Governance of CSR Program and Challenges

Since the inception of the Companies Act, 2013, there has been a steady increase in the Corporate Social Responsibility (CSR) spending. In 2019, the CSR spend was estimated to around ₹11,961 crore which was higher by 18% as compared to year 2018. The trend is likely to continue mainly due to policy changes which include allowing covid-19 related expenses as CSR. With the increase in CSR spend, it also becomes additional responsibility to monitor and govern CSR spend.

During the unprecedented situation of Covid-19, many businesses have switched to remote and restricted working environments. Many businesses have decided to accept this as a new norm and likely to continue remote working for many functions even after the situation is back to normal. Under these circumstances, management of fraud risks presents unique challenge that may not have been envisaged during framing of existing fraud prevention processes and controls. Fraud risk may include diversion or misappropriation of funds, inflated bills or fake invoices, Conflict of interest, showing admin expenses as project cost amongst others:

• Misappropriation funds – Funds either do not reach to the intended beneficiaries or did not serve the purpose for which the money was meant.
• Conflict of Interest – Possibility of assignment of work by NGOs to their related parties. It is important to check the vendor selection process of NGOs and whether these transactions are at arm’s length.
• Expense fraud – Increased digitization in operations opens up opportunity to provide fake or forged expense proofs for reimbursement.
• Over-invoicing – Inflated cost of the project is major area of concern. Financials of NGOs come under little scrutiny and cost of project may not reflect real picture on ground.
• Lack of Controls at NGO – Many times NGOs don’t have adequate controls or governance mechanism to monitor the CSR project. Absence of dedicated team, who can guide and ensure compliance with laws and accounting principles, is also a concern. CSR committee, comprising Board members and senior executives¸ need to establish transparent monitoring mechanism to ensure appropriate implementation of CSR program. However, many times it has been observed that companies just have one or two dedicated employees in CSR teams along with other shared responsibilities. The situation has been intensified especially amid COVID-19 pandemic where the companies have limited staff, therefore lesser time to monitor the allocation of CSR funds efficiently and effectively.
• Regular compliance audits, frequent field visits, review of contracts or vendor relationships, checking accounting books may help in preventing fraud. Companies should initiate proactive majors to ensure that company is protected from frauds and the CSR funds get allocated to the desired causes. It is also important that Companies provide adequate support to NGOs by enabling them establishing right processes to govern the CSR Program as per the requirement and code of conduct of the Company.
• Organization’s whistle-blowing mechanism can play a key role by giving access to third parties to report any misconduct. Apart from CSR Committee, Board of Directors and Senior management should also play an active role in guiding and supervising the CSR Program. In addition to preventing financial loss such initiatives can help to strengthen Company’s reputation and brand image.