Assurance importance: why we should audit impact reports

Are claims made in social impact measurement reports accurate? Someone should check, says Jeremy Nicholls. After all, investors receive independently audited financial reports. Why shouldn’t beneficiaries receive the same?

People receiving social impact should have the legal right for claims about that impact to be independently audited, so they have assurance that the impact is as high as it can be.

Does this seem too strong? Unrealistic? Irrelevant?

An early report (2014) by the UK-led Social Impact Investment Taskforce had this to say:

"Among mainstream businesses, while robust measurement of social outcomes (as opposed to essentially marketing-driven reporting of good works) is still unusual, some prominent companies are moving to a sustainable business model, developing detailed reporting around social and environmental issues. For example, Unilever launched in 2011 a ‘Sustainable Living Plan’, pledging by the end of the decade to double its profits whilst halving its environmental footprint, upgrading the skills of people in its supply chain in developing countries and improving the health of 1 billion new customers. In April 2014, it reported that, among other things, 48% of its agricultural raw materials came from sustainable sources, up from 14% in 2010, against a target of 100% by 2020; and that it had helped and trained over 570,000 smallholder farmers and increased the number of Shakti women micro-entrepreneurs in India that it employs from 48,000 in 2012 to 65,000 in 2013. The sooner this kind of measurement is standardised across similar firms and independently audited, the better."

(Bold added for emphasis.)

Whilst I couldn’t agree more, at one of the launches of this report I heard an impact investor stand up and say words to the effect that there would be audit of impact over his dead body.

The argument that measurement of impact should be independently audited has now been dropped. The recent, and in so many ways excellent, Impact Management Project, which brings together impact management professionals across the world, doesn’t discuss the option, let alone the fundamental need for assurance, and there are very few examples of any impact investor producing impact reports that are independently audited. To be fair, there are very few examples of any non-profit or social enterprise producing impact reports that are independently audited either. And, to be clear, evaluation is not the same as assurance.

A right for beneficiaries

I propose that it’s a right of those who receive the impact to have these reports audited; the report should be evidence that the impact has been as high as it could be.

If this does seem too much to expect, let’s compare what happens in social impact accounting (accounting for changes that people get in their lives), with financial accounting (accounting for financial value that investors get for their lives).

The purpose of financial accounting is to provide investors with information about what an organisation has been doing with an investor’s money. It is about how the organisation has performed against the investor’s objectives, which, at least in the theory, is to maximise financial returns. Accounts are NOT a report on the financial value created, the profit and loss, as could be assumed. They are a report on how well the organisation has done in creating as much financial value as possible. And if it’s not good enough there WILL be consequences.

Assurance can only come from a third party, in reality, a third party acting on behalf of those who receive the impact

This should surely be the same logic for social impact reports.

Of course, the company has accountants to produce this information, and it is prepared and reported against international standards. Nonetheless, investors need assurance that the information is a reasonable, complete and accurate account of the financial value created for the investor.

Completeness may need some explanation. In finance, the accounts should be a complete account of all the financial information relating to the business. Well, not necessarily ‘all’. The actual requirement is for the accounts to include all the material financial information, which means any financial information that would influence an investor’s decisions.

The assurance that the accounts are (materially) complete and accurate comes from the legal requirement for an external auditor using international standard for auditing supported by requirements for training and experience of an individual auditor (independent of who they may be employed by). Without this, on what information are they basing their decision to invest?

In finance accounts, the people getting the financial return have the legally enforced right for that return to be independently audited.

Giving people who receive the social impact a legal right to have that audited doesn’t sound quite so ridiculous now, does it?

And it’s ironic, given that the wealth that impact investors have at their disposal was dependent on an assurance process.

Why is this?

Who holds the power?

At its simplest, it’s because the people getting a social return cannot hold organisations to account for that return. If there is a problem with the finances and any financial return, there will be consequences – the investment stops or people may lose their jobs.

If the social impact isn’t as high as it was expected to be (and assuming there ever was a clear expectation), not much will happen. Often nothing. CEOs get sacked every day for failing to create as much financial value as was expected, no one, though I’d like to have some examples, loses their job for not creating as much social value as was expected.

In the long history of legislation to improve how businesses account for their impact, stock market values haven’t gone down

As a result, there has been an unfortunate focus on measuring impact rather than on measuring how much impact has changed.

Solely measuring impact, knowing what your impact was, is largely pointless. When you are comparing with a budget or you are measuring again later on, then discussions that follow will explore ways of improving performance of making changes to existing products and services.

The thing is, that if you measure your impact, you will have had one. And I’m pretty sure it will be positive. After all, you intend to have a positive impact, which will help, but you will also have a bias – an inbuilt, very human bias – towards reporting intended positive outcomes, whether or not you have caused them. So, when you have reported your impact, I am left thinking, “Well, so what?” The real question is whether the impact has gone up or down and what you are doing to make that happen. Whether you are creating as much impact as you can with the resources you have, and, yes, recognising that there may be trade-offs in doing this.

If the people receiving a social impact could hold an organisation to account for that impact, then the organisation would have no choice but to seek to maximise impact

If the people receiving a social impact could hold an organisation to account for that impact, then the organisation would have no choice but to seek to maximise impact. And if the providers of finance took that into account in allocating resources, organisations that were not seeking to maximise impact would close. Organisations would need good enough information to be constantly making choices between different ways of doing things and choosing the one that, on balance, will have more impact. And this will require an assurance process that forces organisations to consider completeness of the information from the perspective of those “impacted”.

So we would all need assurance that the report on that impact was a reasonably complete and accurate statement of that impact. Given our very human bias, given the ease with which we choose not to include negative impacts for some groups, to ignore displacement, to create causation where none exists, and given the number of people being “impacted”, this assurance can only come from a third party, in reality, a third party acting on behalf of those who receive the impact (positive or negative!). This is much less about accuracy of what is reported than it is about completeness of all the outcomes that resulted from the activities of the business.

And so, as an aside, assurance is third party, to a very specific scope not set by the organisation, focusing on completeness, relevance and accuracy, by reference to international standards (which are frequently updated) with the legal right to have their conclusions made public by the organisation. Critically, these standards are NOT created by (or for) the organisations creating financial value.  

Despite our initial reaction, assurance or audit is not a dull box-ticking exercise offering no value. It is a fundamental building block for creating as much impact as we can, financial or otherwise, with the limited resources we have. We don’t have the luxury of doing anything else.

There are some positive signs, at least for organisations which are used to high levels of accountability to investors and consumers. In corporate reporting there are assurance standards, for example AA1000AS and ISAE 3000, and Social Value International supports a social value assurance standard. There is some demand for assurance using these frameworks, though businesses have far too much say in determining materiality. It is strange that businesses have no say in determining financial completeness and materiality, but have a big say in deciding what is material in sustainability reports. Hopefully, it’s now becoming clearer why this is the case.

Assurance is not a dull box-ticking exercise offering no value. It is a fundamental building block for creating as much impact as we can with the limited resources we have

It will take legislation to address this and standardise the basis for determining materiality from the perspective of those affected by organisations’ activities. The recent EC requirement for non-financial reporting missed a trick by leaving the decision up to member states of whether this information should be audited, though there is some hope that at least one member will require audit. Legislation isn’t popular, but in the long history of legislation to improve how businesses account for their impact, stock market values haven’t gone down. Credible and relevant information helps investors make better decisions.

Every time we are satisfied with a report on our impact without that independent assurance of whether the impact reported is as high as it could be, we are failing the people we claim to be helping. We want to do good but, as we know, the road to hell is paved with good intentions and to get to heaven we’ll need assurance that we are doing as much as we can.