SOCIAL AUDITING: CHALLENGES OF NGOs IN NEPAL

EXECUTIVE SUMMARY
This thesis examines the nature of management-driven social audit and surrogates- (stakeholders)
driven social audit within the NGO sector in Nepal, and how they are used to create NGOs’
accountability. While there are many prior researches on management-driven social auditing and
accounting focusing on the corporate sector, there is a relative lack of research in NGO sector
particularly focusing on a developing country. In particular, there is very limited study on surrogates-
driven social audit, and how it creates change and accountability within the NGO sector. Moving beyond
the existing theories or framework used in social auditing and accountability literature, this thesis
adopts a relatively different notion of accountability theory, called surrogate accountability. In pursuing
the research objective, this thesis used narrative analysis for empirical and robust analysis on the data
collected from semi-structured in-depth interviews and document analysis. The narrative analysis was
also supported by thematic analysis.

The study interviewed a total of 46 people including 8 CEOs and their associates from 2 international
NGOs and 2 local NGOs operating in Nepal. Similarly, 50 documents of these NGOs, including annual
reports and accountability reports, and 186 documents produced by their stakeholders were examined.
In addition, the website contents also were used. The entire analysis was focused on searching the texts
in documents and transcripts to discover repeated patterns of meaning through observation,
comparisons, etc.

KWYEORDS
Social impact, international NGOs, NGOs, social auditing, stakeholders, accountability, an-depth
interview, surrogate driven social audit, no-for-profit, and transparency.

INTRODUCTION
Social audit is a method for evaluating the organization's social and ethical efficiency. The social
audit opens up discussion, to enhance corporate efficiency, between partners, focus audiences,
contributors and organizations.

DEVELOPMENT OF THE RESEARCH OBJECTIVES/ RESEARCH

QUESTIONS: ACCOUNTING PROBLEM/OPPORTUNITY
Over the past decades, there has been many studies about social auditing primarily in the business sector
followed by the not-for-profit or social/NGO sector. Social auditing has been one of the major tools
developed and widely discussed in the academic literature to assess the overall performance of
organizations (Gibbon & Dey, 2011). In addition, a good deal of research has examined why
organizations undertake social auditing.
However, there has been limited empirical study on in-depth understanding of the nature of social
auditing, and how it is practiced in the NGO sector. NGO sector in this study means primarily not-for-
profit humanitarian, development, advocacy and service providing (for example running hospitals)
organizations.
The following research questions will be answered by the study:
a. What is the nature of management-driven social audit and surrogate driven social audit within the NGO
sector in Nepal?
b. Whether and how are management-driven social audit and surrogates driven social audit used to create
NGOs’ accountability or trigger lack of NGOs’ accountability in Nepal?

CONCEPTUAL FRAMEWORK

Scope
Regional
National

Tools
Revenue
Expenses
Social Audit Challenges
Performance
Investment

Actors
CSOs
Media
Government
DEVELOPMENT OF RESEARCH MOTIVATION
The available literature suggest that social auditing has a long history primarily in corporate sector
followed by not-for-profit sector. However, empirical evidence to support the comprehensive nature of
social auditing and its practices in NGO sector is very limited. In addition, such study in the context of a
developing country – an extension of audit practice in new areas (Power, 2003), and more practices in
auditing (Free et al., 2009; Gendron & Spira, 2009) – in which international NGOs have a major focus for
the study is quite rare.
Hence, this study has a significance in academic literature of social accounting to understand the practices
of social auditing/accounting (Gray, 2002; Hopwood, 2009; Owen, 2008) of NGOs in creating real
change/impact and accountability on the ground.

