and schedule)

It further elaborates on the preparation of an assurance statement for all intended users as identified in the said statement as well as a management report to be submitted to the Management which should not contain any materially different findings, conclusions or recommendations other than those stated in the publicly available assurance statement.

OECD’s Social Impact Measurement for Social Enterprises

The Organisation for Economic Co-operation and Development (OECD) has provided a policy brief on Social Impact Measurement for Social Enterprises[6] (SIMSE), wherein there are deliberations covering what is the concept of social impact, and various approaches to achieve the same. 

It states that a ‘Stakeholder-based approach’ to social impact measurement for social enterprises might be effective, where the approach suggests selecting such a metric that enables the collation of information which is specific to the stakeholder and provides an insight to measure the social impact of the Social Enterprise.

The 3 metrics covered in the SIMSE policy are

Metric Type	Case Example of	Brief particulars of measurement of social impact
Cost Benefit Analysis (CBA)	WiSEs ( Public Investor)	CBA was used to demonstrate the net benefit produced by the activity. The analysis is performed in two parts: 1.    cost & benefits at organizational level 2.    cost & benefits for each disadvantaged person employed & studies the outcome on an integrated basis.
Rating	Phitech ( Private Investor)	Rating approach used here was developed by  Le comptoir de l’innovation (CDI Rating), designed to consider different aspects of social business covering financial & extra-financial creiteria. At the end of the of analysis the social enterprise obtains: 1.    10 financial grades based on the financial model and the 300 criteria 2.    10 extra-financial grades based on the social model and the 300 criteria.
Social Accouting & Auditing (SAA)	Jesmond Community Leisure (JCL)(Community)	JCL decided to identify and demonstrate its impact through social measurement techniques using the Social Audit network Framework (SAF). SAFuses key principles to underpin its process, and ensure effective verification. Social Accounts help the social enterprise to understand its impact on people, planet and resources. JCL used a multi-staged process that involved 1.    identifying the organisation’s objectives & values 2.    scoping the social audit 3.    consulting the stakeholders 4.    identifying realistic data-gathering methods 5.    implementing the social accounting plan 6.    writing, reviewing and Publishing the accounts.

Conclusion

The SAS shall provide the necessary framework and guidance required by the social auditors in carrying out the social impact assessment. However, one would need to determine whether the scope of the standards may be extended to provide guidance under other legal frameworks requiring impact assessment of social activities or sustainable financing.

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^[1]https://www.icai.org/post/eoi-initial-empanelment-of-social-auditors

^[2]Technical Group Report on Social Stock Exchange

^[3]https://www.sebi.gov.in/media/press-releases/sep-2019/sebi-constitutes-working-group-on-social-stock-exchanges-sse-_44311.html

^[4]https://resource.cdn.icai.org/72658srsb58573.pdf

^[5]https://www.icsi.edu/media/webmodules/EXPOSURE_DRAFT_OF_ICSI_SAS.pdf

[6]https://www.oecd.org/social/PB-SIM-Web_FINAL.pdf

Resource Centre on Social Sector