Implementing and Auditing Ethics Programs Chapter 9 Implementing and Auditing Ethics Programs Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. 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 Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. 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 Copyright © Houghton Mifflin Company. All rights reserved.

Employee Observed Misconduct by Risk Factor Copyright © Houghton Mifflin Company. All rights reserved.

How would you defend ethics auditing in a company? Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. Benefits of Auditing Ethical crisis management and recovery Challenges of measuring non-financial performance Risks and requirements in ethics auditing Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. 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 Copyright © Houghton Mifflin Company. All rights reserved.

Channels That Employees Feel Comfortable Using to Report Misconduct Copyright © Houghton Mifflin Company. All rights reserved.

Ethical Crisis Management and Recovery 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 Copyright © Houghton Mifflin Company. All rights reserved.

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. Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. 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. Copyright © Houghton Mifflin Company. All rights reserved.

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. Copyright © Houghton Mifflin Company. All rights reserved.

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. Copyright © Houghton Mifflin Company. All rights reserved.

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 Copyright © Houghton Mifflin Company. All rights reserved.

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. Copyright © Houghton Mifflin Company. All rights reserved.

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. Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. 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. Copyright © Houghton Mifflin Company. All rights reserved.

Copyright © Houghton Mifflin Company. All rights reserved. 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. Copyright © Houghton Mifflin Company. All rights reserved.

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 Copyright © Houghton Mifflin Company. All rights reserved.