LITERATURE REVIEW
Stakeholder theory can provide insights which are similar to those provided by legitimacy theory
which means that both derive from political economy theory. The theory of stakeholders is a
philosophy of operational and corporate management that encompasses a multitude of political
fields, such as workers, vendors, local governments, creditors and others. The stakeholders are
the person, particular groups or parties who may influence an agency, legislation, program or
decision or are personally affected. Public stakeholders are likely to be a council leader or a large
variety of project stakeholders.
DEFINING SOCIAL AUDIT: THE TWO FACETS
Social auditing, including its meaning, has been discussed for a couple of decades in SAA literature.
Social audit is a way to see whether an organization’s performance is following different stakeholder
expectations (Deegan, 2009). Social auditing also supports a company to check its social impacts on
wider stakeholders and identify whether companies are meeting their social objectives, and thus social
audit can play a role for continuous dialogues of company with stakeholders (Deegan, 2009). The
understanding and view of Deegan on social auditing is also supported by other studies. For example,
social audit refers to the whole process by which an organization determines its impacts on society, and
measures and reports the same to the wider community. Similarly, social auditing can be viewed as
process for assessing, reporting and improving an organization’s social performance and ethical behavior
through actively engaging stakeholders. A couple of other researchers including Gray (1996) and
Medawar (1976) questioned the capacity of social auditing conducted by organizations, and thus they
facilitated the discussion around third-party-driven social auditing. This type of social auditing was in
various forms but was generally referred to as independent (external) social reporting (Gray et al., 1996),
as a counter balance or counter reporting to current practices (Dey, 2010). The details of these two facets
– one from the organization side and another from the stakeholder’s side – of social auditing in terms of
management driven and stakeholders driven will be discussed later in this chapter. While the notion of
social auditing seems to be expanded from the concept of ‘a tool to manage corporate social
responsibility’ to a tool to improve an organization’s social performance; businesses or organizations
would solely focus on the mission potentially without being proactive to manage social performance to
meet stakeholders’ expectations until there are issues raised by communities or stakeholders.

MEANING OF SOCIAL AUDIT

The documents produced by the organizations discussed above have defined and described social auditing
and accountability. For example, “social accountability is an approach towards ensuring accountability by
engaging citizens and citizen’s groups directly or indirectly” (CUTS, 2013, p. 2). In social accountability
notion, the citizens, media, communities and Civil Society Organizations (CSO) adopt several kinds of
strategy to hold the service providers accountable (CUTS, 2013). Similarly, AIN defines social auditing
as “a process whereby the beneficiaries/right holders and stakeholder’s analyses, review and provide
feedback on the effectiveness, efficiency and relevancy of programs, activities and resources in intuition.
It is a way of understanding, measuring, reporting and ultimately improving an organizations’ social,
ethical, environmental, financial and managerial performance through creating a conversation between an
organization and its clients, partners and stakeholders” (AIN, 2010, p. 2). Finally, the government
document defines, “social audit is an assessment, analysis and evaluation of the work contribution on
entire socio-economic development of plan, policy, program, project implementation and service
delivery”.

SOCIAL AUDIT CHALLENGES IN NGO

Interestingly, the social auditing and accountability appeared to focus only to make government agencies
accountable as most of its tools talk about making government accountable towards people. The
understanding of UNDP on social accountability proves this fact as it understands accountability as,
“Social accountability refers to a form of accountability that emerges through actions by Civil Society
Organizations (CSOs) aimed at holding the state to account, as well as efforts by government and other
actors [media, private sector, donors] to support these actions” (UNDP, 2010, p.10). While discussing
with representatives of the international organizations, they strongly believed that Nepal has fertile
ground for practicing various social accountability tools as there are required formal structures and legal
framework (CUTS, 2013). However, the NGO sector has its own problems of social accountability,
transparency and internal governance. In addition, people are even more critical towards donor
community in terms of their lack of transparency and accountability towards their stakeholders such as
Nepalese government and local community. For example, over the years, a persistently negative image of
NGOs has dominated. This includes NGO culture being deemed as ‘dollar farming,’ and NGOs as
‘begging and cheating bowls,’ ‘family entrepreneurial endeavors,’ and ‘slaves of foreigners’, if not the
extension of imperial powers. This is linked to perceptions of NGOs as being elite-led, hierarchically
structured, lacking transparency and accountable only to donors. The stated unofficial ties to political
parties have further undermined the credibility of NGOs.
Because of the significant work of donor agencies and NGOs, different ministries of the Nepalese
government have prepared social audit guidelines. For example, government of Nepal, Ministry of
Federal Affairs and Local Development (MoFALD) have adopted the Social Audit as a tool for
downward accountability. For this purpose, it has developed guidelines called, “Local body social audit
guidelines 2067” to be adopted by all government institutions under the ministry. The ministry has
defined the concept of Social Audit as “an assessment, analysis and evaluation work of contribution of
entire socio-economic development of Plan, Policy, Program, Project implementation and service
delivery” (MoFALD, 2010, p. 2). The same guidelines have mentioned the provision of conducting social
auditing by NGOs and state, “NGO and other social organizations also may adopt the guidelines to
conduct social auditing”. However, the guidelines have asked each local body to conduct social auditing
once in a year mandatorily. In addition to the ministries’ guidelines, AIN guidelines on social audit
mentions, “though RTI act does not explicitly mention about INGO but AIN has felt that act is relevant to
INGOs”. These could be taken as loopholes in policies which were intentionally prepared through strong
facilitation of INGOs to be strictly implemented, but not for them. This example shows a paradoxical
behavior and operations of international NGOs and donor communities in Nepal.

