It's time to inject a dose of reality and integrity into corporate social responsibility and sustainability reports, argues Prakash Sethi
It's time to inject a dose of reality and integrity into corporate social responsibility and sustainability reports, argues Prakash SethiA large number of major corporations, notably the large multinational corporations, have been publishing non-financial reports that describe a company’s activities pertaining to issues of major concern to various socio-political groups and public-at-large.
For example, in a database generated by SICCA and containing over 1200 companies from around the world, in 2008 there were 490 companies that had published corporate social responsibility/sustainability (CSR-S) reports including 13 companies that had created web-based CSR-S reports.
All available evidence suggests that the trend toward publishing CSR-S reports will increase as companies are confronted by public demand, and peer group pressure, to provide greater information about social and environmental impact of their business practices in all parts of the world.
We should not, however, rush to judgment by concluding that corporations have significantly increased their CSR activities especially when they go beyond corporate charity and philanthropy and where CSR-S reports are loaded with pictures of beautiful landscapes and smiling children waving happily to their corporate benefactors.
The new emphasis in the CSR-S reports instead focuses on a company’s core business activities and their impact on the sustainability of the planet’s environment and preservation of the quality of life and survivability of its the inhabitants.
The widespread corporate embrace of CSR-S reports is one example of this growing and pertinent trend. CSR-S (or non-financial) reports provide corporations a number of important advantages.
1. The company has total control over the medium, i.e., CSR-S report, to ensure that its message is presented in the most favorable surrounding context.
2. The message is communicated as intended with no independent external or un-controlled assessment.
The nature of corporate control over the medium and the message also places enormous burden on the corporate sponsor to ensure that its message contains a high level accuracy, specificity, and materiality to engender public trust in the corporate message.
The model is broken
Companies are spending millions of dollars annually to publish and disseminate their CSR-S reports.
And yet, rather than enhancing corporate credibility, these reports have tended to exacerbate public distrust and skepticism because they lack credible evidence as to the accuracy and comprehensiveness of the information contained in these reports.
Under the circumstances, it would seem logical that companies would take their lead from their publication of financial reports where they are required by law to provide external measures of assurance as to the quality and accuracy of information.
Unfortunately, our analysis of the current state of CSR-S reports suggests that companies have largely misused this opportunity by loading their reports with generally non-substantive information asserting companies performance on issues of environment, society, and governance (ESG).
Our analysis shows that of the companies publishing CSR-S reports, 61% did not make any mention of integrity assurance; 11% made some reference to assurance but provided no information; and only 28% of the companies provided some type of formal assurance statement.
A content analysis of assurance statements was based on a 10 point score. Of these even (7) points were allocated to the comprehensiveness of the investigation and verification process, and three (3) points were assigned to the scope of the integrity assurance.
The data shows that level of integrity assurance, and indeed the overall quality of CSR-S reports, was not confined to a particular industry or region, although some industries and regions displayed overall results.
In general, companies were more inclined to provide details as to the comprehensive of the investigation and verification process than the scope of the integrity assurance itself.
For example, 49% of the companies (67) scored between 5-7 points on the details on the investigative process, and only 6 companies received the top score of 3 on the scope of integrity assurance.
There 9 companies with the best performing scores of 9-10 with regard to Assurance Statements.
Big four accounting firms and conflicts of interest
A large number of assurance statements were provided by the big four certified public accounting firms (63%). However, assurance statements providers also included specialized integrity assurance organizations, for-profit NGOs and other third-party monitoring groups.
Our analysis of assurance providers for CSR-Sustainability reports revealed a disturbing trend with regard to assurance audits conducted by the Big Four Financial Auditing Firms, i.e., the firm providing assurance statements for CSR-Sustainability reports was also responsible for conducting financial audit for the same company.
Moreover, this situation was found to exist in the case of 43 companies (49%) where CSR-Sustainability reports had assurance statements provided by the Big Four financial auditing firms, i.e., PricewaterhouseCoopers (15 companies), KPMG (12 companies), Ernst & Young (9 companies), and Deloitte (7 companies).
In the U.S. and European Union, financial auditing firms have faced increased scrutiny and criticism where they have provided additional advisory-consulting services to the corporations in addition to conducting financial audits.
It seems ironic that corporations and financial auditing firms would not avoid even the appearance of conflict of interest and thereby avoiding public distrust.
At the risk of stating the obvious, it behooves on the corporate community to substantially increase their efforts and improve the quality of their CSR-S reports in terms of comprehensiveness and relevance of the information provided these reports, and also to ensure their accuracy through independent and credible verification of information that is disseminated to the public with maximum transparency. Otherwise, corporations would be faced with a further diminution in the public trust and a degradation of their reputation.
For a free download of a brief summary of our CSR-S report, please visit our web site www.sicca-org.org
S. Prakash Sethi is President of the Sethi International Center for Corporate Accountability, and University Distinguished Professor at Baruch College/CUNY, New York. Prakash.Sethi@baruch.cuny.edu / www.sicca-ca.org