Weak Governance and Lack of Due Diligence Pose a Grave Risk to CSR Programmes: EY Survey

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Mumbai, May 2020: 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) programmes, states EY Forensic & Integrity Services’ report, Corporate Social Responsibility in India: Reengineering Compliance and Fraud Mitigation Strategies. The report highlights that although there is a high dependence on third parties to execute CSR programmes, 65 per cent of the respondents did not have a clear due diligence policy, and only 45 per cent admitted to checking the past record of implementation partners.

As CSR spends to aid communities in need during the COVID-19 pandemic increases, the integrity, efficacy and success of these programmes may be uncertain due to inadequate controls, governance and monitoring. The report further highlights that 40 per cent 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 programmes 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 programmes, strengthen governance and enhance monitoring efforts to impede fraud and unethical practices.”

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 programmes, the implementation process, partners and procedures to minimize risks would be critical.”

The objective of EY Forensic & Integrity Services’ report was to assess the incidence of fraud and unethical practices in CSR programmes, gaps observed and organisations’ preparedness to manage these risks through anti-fraud and integrity mechanisms. Key findings of the report include:

Lack of transparency around the implementation partner’s background

Only 45 per cent of the respondents had taken any steps to check the past record while 65 per cent 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 organization’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 per cent), fraud in the procurement of goods & services (34 per cent) and diversion of funds (30 per cent) were some of the unethical practices demonstrated by implementation partners. Investigating a CSR fraud was a key challenge for 20 per cent of the respondents. Organisations need to make sure that the process of execution during the entire lifecycle of the CSR programme is conducted with integrity.

Limited governance and monitoring

56 per cent of the respondents said that there was no board involvement and only 22 per cent said their CSR committee included the CEO. 50 per cent admitted their organization did not have a case management workflow or governance structure for reported or identified violations related to CSR projects. Less than half (46 per cent) 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.