Lack of due diligence on implementation partners, weak governance and limited management involvement are contributing to ethical lapses and fraud in corporate social responsibility (CSR) programs, states EY Forensic & Integrity Services’ report, Corporate social responsibility in India: re-engineering compliance and fraud mitigation strategies. The report highlights that although there is a high dependence on third parties to execute CSR programs, 65% of the respondents did not have a clear due diligence policy and only 45% admitted to checking the past record of implementation partners.
As CSR spends to aid communities in need during the COVID19 pandemic increases, the integrity, efficacy and success of these programs may be uncertain due to inadequate controls, governance and monitoring. The report further highlights that 40% of the respondents shared that regular monitoring and evaluation of CSR projects was a key challenge.
Arpinder Singh, Partner and Head – India and Emerging Markets, Forensic & Integrity Services, EY said, “CSR programs can be a powerful force for organisations to create a positive impact on society, transform communities and deliver long term value to stakeholders. Any gaps, inadequacies or compliance lapses in the CSR efforts defeat its true purpose and significance, particularly during times of crises which can have far-reaching implications. Organisations and their leaders need to ingrain integrity within CSR programs, strengthen governance and enhance monitoring efforts to impede fraud and unethical practices.”
The survey was conducted with over 100 CSR executives across mid and senior management based in India, representing a mix of Indian enterprises as well as the Indian subsidiaries of multinational companies. The respondents operate across a wide range of industries including banking and financial services, manufacturing, infrastructure, media and entertainment, IT/ITeS, life sciences, automotive, retail and consumer products.
Saguna Sodhi, Partner, Forensic & Integrity Services, EY said, “The key to success for CSR committees will be maintaining compliance with the law, managing checks and balances, and seeking guidance from senior management. Safeguarding the veracity of CSR programs, the implementation process, partners and procedures to minimise risks would be critical.”
The objective of EY Forensic & Integrity Services’ report was to assess the incidence of fraud and unethical practices in CSR programs, gaps observed and organisations’ preparedness to manage these risks through anti-fraud and integrity mechanisms.
Some of the key findings include:
> Lack of transparency around the implementation partner’s background — Only 45% of the respondents had taken any steps to check the past record while 65% did not have a defined third-party due diligence policy that covered execution partners. External specialists can bring precision, discipline and efficiency when running an organisation’s CSR project. However, omitting adequate due diligence and an opaque background may lead to ethical or integrity-related concerns, regulatory scrutiny and expose the company to financial and reputational risk.
> Fraudulent practices during the lifecycle of the CSR implementation process — Financial misrepresentation of CSR funds (33%), fraud in procurement of goods & services (34%) and diversion of funds (30%) were some of the unethical practices demonstrated by implementation partners. Investigating a CSR fraud was a key challenge for 20% of the respondents. Organisations need to make sure that the process of execution during the entire lifecycle of the CSR program is conducted with integrity.
> Limited governance and monitoring — 56% of the respondents said that there was no board involvement and only 22% said their CSR committee included the CEO. 50% admitted their organisation did not have a case management workflow or governance structure for reported or identified violations related to CSR projects. Less than half (46%) admitted to conducting reviews and monitoring CSR activities. Limited leadership involvement, absence of monitoring and the impact measurement of projects may lead to adverse repercussions for organisations, augmented exposure to a wide-ranging set of risks.