Transcript Auditors` Responsibilities on Globalization!

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
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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
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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.
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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 trade
“Source:Wikipedia”
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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”
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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.
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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 1925. During that
period, international standards were
also agreed for telegraphy and
signaling.
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What is Globalization
Economically,socially, and ecologically negative:
As an engine of "corporate imperialism";
one which tramples over the human rights
of developing societies, claims to bring prosperity,
yet often simply amounts to plundering
and profiteering. Negative effects include
cultural assimilation via cultural imperialism,
the export of artificial wants, and the destruction
or inhibition of authentic local and global community,
ecology and cultures.
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Background
The first great expansion of European capitalism
took place in the 16th century, following the first
circumnavigation of the earth in 1519 to 1521.
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 1930. Some see this
period as an interruption to the process of
globalization commenced in the late 19th
century.
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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.
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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.
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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.
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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.
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The elements of an effective global
financial reporting infrastructure include:
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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.
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Developments in International
Financial Reporting
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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.
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Social responsibility
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Community
Diversity
Environment
Ethics
Financial Responsibility
Human Rights
Safety
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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.
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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.
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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
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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.
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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.
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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 Cooperation and Development (OECD), and the
Canadian federal government.
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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.
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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 multistakeholder approach to corporate citizenship
issues.
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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.
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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 ‘fieldtested’ in 1999 by over 20 companies and released
in June 2000. A revision was published in 2002.
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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.
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The Global Eight
1-The U N Global Compact
2- ILO conventions
3- The OECD Guidelines for Multinational Enterprises
4- ISO 14000 Series
5- Accountability 1000
6- The Global Reporting Initiative
7- The Global Sullivan Principles
8- Social Accountability 8000
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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 nonspecific 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:
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Standards Stage
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Process
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Performance
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Foundation
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Certification
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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.
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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.
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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 14000 Series)
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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.
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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.
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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.
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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.
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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.
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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.”
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Labour
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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).”
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Environment
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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!).”
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Human Rights
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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.”
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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).”
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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).”
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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.).”
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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)
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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.
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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).
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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.
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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.
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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
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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.”
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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.
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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.
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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.
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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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