JUSTIFICATION FOR THE STUDY

This study will look into social auditing challenges of non -government organisation (NGO’S) in
Nepal. The result obtained from this study will be beneficial for both theoretical and practical purposes.

The implications will be as follows:

 The result obtained from this study can be taken as basis for future research on similar
topics.
 It will help to evaluate how well public resources are being used to meet the real needs of
target beneficiaries.
 Management will be able to decide if they should be concerned about quality of audit on
NGO and therefore, contract auditors of high reputation and capabilities.
 It will help to scrutinize the various policy decisions keeping in view stakeholder
interests and priorities, particularly of rural poor.
 Regulators and legal bodies can decide to allocate needs and resources available for
social aims and objectives.

FORMULATION OF OBJECTIVES AND HYPOTHESIS

OBJECTIVES OF THE STUDY
The objectives of social audit are:
 To explore how the system of substitute responsibility creates the short- and medium-term
liability of NGOs
 To contribute to contemporary understanding of social auditing, showing the degree of conflict
between NGOs and their stakeholders
 To explain how NGOs, collect social auditing to reveal their records and disclosure of their social
impacts
  To provide observations that the transparency of NGOs and their influence accounts was
systematically manipulated and exaggerated
 The actual performance and the organization’s goals were equivalent.
 The improvement was not needed recently.
 The accountability and transparency in local bodies were strong.
 The efficacy and effectiveness of local development programs were high.

METHODOLOGY
Since the study focuses on the nature of social auditing and its uses in the creation of real
change/impact and accountability of NGOs; their practices on social auditing as well as claim on
disclosures about their performance, impacts and accountability would be important. The additional
value is added while identifying stakeholders’ perspectives, opinions, perceptions, ideas, understanding,
and experiences about NGOs. These attributes could be explored using qualitative research methods.
Within the qualitative research methods, this study adopted including information published in websites
for the study is In-depth interview.

INTERVIEW METHOD

The interview was a significant research method for robust and empirical study. Therefore, the
researcher used interview method as a key technique for the study. In this method, out of three formats
of interview: informal conversational interview, general interview guide approach, and standardized
open-ended interview, this study used standardized open-ended interviews. This approach is known for
asking identical questions so that responses are open ended. Such open-ended questions allowed
interviewees to give in-depth views as they liked. Hence, the in-depth interview provided the
opportunity to probe deeply to uncover new clues, open up new dimensions of a problem and to secure
vivid, inclusive accounts that are based on personal experience, and acquired rich insights for the study.

SCALING TECHNIQUES

For collecting data on the social auditing challenges of NGOs in Nepal, a questionnaire will be used.
Likert scale has been used in preparation of the questionnaire. Likert scale is an ordinal scale as in its data
have an ordered category and the distance between the categories is not known. The questionnaire uses
closed ended questions that are to be given points in the range of 1 to 5 (1- Strongly Disagree, 2-
Disagree, 3-Undecided, 4- Agree, 5- Strongly Agree).

ORGANIZATION OF QUESTIONNAIRE SAMPLING ISSUESS

The questionnaire to be used for this study is in Appendix 1. The questionnaire has been divided into two
sections, Part I General information and Part II Questions. Firstly, general information about the
respondent such as their name, designation, company they belong to has been enquired and the details of
the NGOs has been asked. In the second section, questions referring to challenges of social audit has been
enquired. The respondents are required to tick on one of the five options (i.e. Strongly Disagree, Disagree,
Undecided, Agree, Strongly Agree).

