Implementing and Auditing Ethics Programs

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

•      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

–     Inclusivity

–     Comparability

–     Completeness

–     Evolution

–     Management policies and systems

–     Information disclosure

–     Continuous improvement