Chapter 9 Business

Benefits of an Ethics Audit

Detect misconduct before it becomes a major problem Identifies potential ethical issues and improve legal compliance Improve organizational performance Improve relationships with stakeholders who demand greater transparency Sets goals against which to measure actual performance

Stages of an Ethical Disaster

Ethical misconduct disasters progress in stages Ethical issue recognition The decision to act unethically Organization's discovery of and response to the act Anticipation of and intervention can stave off organizational disasters Formal mechanisms in place to detect risk

A 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 -Should be the most important part of an ethics program -Primary purpose is to identify risks and problems in activities and plan steps to adjust/correct/eliminate concerns -Recent legislation encourages greater ethics audits

The Auditing Process

Audits should be unique to each company The following steps provide a general framework... Secure management and board commitment Establish an ethics audit committee Define the scope of the audit Review organizational mission, goals, and values Collect and analyze relevant information Verify the results through an outside agent Report the findings

The second step in the auditing process

Boards of directors financial audit committee should oversee the audit Managers or ethics officers conduct it in most firms Internal and external parties should be involved External auditors should not have other consulting or conflict-of-interest relationships with top managers or board members

The process of accessing and reporting a business's performance in fulfilling its economic, legal, ethical, and philanthropic responsibilities expected by stakeholders

Broader in scope than an ethics audit An ethics audit might be a component

Five factors can impact success of ethics programs

Five factors can impact success of ethics programs The content of the code of ethics The frequency of communication regarding the ethics program The quality of communication Senior management's ability to incorporate ethics into the organization Local management's ability to do the same

Verify the Results

Have an independent party verify the results of the analysis Companies often have results independently audited Verification is an assessment of the quality, accuracy, and completeness of a company's social report Should involve standard procedures to control reliability and validity of information

Collect and Analyze Information

Identify tools for measuring progress in improving employees' ethical decisions Collect relevant subject matter Internal and external documents Determine a baseline level of compliance

An ethics audit should...

Include a review of the current mission statement and strategic objectives Examine all formal and informal documents that make commitments with regard to ethical, legal, or social responsibility A firm should define its ethical priorities at this time

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 Providing tools to respond

Risks in Ethics Auditing

May uncover ethical problems a company does not wish to disclose May reveal a problem that cannot be remedied Stakeholders may be dissatisfied with the information Conducting ethics audits requires financial and record keeping resources No guarantee that auditing is the solution Lack of standardization in auditing

Measuring Nonfinancial Ethical Performance

Nonfinancial performance measures are crucial to a firm's health Measure wholeness and soundness of a company "Return on integrity" Many organizations and regulatory frameworks offer a means of capturing ethical performance Structural Behavioral

Process Controls for Ethics Programs

Proper selection of employees Ethics training Structural and communication systems Ethics assistance line Help desk Management's commitment to the program Comparing standards against actual behavior Ethics audit

Should be conducted regularly

Provides 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 lin

The first step in the auditing process

Sarbanes-Oxley requires that boards of directors provide oversight The board may initiate audits Managers may request an ethics audit to improve confidence in a firm's reporting processes

Organizations must focus on implementation and planning an ethics program

Should be part of strategic planning and management activities

The final step in the auditing process

Spells out the purpose and scope of the audit, methods used, role of the author, and auditing and reporting guidelines May be disseminated internally or externally Ethics audits are similar to financial audits, but forms are different Unqualified opinion Qualified opinion Adverse opinion Disclaimer of opinion

Define the Scope of the Audit

The ethics audit committee should establish the scope of the audit and monitor its progress Scope is determined by the type of business, risks faced, and the opportunities to manage ethics