Corporate Social Responsibility (CSR) is a mandatory spend stipulated by the legislation which requires the Board of Companies that falls within the criteria specified in 135(1) of the Companies Act, 2013 (Act) to spend at least two percent of its average net profits towards CSR.
The term used is “at least”, which means a minimum of two percent should be spent for CSR. The responsibility is cast on the Board of Directors of the Company to spend this amount every financial year.
This article examines the responsibility of an auditor towards ensuring whether the Board of these Companies have spend the amount on CSR and the reporting for such spend, underspend overspend or non-spend of CSR. It is a given fact that the responsibility of the auditor is primarily towards the shareholders of the Company as the audit report is addressed to them.
The big picture in CSR is whether the auditor should question the Board of Directors on the following issues:
- Why the Boards failed to spend the minimum of two percent on CSR?
- Why the Boards spent more than two percenton CSR?
CSR – permissible by shareholders
Unfortunately the law has not mandated the Boards to seek a prior approval of the shareholders before spending on CSR. The net profits are the shareholders money and the law has mandates a CSR spend of at least two percent by the Board. It is clear that there is no mandate to spend the shareholders money beyond two percent without seeking approval of shareholders. Section 135 is different from section 181, under section 181 in case the company wants to spend on charitable purpose the law has provided that the Board is authorised to spend upto five percent of net profits and any amount in excess requires a prior approval of shareholders. The dilemma now is, thelaw has not provided for such a provision for CSR that will require the shareholders approval for the Board to spend more than two percent.
CSR Spend
If the company, which is mandated in section 135, spends the minimum amount of two percentthe auditor cannot question the Board. In such cases the Auditors can only look into the details of the various spends and question the Board on the authenticity of such spends.
CSR Non-Spend
The responsibility has been cast on the auditor to question the Board if no amount wasspent on CSR. The auditor is required to report such an instance in the notes to accounts. In fact the recommendation will be to qualify the same in the auditor’s report. This will result in responsible reporting that making a reference in the notes to accounts. Unfortunatelythe auditors, where there was no spend on CSR by the Company, did not qualify any of the annual reports last year.
CSR Underspend
Theresponsibility of theauditors in case of an instance of under spending of CSR is to report, which means if the Board has not spent the minimum amount of two per cent, then the Auditors have to qualify in the audit report that the company has not spent the money. The guidance note only requires the auditor to report in the notes to accounts and create a provision for any under spend of CSR. This issue of under spending of CSR should also be qualified in the Audit report.
CSR Over spend
The responsibility is cast on the auditor to report on overspend. In case of any overspend shareholders approval is required to be sought, eventhough the law does not mandate. Thus the onus is on the auditors to report the fact that the Board has spent more money on CSR than what was mandated in the Act. The questions that can be arise in case an overspend while protecting the shareholders’ interest can be:
1. How can a company spend more than two percent on CSR, when it is not mandated by the Act?
2. How should the auditor account for the excess amount spend on CSR beyond two percent?
3. Any excess beyondtwo percent, willit fall under the limits of section 181 and not section 135 of the Act?
3. Can a promoter spend 25% of its profits on CSR and get away?
4. Can this amount on CSR be spent on related party transaction?
The way forward- Qualification in Auditors’ report
The responsibility of the auditors requires that any transaction that is under spend, over spend or non-spend has to be qualified by the auditors in the Audit Report. If a auditor is responsible towards the shareholders, these issuesin CSR are considered a deviance and by making a qualification, it ensures that the attention of the shareholders is drawn to the fact that there has been a deviation in the accounting of CSR. It will ensure the shareholders are aware that the money was not spent on CSR or was spend in excess without seeking shareholders permission.
Every responsible auditor should take this deviance in CSR seriously and ensure that they report more responsibly as a Qualification in the Audit Report and not as a mere reference in the notes to accounts; a qualification will surely serve the purpose and draw the attention of the shareholders.
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