Implementing and Auditing Ethics Programs
The Ethics Audit
• Ethics audit—systematic evaluation of an organization’s ethics program and performance to determine whether it is effective
– Regular, complete, and documented measurements of compliance with the company’s published policies and procedures
– Opportunity to measure conformity to the firm’s ethical standards
– Similar to financial auditing
• Social auditing—process of accessing and reporting a business’s performance in fulfilling the economic, legal, ethical, and philanthropic responsibilities expected by its stakeholders
– Broader in scope than an ethics audit
– An ethics audit might be a component of a social audit
Employee Observed Misconduct
by Risk Factor
How would you defend ethics auditing in a company?
Benefits of Auditing
• Ethical crisis management and recovery
• Challenges of measuring non-financial performance
• Risks and requirements in ethics auditing
Benefits of Auditing
• The results of the auditing process can be a key component in improving organizational performance.
– Improves organizational learning, facilitates communication and working relationships
– Can improve their operating efficiencies and reduce costs
• It can help identify potential risks and liabilities and improve compliance with the law.
• It can improve relationships with stakeholders.
– Exhibiting greater transparency
Channels That Employees Feel Comfortable Using to Report Misconduct
Ethical Crisis Management and Recovery
• Crisis management
– Plans to respond to and recover from natural disasters and ethical disasters which can disrupt routine operations, paralyze employees, reduce productivity, destroy organizational reputation and erode shareholder confidence
– Involves contingency planning, assessing organizational risks, planning for potential occurrences and providing ready tools to respond
Risks and Requirements in Ethics Auditing
• Ethics audits may uncover ethical problems that a company cannot immediately remedy.
• Stakeholders may be dissatisfied with the information in the audit.
• Conducting the audits poses a financial and record keeping burden for the company.
• There is no guarantee that auditing is the solution to ethics concerns.
The Auditing Process
• Secure top management and board commitment.
• Establish an ethics audit committee.
• Define the scope of the audit.
• Review the organizational mission, goals, and values.
• Collect and analyze relevant information.
• Verify the results through an outside agent.
• Report the findings to:
– Audit committee, managers, and stakeholders.
Secure Commitment from Top Management and the Board
• Board members may initiate audits based on specific stakeholder concerns or in response to corporate governance reform.
• Board members have been held responsible for the ethical and legal compliance programs of the company’s they oversee.
• Top management may want a way to benchmark their ethical performance.
Establish an Ethics Oversight Committee
• Establish a committee to oversee the audit process.
• Ideally, the board of directors’ financial audit committee would oversee the ethics audit.
– However, in most companies managers or ethics officers conduct the audits.
• Individuals within the firm should be involved as well as external auditors.
Define the Scope of the Audit
• The ethics audit committee should establish the scope of the audit and monitor progress.
• Scope is determined by the type of business, risks faced, and the opportunities to manage ethics.
• Subject matter definition:
-Environmental -Privacy -Legal compliance
-Product liability -Fraud -Discrimination
-Employee rights -Financial reporting
Review Organizational Mission and Goals
• Ethics audits compare an organization’s ethical performance to its goals, values, and policies.
• Current missions and objectives should be reviewed:
– Review all formal documents that make explicit comments about ethical, legal, or social responsibilities.
– Define the organization’s ethical priorities.
Collect and Analyze Relevant Information
• Identify the tools or methods for measuring progress in improving employee’s ethical decisions and conduct.
• Collect internal and external documents.
• Determine a baseline level of compliance.
• Determine commitments met and unmet.
Verify the Results
• Verify results through an independent party:
– Social/ethics audit consultant
– Financial accounting firm
– Nonprofit special interest group
• Verification is not required, although many organizations are treating ethics audits as they would financial audits.
• They want to determine the reliability and validity of the findings.
Report the Findings
• Issue the ethics audit report to the board of directors and top executives until approved; and then submit it to external stakeholders.
• The report should identify the purpose and scope of the audit, methods used, role of the auditors, and guidelines followed.
Strategic Importance of Auditing
• Audits should be conducted regularly rather than in response to problems.
• Audits provide a benchmark as to the overall effectiveness of ethics initiatives and can be important in asset allocation and program development.
• Quality and effectiveness in ethics auditing
– Management policies and systems
– Information disclosure
– Continuous improvement