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1 Auditors' Responsibilities on Globalization! Dr.Gholamhossein Davani Chairman of Dayarayan Auditing & Financial Services Firm Member of High council.

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Presentation on theme: "1 Auditors' Responsibilities on Globalization! Dr.Gholamhossein Davani Chairman of Dayarayan Auditing & Financial Services Firm Member of High council."— Presentation transcript:

1 1 Auditors' Responsibilities on Globalization! Dr.Gholamhossein Davani Chairman of Dayarayan Auditing & Financial Services Firm Member of High council of Iranian association of Certified Public Accountants (IACPA) IMA,IIA,AAA,BAA,EAA,CAAA,AIA

2 2 Ladies & Gentelman. I am very glad to have the opportunity to speak at this conference, as it gives me the chance to stress the importance of the relationship between Globalization & auditor's social responsibility

3 3 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.

4 4 Globalization in the era since World War II has been driven by trade negotiation rounds, originally under the auspices of GATT, which led to a series of agreements to remove restrictions on "free trade". The Uruguay round led to a treaty to create the World Trade Organization or WTO, to mediate trade disputes. Other bi- and trilateral trade agreements, including sections of Europe's Maastricht Treaty and the North American Free Trade Agreement have also been signed in pursuit of the goal of reducing tariffs and barriers to tradetrade negotiation roundsGATTUruguay World Trade OrganizationMaastricht TreatyNorth American Free Trade Agreement Source:Wikipedia

5 5 What is Globalization Globalization as a decoupling of space and time, emphasizing that with instantaneous communications, knowledge and culture can be shared around the world simultaneously. Sociologist, Anthony Giddiness

6 6 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.

7 7 What is Globalization? 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 During that period, international standards were also agreed for telegraphy and signaling.

8 8 Economically,socially, and ecologically negative: As an engine of "corporate imperialism";corporate imperialism one which tramples over the human rightshuman rights of developing societies, claims to bring prosperity, yet often simply amounts to plunderingplundering and profiteering. Negative effects includeprofiteering cultural assimilation via cultural imperialism,cultural assimilationcultural imperialism the export of artificial wants, and the destruction or inhibition of authentic local and global community, ecology and cultures. What is Globalization

9 9 Background The first great expansion of European capitalism took place in the 16th century, following the first circumnavigation of the earth in 1519 to 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 Some see this period as an interruption to the process of globalization commenced in the late 19th century.

10 10 How Globalization Birth 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.

11 11 New world Discipline 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.

12 12 World Capitalism 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.

13 13 International business Multinational companies face special issues in relation to ethical auditing. It is, though, precisely these special issues which can make ethical auditing so valuable to multinationals. Executives of such companies are well aware of the added complications which operating across a number of cultures brings. But problems tend to multiply when differing value bases are permitted to take hold within different cultures. It may have seemed acceptable for Shell to apply differing environmental standards to their drilling in Ogoniland decades ago to those they applied in Europe or North America - but in an era of acute global consciousness of the interdependence of the world eco-system the same standards are rightly expected in every continent.

14 14 The elements of an effective global financial reporting infrastructure include: effective, independent and high quality accounting & auditing standard setters auditor s social responsibility high quality auditing standards; audit firms with effective quality controls worldwide; profession-wide quality assurance; and active regulatory oversight.

15 15 Developments in International Financial Reporting In the last three years, there has been a tremendous change in the financial reporting infrastructure within the European Union, as evidenced by the many interesting and important developments that have occurred. Some of these changes in regulatory side are as :, The European Commission (EC) issued a draft regulation that will require the use of IAS by 2005, or 2007, for 7,000 companies. That draft regulation was endorsed by the European Parliament less than 2 months ago; The European Financial Reporting Advisory Group, or EFRAG, was established to coordinate the development of input to the IASB; and Securities regulators in Europe have come together to agree on a more unified structure via the Committee of European Securities Regulators, otherwise known as CESR.

16 16 Social responsibility Community Diversity Environment Ethics Financial Responsibility Human Rights Safety

17 17 Point of beginning 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.

18 18 Social Responsibility 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.

19 19 Social Accounting 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

20 20 World Ethical Auditing World ethical auditing is a process which measures the internal and external consistency of an organization's values base. The key points are that it is value-linked, and that it incorporates a stakeholder approach. Its objectives are two-fold: It is intended for social accountability and transparency towards stakeholders and it is intended for internal control, to meet the ethical objectives of the organization.

