Chapter 2

9-1

Chapter 9

Implementing and AuditingEthics Programs

9-2

The Ethics Audit

Ethics audit—systematic evaluation of anorganization’s ethics program and performanceto determine whether it is effective

–Regular, complete, and documented measurements ofcompliance with the company’s published policies andprocedures

–Opportunity to measure conformity to the firm’s ethicalstandards

–Similar to financial auditing

9-3

Social Auditing

Social auditing—process of accessing andreporting a business’s performance in fulfillingthe economic, legal, ethical, and philanthropicresponsibilities expected byits stakeholders

–Broader in scope thanan ethics audit

–An ethics audit might be acomponent of a social audit

9-4

Employee Observed Misconductby Risk Factor

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9-5

How would you defend ethicsauditing in a company?

9-6

Benefits of Auditing

Ethical crisis management and recovery

Challenges of measuring non-financial performance

Risks and requirements in ethics auditing

9-7

Benefits of Auditing

The results of the auditing process can be a keycomponent in improving organizational performance.

–Improves organizational learning, facilitates communication andworking relationships

–Can improve their operating efficiencies and reduce costs

It can help identify potential risks and liabilities andimprove compliance with the law.

It can improve relationships with stakeholders.

–Exhibiting greater transparency

9-8

Channels That Employees FeelComfortable Using to Report Misconduct

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9-9

Ethical Crisis Management andRecovery

Crisis management

–Plans to respond to and recover from naturaldisasters and ethical disasters which can disruptroutine operations, paralyze employees, reduceproductivity, destroy organizational reputation anderode shareholder confidence

–Involves contingency planning, assessingorganizational risks, planning for potentialoccurrences and providing ready tools torespond

9-10

Risks and Requirements inEthics Auditing

Ethics audits may uncover ethical problems that acompany cannot immediately remedy.

Stakeholders may be dissatisfied with theinformation in the audit.

Conducting the audits poses a financial and recordkeeping burden for the company.

There is no guarantee that auditing is the solution toethics concerns.

9-11

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, andvalues.

Collect and analyze relevant information.

Verify the results through an outside agent.

Report the findings to:

– Audit committee, managers, and stakeholders.

9-12

Secure Commitment from TopManagement and the Board

Board members may initiate audits based onspecific stakeholder concerns or in response tocorporate governance reform.

Board members have been held responsible forthe ethical and legal compliance programs of thecompany’s they oversee.

Top management may want a way to benchmarktheir ethical performance.

9-13

Establish an EthicsOversight Committee

Establish a committee to oversee theaudit process.

Ideally, the board of directors’ financialaudit committee would oversee theethics audit.

–However, in most companies managers orethics officers conduct the audits.

Individuals within the firm should beinvolved as well as external auditors.

9-14

Define the Scope of the Audit

The ethics audit committee should establish thescope of the audit and monitor progress.

Scope is determined by the type of business, risksfaced, and the opportunities to manage ethics.

Subject matter definition:

-Environmental-Privacy-Legal compliance

-Product liability-Fraud-Discrimination

-Employee rights-Financial reporting

9-15

Review OrganizationalMission and Goals

Ethics audits compare an organization’s ethicalperformance to its goals, values, and policies.

Current missions and objectives should bereviewed:

–Review all formal documents that make explicitcomments about ethical, legal, or social responsibilities.

–Define the organization’s ethicalpriorities.

9-16

Collect and Analyze RelevantInformation

Identify the tools or methods for measuring progress inimproving employee’s ethical decisions and conduct.

Collect internal and externaldocuments.

Determine a baseline level ofcompliance.

Determine commitments metand unmet.

9-17

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 manyorganizations are treating ethics audits as theywould financial audits.

They want to determine the reliability and validity ofthe findings.

9-18

Report the Findings

Issue the ethics audit report to the board ofdirectors and top executives until approved; andthen submit it to external stakeholders.

The report should identify the purpose andscope of the audit, methodsused, role of the auditors,and guidelines followed.

9-19

Strategic Importance of Auditing

Audits should be conducted regularly rather than in response toproblems.

Audits provide a benchmark as to the overall effectiveness of ethicsinitiatives and can be important in asset allocation and programdevelopment.

Quality and effectiveness in ethics auditing

–Inclusivity

–Comparability

–Completeness

–Evolution

–Management policies and systems

–Information disclosure

–Continuous improvement