What Is Corporate Social Responsibility Audit? Explained

A corporate social responsibility audit is a formal examination of a company’s CSR activities, spending, and reporting to ensure compliance with Section 135 of the Companies Act, 2013 and the Companies (CSR Policy) Rules, 2014. The audit checks whether the company has spent the mandatory 2% of its average net profit from the preceding three financial years on eligible CSR projects, and whether the funds were used for the intended purposes.

Under Rule 8 of the Companies (CSR Policy) Rules, 2014, companies with a CSR obligation of ₹10 crore or more in a financial year must obtain an audit certificate from a practising chartered accountant. This certificate confirms that the CSR funds have been spent in accordance with the CSR policy and the Act. For companies with lower CSR obligations, the requirement is limited to a declaration by the board, but many voluntarily opt for an audit.

The audit covers three main areas: financial compliance (whether the prescribed amount was spent), procedural compliance (whether board approval and reporting requirements were met), and impact assessment (whether the projects achieved their stated objectives). The Institute of Chartered Accountants of India (ICAI) has issued detailed guidance on CSR audit procedures.

Under the Companies (CSR Policy) Rules, 2014, any company that meets the threshold under Section 135(1) must have its CSR spending audited. The threshold applies to companies with a net worth of ₹500 crore or more, turnover of ₹1,000 crore or more, or net profit of ₹5 crore or more during the preceding financial year.

Specifically, Rule 8(3) requires that companies with a CSR obligation of ₹10 crore or more in a financial year must obtain a certificate from a practising chartered accountant. The certificate must state that the CSR funds have been spent in accordance with the company’s CSR policy and the provisions of the Act. For companies with CSR obligations below ₹10 crore, the board must pass a resolution stating that the CSR policy and spending comply with the Act, but an audit certificate is not mandatory.

The audit must be conducted by a chartered accountant in practice, as defined under the Chartered Accountants Act, 1949. The auditor cannot be an employee of the company or have any conflict of interest. The audit report must be placed before the board and included in the board’s annual report.

A CSR audit examines three dimensions: financial compliance, procedural compliance, and project effectiveness. The financial audit verifies that the company spent at least 2% of its average net profit from the preceding three financial years on CSR activities. It checks whether the spending was on eligible activities listed in Schedule VII of the Companies Act, 2013, such as education, healthcare, environmental sustainability, and rural development.

The procedural audit reviews whether the company followed the required process: formation of a CSR committee, board approval of the CSR policy, identification of projects, and monitoring of implementation. The auditor checks minutes of CSR committee meetings, board resolutions, and project documentation. The audit also verifies that the company has not spent CSR funds on activities that benefit only its employees or on political contributions, which are explicitly excluded.

The impact assessment component, while not mandatory for all companies, is increasingly expected. Companies with CSR obligations of ₹10 crore or more must commission an impact assessment for projects with outlays of ₹1 crore or more. The auditor may review these impact assessment reports to verify that the projects achieved their stated outcomes.

Non-compliance with CSR audit requirements can lead to penalties under Section 135(7) of the Companies Act, 2013. If a company fails to spend the prescribed amount on CSR activities, the board must specify the reasons in its annual report. However, if the company fails to spend and does not provide adequate reasons, the company is liable to a penalty of twice the amount required to be spent or ₹1 crore, whichever is less.

For non-compliance with the audit certificate requirement under Rule 8(3), the company and its officers may face penalties under Section 450 of the Companies Act, 2013, which provides for a fine of up to ₹10,000 for the company and up to ₹1,00,000 for officers in default. Additionally, the company may face reputational damage and increased scrutiny from regulatory authorities.

The Ministry of Corporate Affairs (MCA) has the power to order a special audit under Section 128 of the Companies Act, 2013 if it suspects non-compliance. In practice, the MCA has been increasing its scrutiny of CSR spending, and several companies have faced show-cause notices for inadequate CSR reporting.

A CSR audit is distinct from a financial audit in scope, purpose, and methodology. A financial audit under the Companies Act, 2013 focuses on the accuracy of financial statements, internal controls, and compliance with accounting standards. A CSR audit, on the other hand, focuses on whether CSR funds were spent on eligible activities, whether the spending was in line with the approved CSR policy, and whether the company met its statutory obligations.

The financial audit is mandatory for all companies meeting specified thresholds, while the CSR audit is mandatory only for companies with CSR obligations of ₹10 crore or more. The financial audit is conducted by the company’s statutory auditor, while the CSR audit can be conducted by a different chartered accountant. The CSR audit certificate is a separate document from the financial audit report.

The CSR audit also involves a qualitative assessment of project implementation, which is not part of a standard financial audit. The auditor may visit project sites, interview beneficiaries, and review project documentation to verify that the CSR activities were actually carried out. This makes the CSR audit more operational and impact-focused than a traditional financial audit.

If your company is subject to CSR obligations under Section 135 of the Companies Act, 2013, you should review your CSR policy and spending to ensure compliance. For companies with CSR obligations of ₹10 crore or more, engage a practising chartered accountant to conduct the mandatory CSR audit and obtain the required certificate before the board’s annual report is finalised.

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This page provides preliminary information. It is not legal advice. For your matter, consult a qualified professional.