The questionnaire does not have sensitive questions or open-ended questions. The questions are simple
and the respondent will not require much time to response to those questions. Mainly, the following two
sample errors are likely to occur:

 Selection error: As hapazard sampling will be used to select the samples, there is a possibility
that the selected companies may not be willing to respond or may not represent that population.
To minimize this sampling error, pre-survey contact requesting cooperation from them is
necessary.

 Non-response: It is also likely that the sampled companies may not respond to all the questions
of the questionnaire or some questions may not be relevant to them. To minimize this sampling
error, follow-up survey will be used.

FIELDWORK AND DATA COLLECTION POSSIBLE DATA ANALYSES

Firstly, descriptive statistics will be used to analysed the obtained data through SPSS software.
Descriptive statistics aid in understanding large data set by simplifying into brief summarizes
[ CITATION Inv20 \l 1033 ]. The following descriptive statistics will be used in the study:

i. Mean: Mean is the average of the data set.

ii. Median: It is the data value which is in the middle of a sorted data set.
iii. Mode: It is the data that has occurred the greatest number of times in a given data set.
iv. Standard deviation: It is measure of dispersion of data from the mean of the data set.

Also, graphical tools such as pie charts, bar diagram will be used to examine the distribution of data
collected.

Further, correlation between independent variables and dependent variable will be examined through use
of correlation matrix. Correlation matrix is a tabular form of analysis the correlation coefficients between
dependent and independent variables. This statistical tool is useful in establishing the possible connection
between variables [ CITATION djs20 \l 1033 ]. Lastly, regression analysis will be performed to
evaluate the strength of the relationship established by the model.

RESEARCH IMPLEMENTATION

The above discussion revealed the extensive level of contradictions, struggles and tensions between
NGOs, and their accountability holders and stakeholders. Discussions and Conclusions NGO officials and
management-driven social auditing claim extensive stakeholders’ engagement and their empowerment,
wide-ranging impact accounting and disclosing process, and complete accountability to beneficiaries and
stakeholders; surrogates driven social auditing confronted those claims of NGOs and asserts that many
such proclamations have not been seen in practice on the ground. Surrogates’ accounts have raised
questions on the effectiveness, performance, wider impacts, democratic process, and ethical disclosing
practices of management-driven social auditing.

LIMITATION OF THE STUDY

While this thesis makes a number of theoretical and empirical contributions in the field of SAA, there are
limitations in terms of the scope of findings. This study summarizes its limitations into two areas.

 Firstly, the available sample size would be useful as thick cultural description and analysis of
social auditing and impact measurement practices extend an important understanding in the
sector, the scope of such findings is particularly limited in the context of Nepal.
 Secondly, this study has limitations regarding the findings as well. Findings did not aim to
demonstrate all anticipated and unanticipated social impacts, and social impact accounts
captured by social auditing. Rather, they were used for illustration to address the central
research questions

QUESTIONNAIRE
Section 1: General Information
Demographics Details:
1. Gender
o Male
o Female

2. Age
o 26 - 30
o 31 – 35
o 36 – 40
o Above 40

3. Education
o High School
o Bachelors
o Masters
o PhD

4. Income
 o Below 20000
o 21000-30000
o 31000-40000
o 41000-50000
o Above 50000

Details of NGO
1. Size of the company
o Very Small (1-10 staffs)
o Small (11-30 staffs)
o Medium (31-100 staffs)
o Large (above 100 staffs)

2. Tenure with company

o Very Short (1 year)
o Short (2 years)
o Average (3 years)
o Long (above 4-6 years)
o Very long (above 6 years)

Section 2: Questions
Subjective
1. Define your stakeholders who expect to see results of social impacts?

2. How does government ensure aid agencies and NGOs are operating for community interests?

3. How stakeholders react to your evaluations, social impacts outputs?

4. How stakeholders are impacted by your operations and social impact measures?

5. Are there any other insights you would like to share with us regarding social auditing?

Objective
S. N Questions Yes No
 1 The activities are reported to the government officials.
2 The organization admin utilizes the resources properly.
3 The management of the organization is flexible.
4 The social performance of the organization is good.
5 Different training programs are organized to train on social
auditing methods
6 The organization is performing ethically
7. The organization maintain strong accountability and transparency
in local bodies.