Implementing and AuditingEthics Programs
C H A P T E R 9
The Ethics Audit
•Systematic evaluation of anorganization’s ethics program andperformance to determine whetherit is effective
–Regular, complete, anddocumented measurements ofcompliance with policies andprocedures
–Can be a precursor toestablishing an ethics program
–Helps to identify the firm’scurrent ethical standards,policies, and risk areas
Source: Digital Vision
The Social Audit
•Process of accessing and reporting a business’sperformance in fulfilling the economic, legal,ethical, and philanthropic responsibilitiesexpected by its stakeholders
–Broader in scope than an ethics audit
–An ethics audit might be a component of asocial audit
Benefits of an Ethics Audit
•Identify potential risks and liabilities and improvelegal compliance
•Can be key in improving organizationalperformance
•Improved relationships with stakeholders
–Pressure to account for actions in areasincluding corporate governance, ethicsprograms, customer relationships, employeerelations, environmental policies, and communityinvolvement
Top Business Issues Over the NextFive Years
Ethical Crisis Management
•Plans to respond to and recover from disasters thatcan disrupt operations, destroy organizationalreputation and erode shareholder confidence
–Involves contingency planning, assessingorganizational risks, planning for potentialoccurrences and providing tools to respond
Crisis Management and Recovery
•U.S. companies are failing to identify and manageethical, social, economic, and environmentalconcerns
•Ethical disasters follow recognizable phases ofescalation
–Anticipation ofproblems andintervention canstave offorganizationaldisaster
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 crucialto a firm’s health
•Measure wholeness and soundness of a company(“return on integrity”)
•The Sarbanes–OxleyAct
•Six Sigma
•Balanced Scorecard
•The Triple BottomLine
Risks in Ethics Auditing
•Ethics audits may uncover ethical problems that acompany cannot remedy
•Stakeholders may be dissatisfied with the information
•Conducting the audits is a financial and recordkeeping burden
•No guarantee that auditing is the solution to ethicsconcerns
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 TopManagement and the Board
•The first step in the auditing process
–Top management may want a way to benchmarktheir ethical performance
•The board may
–Initiate audits based on stakeholder concerns or inresponse to corporate governance reform
–Have been held responsible for the ethical andlegal compliance programs of the company’s theyoversee
Establish an Ethics OversightCommittee
•Ideally, the board of directors’ financial auditcommittee would oversee the audit
–In most companies, managers or ethics officersconduct it
•Individuals within the firm and external auditorsshould be involved
–An external auditor should not have otherconsulting or conflict-of-interest relationships withtop managers or board members
Define the Scope of the Audit
•Scope is determined by thetype of business, risks faced,and the opportunities tomanage ethics
–Includes defining the keysubject matter or risk areasthat are important to theethics audit as well as thebases on which theyshould be assessed
Source: Triangle Images
Review Organizational Mission andGoals
•Should include a review of the current missionstatement and strategic objectives
•Should examine all formal and informal documentsthat make commitments with regard to ethical, legal,or social responsibility
•Define the firm’s ethical priorities
Collect and Analyze Information
•Identify tools for measuringprogress in improvingemployee’s ethical decisions
•Collect internal and externaldocuments
•Determine a baseline level ofcompliance
•Determine all commitments
Source: Digital Vision
Employee-Preferred Channels forReporting Misconduct
Source: 2009 National Business Ethics Survey, Ethics Resource Center, p. 35
Verify the Results
•Have an independent party verify the results of thedata analysis
–Increasing numbers of companies having resultsindependently 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 theaudit, the methods used in the audit process
•Although the ethicsaudit may be similar toa financial audit, theirforms are different
Source: Stockbyte
Strategic Importance of EthicsAuditing
•Should be conducted regularly
•Provide a benchmark of overall effectiveness ofethics initiatives
–Can be important in asset allocation and programdevelopment
•Can demonstrate the positive impact of ethicalconduct and social responsibility initiatives on thefirm’s bottom line