Implementing and Auditing Ethics Programs

C H A P T E R 9

The 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 policies and procedures

– Can be a precursor to establishing an ethics program

– Helps to identify the firm’s current ethical standards, policies, and risk areas

Source: Digital Vision

The Social Audit

• 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

Benefits of an Ethics Audit

• Identify potential risks and liabilities and improve legal compliance

• Can be key in improving organizational performance

• Improved relationships with stakeholders– Pressure to account for actions in areas

including corporate governance, ethics programs, customer relationships, employee relations, environmental policies, and community involvement

Top Business Issues Over the Next Five Years

Ethical Crisis Management

• Plans to respond to and recover from disasters that can disrupt operations, destroy organizational reputation and erode shareholder confidence– Involves contingency planning, assessing

organizational risks, planning for potential occurrences and providing tools to respond

Crisis Management and Recovery

• U.S. companies are failing to identify and manage ethical, social, economic, and environmental concerns

• Ethical disasters follow recognizable phases of escalation

– Anticipation of problems and intervention can stave off organizational disaster

Source: Triangle Images

Where U.S. Has Lost Competitiveness

A growing number of people fear the U.S. is losing ground in business ethics and corporate governance.

Measuring Non-financial Performance

• Non-financial measures of performance are crucial to a firm’s health

• Measure wholeness and soundness of a company (“return on integrity”)

• The Sarbanes–Oxley Act

• Six Sigma• Balanced Scorecard • The Triple Bottom

Line

Risks in Ethics Auditing

• Ethics audits may uncover ethical problems that a company cannot remedy

• Stakeholders may be dissatisfied with the information • Conducting the audits is a financial and record

keeping burden • 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 of Top Management and the Board

• The first step in the auditing process– Top management may want a way to benchmark

their ethical performance• The board may

– Initiate audits based on stakeholder concerns or in response to corporate governance reform

– Have been held responsible for the ethical and legal compliance programs of the company’s they oversee

Establish an Ethics Oversight Committee

• Ideally, the board of directors’ financial audit committee would oversee the audit– In most companies, managers or ethics officers

conduct it• Individuals within the firm and external auditors

should be involved– An external auditor should not have other

consulting or conflict-of-interest relationships with top managers or board members

Define the Scope of the Audit

• Scope is determined by the type of business, risks faced, and the opportunities to manage ethics– Includes defining the key

subject matter or risk areas that are important to the ethics audit as well as the bases on which they should be assessed

Source: Triangle Images

Review Organizational Mission and Goals

• Should include a review of the current mission statement and strategic objectives

• Should examine all formal and informal documents that make commitments with regard to ethical, legal, or social responsibility

• Define the firm’s ethical priorities

Collect and Analyze Information

• Identify tools for measuring progress in improving employee’s ethical decisions

• Collect internal and external documents

• Determine a baseline level of compliance

• Determine all commitments

Source: Digital Vision

Employee-Preferred Channels for Reporting Misconduct

Source: 2009 National Business Ethics Survey, Ethics Resource Center, p. 35

Verify the Results

• Have an independent party verify the results of the data analysis – Increasing numbers of companies having results

independently audited• Verification is an assessment of the quality, accuracy,

and completeness of a company’s social report

Report the Findings

• The final step: Issue the ethics audit report– Should spell out the purpose and scope of the

audit, the methods used in the audit process • Although the ethics

audit may be similar to a financial audit, their forms are different

Source: Stockbyte

Strategic Importance of Ethics Auditing

• Should be conducted regularly• Provide a benchmark of overall effectiveness of

ethics initiatives – Can be important in asset allocation and program

development• Can demonstrate the positive impact of ethical

conduct and social responsibility initiatives on the firm’s bottom line