21 21 Ethical Audit The ethical audit will result in the identification of (actual) organizational values on the one hand, and in a general direction as to how the company wants to develop its value system on the other. The findings will therefore need to be translated into action planning for the following year. If the ethical audit is performed every year or every other year, a company should be able to track its progress based upon the baseline information provided by the different elements of the ethical audit.

22 22 Professional activities 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.

23 23 SR /SD The currency and general relevance of social responsibility (SR) and sustainable development (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.

24 24 What are SR/SD 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.

25 25 Elements of SR/SD 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.

26 26 History of Global Reporting 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 A revision was published in 2002.

27 27 What is GRI 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.

28 28 The Global Eight 1-The U N Global Compact 2- ILO conventions 3- The OECD Guidelines for Multinational Enterprises 4- ISO Series 5- Accountability The Global Reporting Initiative 7- The Global Sullivan Principles 8- Social Accountability 8000

29 29 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 are specific and advocate a set of benchmarks to be attained. There are several different types: process, performance, certification, and foundation:

30 30 Standards Stage Process Performance Foundation Certification

31 31 Process 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.

32 32 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.

33 33 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 Series)

34 34 SA/CSR After Enron Collapse 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.

35 35 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.

36 36 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.

37 37 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.

38 38 Detail of Social Auditing Social Auditor will work on the components of a company's Social Policy (Ethics, Labor, Environmental, Human Right, Community, Society, COMPLIANCE and etc.), and for each subject, the Social Auditor will analyze the expectations of all stakeholders.

39 39 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.). The Ethics Policies will attract long-term investors, increase market shares for the ethical product, strengthen partnerships, and make the employees proud.

40 40 Labour 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. 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).

41 41 Environment monitoring and reduction of the damage caused to the environment. For instance, policies of reduction of emissions and waste. 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!).

42 42 Human Rights making sure the company does not violate human rights nor appears as supporting human rights violators. 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.

43 43 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. 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).

44 44 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). 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).

45 45 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 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.).

46 46 The ILO has defined core labour standards, which include: Freedom of association (Convention 87) Right to collective bargaining (Convention 98) Prohibition on forced labour (Convention 29 and 105) Prohibition on child labour Freedom from discrimination (Convention 111)

47 47 Social Responsibility In the globalization area auditors' responsibilities have changed to corporate social responsibility that main basic is related to Ethics. Although many auditors are burning the midnight oil to familiarize themselves with the new regulations and to prepare for their role in the compliance process, the scope and complexity of change has made the learning process a significant challenge.

48 48 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).

49 49 Who is independent Social Auditor 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, or make recommendations on the necessary measures to build the Social Policy.

50 50 The conceptual framework In contrast to social auditing which aims primarily at measuring the social impact of a company on its environment, the ethical audit from the outset is value-linked. It measures the "ethical climate" of a company by analyzing the values on which the organizational actions are based and by testing the moral quality of these actions against values that should be taken into consideration. the ethical audit is organisation-centred, meaning that organizational values are to be found within the company at all levels in stead of being inculcated from outside or by senior management alone.

51 51 Accountability The objective of accountability towards stakeholders requires information about general issues such as product safety, the environment, employee relations, etc. An ethical bookkeeping system collects data systematically about the organization's ethical behavior, which is relevant for stakeholders. This process is most likely to include "hard" information, including for instance complaints of stakeholders, business accidents or fines for unethical behavior

52 52 Corporate Governance The good corporate governance needs to address not only boards of directors, committees, and legal and regulatory issues, but also business practices and ethics, disclosures and transparency, enterprise risk management, monitoring, and communication. That it's a whole set of systems and processes. It's not just narrowly focused on compliance with Sarbanes-Oxley.

53 53 Sustainable Company The systems and processes of corporate governance also should consider a diverse group of stakeholders, not solely shareholders. "Most corporate governance focuses just on shareholders. But a shareholder's interest is different than an employee's interest, which is different than the interest of a community, creditor, or supplier. And too often, the focus of shareholders, management, and everyone else in the company is on increasing shareholder value. Furthermore, this responsibility is often on the backs of the community or the employees or the suppliers, and that is not in their interest.

54 54 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.

55 55 Conclusion Auditor s social responsibility & 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.

56 56 Dr. Gholamhossein Davani B.SC. Cost Accounting MBA,EM.B.A, PHD Business Administration IACPA, IICA, IMA, AAA, BAA, EAA, IIA,AFA,CAAA,CFE 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,CFE and CAAA. Davani is chairman of Dayarayan auditing & Financial Services Firm. He was formerly a managing director of Petrochemical Auditing & Management Services Firm (Hessam). 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 & share assessment. He had been editor of Accountancy magazine in Iran for four years.


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