Corporate Ownership & Control / Volume 5, Issue 1, Fall 2007 ROLE FOR AUDITING IN CORPORATE SOCIAL RESPONSIBILITY AND CORPORATE GOVERNANCE: UNDER NEW CORPORATE VIEW Ryuuichiro Kurihama* Abstract Auditing plays a key role in Corporate Social Responsibility (CSR) and corporate governance. Auditing is essential to corporations and society because it is a medium to build a good relationship between corporations and stakeholders. However, a role for auditing in CSR and corporate governance has not been adequately discussed under new corporate view. This paper clarifies the relationship between CSR, corporate governance and auditing, and reexamines a role for auditing in CSR and corporate governance through the discussion of the relationship between corporations and society as recently brought up concerning CSR. This is necessary in order to think the view of how corporations and auditing should be toward rebuilding public trust. Keywords: Corporate Social Responsibility (CSR), Corporate Governance, Auditing, Fiduciary duties * Ph.D., Associate Professor of Accounting and Auditing, Graduate School of Accounting , Aichi University, Japan, Tsutsui 2- 10-31, Higashi-ku, Nagoya-shi, Aichi, 461-8641, Japan, E-mail: [email protected] / [email protected]. 1. Introduction governance, and considers the core concept of corporate governance designed to ensure the In recent years, Corporate Social Responsibility implementation of CSR. Section 4 examines how (CSR) (see endnote 1) has attracted growing attention, auditing contributes to the system of corporate and has become one of the key topics. CSR has an governance as well as how auditing must be changed effect on the conventional views of how corporations, under new corporate view. Section 5 concludes. market and society should be. CSR also has an impact on auditing, because the concept of auditing has been 2. Impact of CSR on Corporations: changing over time as people’s views of corporations corporations and society and society change. Auditing is a social institution that is loosely linked with society through interaction. 2.1 Today’s CSR Although it is said that auditing is an essential element of the system of corporate governance, a role CSR has been discussed since a long time ago. In the for auditing in CSR and corporate governance traditional context, each corporation has a social designed to ensure the implementation of CSR has not responsibility toward its shareholders, placing great been adequately discussed under new corporate view. importance on its relationship with them. Under such This paper clarifies the relationship between circumstances, CSR means boosting profits by CSR, corporate governance and auditing, and producing and providing quality products and reexamines a role for auditing in CSR and corporate services, and paying as large amounts of taxes as governance through the discussion of the relationship possible. Therefore, it has been considered that the between corporations and society as recently brought function of corporations is to maximize profits for up concerning CSR. And it examines how auditing their own shareholders. However, corporations contributes to rebuilding the mutual trust of nowadays can no longer accept uncritically such a corporations and society as well as how auditing must view of CSR. be changed in line with CSR. This is necessary in With corporate globalization and the IT order to understand the concept of society, revolution accelerating, and with corporate misdeeds corporations and auditing today, and to think the view and scandals (see endnote 2) more frequent, greater of how corporations and auditing should be toward attention has been focused on CSR in recent years. rebuilding public trust. Social demands for corporations change with the This paper is structured as follow. Section 2 times, and social reactions to corporate behaviors are argues changing corporate view through the also becoming more extensive and/or faster. discussion of CSR, and reviews a relationship not Particularly, many recent corporate misdeeds and only between corporations and shareholders but also scandals have resulted in loss of public trust in between corporations and stakeholders. Section 3 corporations and a growing sense of uncertainty clarifies a relationship between CSR and corporate among people. For example, according to a survey of 109 Corporate Ownership & Control / Volume 5, Issue 1, Fall 2007 Price Waterhouse Coopers (2003), 52 % of the CEOs CSR itself. In order for a corporation to build and interviewed answered that public trust in other maintain the relationship of trust with society, corporations has declined (see endnote 3). Rebuilding emphasis should be placed on “what needs to be done the public trust they have lost is their prime task (see to work things out” or “minimum things to do” rather endnote 4). than on “what to do to be successful (see endnote 8).” The new corporate investment of Socially Therefore, controlling the negative aspect of Responsible Investment (SRI) has an impact on the CSR is a minimum requirement for corporations to market as well as corporations. SRI represents maintain the relationship of trust with society. There investors’ efforts to systematically evaluate have been numerous cases in which corporations have corporations in terms not only of their economic lost public trust because they cannot control the aspects but also of their social, human, and negative aspects. It may be possible to distinguish the environmental aspects while making full use of positive aspect as a voluntary one from the negative market mechanisms. At the same time, there is a trend aspect which is mandatory. In short, the negative on the market side that, instead of emphasizing aspect of CSR is a necessary condition while the economic efficiency, market includes the social, positive aspect is a sufficient condition. Hence, CSR human, and environmental aspects when evaluating is a necessary and sufficient condition for corporations. In response to these changes, the way of corporations to be trusted by society. evaluating corporate value is also changing. Each Each corporation must control the negative aspect corporation is now under pressure to balance the of CSR first in order to restore public trust although it above four aspects. may be insufficient for today’s CSR. Under such circumstances, the issue of CSR needs to be discussed in terms of what benefits 2.3 Corporations and society: relationship corporations bring to society in the 21st century and with shareholders (see endnote 9) for whom they exist (see endnote 5). CSR can be defined as efforts aimed at realizing sustained As is well known, Milton Friedman viewed the corporate value-creation and a better society through corporations in a free market as follows: the erection of mechanisms for synergetic “There is one and only one social responsibility development of corporations and society (Japan of business – to use its resources and engage in Association of Corporate Executives, 2003, p.7) (see activities designed to increase its profits so long endnote 6). This requires reconsideration of the as it stays within the rules of the game, which is relationship between corporations and society in the to say, engages in open and free competition discussion of today’s CSR, since this relationship can without deception or fraud” (1962, p.133) influence the views of corporations and others. In a free market, CSR means to increase profits, and corporate value is mainly measured by economic 2.2 Dual aspects of CSR efficiency. Specifically, CSR means to increase profits by producing and selling quality products Although CSR varies depending on the country, and/or services, while also paying as large amounts of region, and corporation, it basically has two aspects: taxes as possible, which in turn enrich the government positive aspect and negative aspect (Taka etc., 2002, and other stakeholders. Therefore, each corporation pp.17-18) (see endnote 7). CSR serves to maximize places greater emphasis on the relationship with the positive aspect. The positive aspect is something shareholders and bears social responsibilities toward that positively affects society, and includes social them. Under such conditions, CSR means to contributions, volunteer activities, philanthropy (pro maximize shareholder value. bono activities), and others performed by corporations Why do corporations place great emphasis on the which are not just compliance with laws and relationship with shareholders? To answer this regulations. This aspect boosts corporate question, there is a neoclassical theory on the profit- competitiveness. maximizing principle of corporations. That is, a On the other hand, CSR controls the negative corporation is a kind of private property owned by its aspect. The negative aspect is something that shareholders, whose agents are the managers of the negatively affects society, and includes corporate corporation. Therefore, their only responsibility is to fraud, violation of laws and regulations, and deviation maximize profits for the shareholders. In this context, from social norms. This aspect prevents corporate if the managers attempted to fulfill CSR for other misdeeds and scandals. stakeholders rather than their own, it would disrupt CSR is said to be voluntary and autonomous the free market system. initiatives of corporations. In CSR, both the positive Even now, maximizing shareholder value leads to and negative aspects are equally important. However, the improvement of