Module-1 Ethics Programme: Ethics Audit - Part-1/3

 Internal controls are best practice and necessary to ensure compliance with applicable laws and regulations and to ensure that there is a system of checks and balances to detect inappropriate transactions. Yet, without a culture of ethics and compliance, people will find ways to circumvent internal controls, policies, and procedures.

While there is no set ethics audit definition, an ethics audit can include reviewing the code of ethics, reviewing past incidents and the response by the individual and the organization, and interviewing employees to understand their perspective on the organization’s ethics. Some choose to utilize different ethics audit types. The ethics audit types vary from assessing individual employee awareness to understanding the overall ethical culture. In the end, ethics auditing is similar to any other audit. Approach the audit by defining an organizational objective, risks, and controls. The objective is to build a strong ethical culture and the risks include lack of awareness, weak incident reporting, and poor commitment from management. When considering the repercussions of a weak ethical culture, it is clear why ethics is important in auditing.

 

An ethics audit is a systematic evaluation of an organisation’s ethics program and performance to determine whether is is effective. It includes regular, complete and documented measurement of compliance , measuring conformity to the firm’s desired ethical standards. It can be a precursor to setting up an ethics program. It identifies the firm’s current ethical standards, policies, and risk areas so that an ethics programme can be effectively address problem areas.

An audit of Ethics is a process by which various dimensions of ethical conduct of an organisation can be evaluated

The Audit of Ethics addresses the ultimate responsibility and corresponding accountability of the organisation leadership to promote and ensure that its management of all levels and its staff behave in an ethical way and by doing so refrain from acts of fraud and corruption.

An Audit of Ethics may be used if there are specific issues or perceived risks that need to be addressed

•      Behavioural issues such as leadership, system , integrity

•      Identify areas of concern

•      Evaluate the extent to any perceived problems

•      Suggest ways forward by which these problems can be tackled

•      When there are no concerns

–     Act as an ethical health check

–     Identify existing good practice

–     Further strengthen the organisation The audit of Ethic looks at the ethical health of the organisation

Audit of Ethics has  three components ,  mainly: Compliance Audit  , Cultural Audit and Systems Audit

The compliance audit looks at whether the firm has met the requirements under the applicable laws, Regulations and Standards.

The Cultural audit examines whether culture is aligned to firm’s goals in an ethical manner. Culture is the way in which the members of the organization think, feel, relate and finally deliver a product or an experience.

A social audit is the process of assessing and reporting a business’s performance in fulfilling the

·         Economic

·         Legal

·         Ethical and

·         Philathrophic

responsibilities expected of it by its stakeholders.

Social reports often discuss issues related to a firm’s performance in the four dimensions as well as to specific social responsibility and ethical issues such as staff issues, community economic development, volunterrism, and environmental impact.

In contrast, ethics audit ‘s focus is on  more narrow issues related to assessing and reporting on a firm’s performance in terms of ethical and legal conduct . an ethics audit can be a component of a social audit . Ethics auditing is similar to financial auditing inthat it employs similar procedures and processes to create a system of integrity that includes objective reporting.

 

Why Ethics Audit

In view of Reform and modernisation of state administration and public management, ethics turned out to be part of public governance and performance.

Corporate Governace is the application of best management practices, compliance of law in letter and spirit and adherence to ethical standards for effective management and distribution of wealth and discharge of social responsibility for sustainable development of all stakeholders”

                                                                              - Institute of Company Secretaries of India 

Subject matter for ethics audits

•      Audit problem / what is auditable

•      Ethics policy

•      Propriety of behavior

•      Ethical culture / climate

•      Ethical infrastructure

•      Ethics/integrity management and control ( including risk assessment)

 

Audit Problem/What is Auditable in Ethics Audit

An investigation into how well (or poorly) a company conforms to the ethical standards of its industry or society generally. An ethics audit may consider the company's own practices, how it redresses grievances, how it discloses its finances, whether it punishes whistleblowers, and even the general cultural surrounding its business dealings. Some companies may formally adopt a code of ethics and conduct periodic ethics audits to see how closely they follow their own rules.

Ethics Policy

Ethical policies are guidelines for all employees of a company to do the right thing and behave at high standards at all times. Good ethical policies create a good culture based on trust and transparency. They promote moral conduct, and they benefit customers as well, as happy employees develop happy customers who keep coming back. Policies on ethical behavior help run a business by giving employees concrete ideas about what is right and what is not accepted in the workplace, without the need for constant management presence to supervise them.

 

The Ethics Policy applies to everyone the firm  employs or have business relations with. This includes individual people such as employees, interns, volunteers, but also business entities, such as vendors, enterprise customers or venture capital companies.

The Ethics Policystatement lists out The Objectives of the Ethics Policy, Details whom it is applicable, The Code of Ethics, What behavior is not expected normally, Who is responsible for actions/lack of it , Authority to communicate it to stakeholders and also modify it . A sample Ethics Policy is available here

Propriety of Behaviour

The expected standards of behavior of the employees (including all other stakeholders ) are made known by the Ethics Policy document. Leaders must consider if the Ethics Policy encourages the type of actions that are valued by the organization. If there is a risk of impropriety, it is important to have a conversation around what checks and balances will be put in place to make sure unwanted behaviors are handled appropriately.

Organizations must research, develop, and document policies and processes around defining, identifying, and reporting ethics violations. These policies should be articulated in the employee handbook and protections should be put in place for those who raise ethical issues. However, having a policy is not enough. You must practice what you preach.

The Enron Corporation was known to have one of the most intricate ethics policies in the country. The 64-page document was given to new employees with a letter from Ken Lay, the company’s Chairman and Chief Executive Officer. But, in 2001, it was revealed that Enron had engaged in major accounting fraud to disguise its poor financial health. After Enron declared bankruptcy, copies of their ethics policy went up on eBay. The Smithsonian National Museum of American History also secured a copy that now lives in the museum’s exemplary business practices exhibit

Ethical Culture/Climate

Ethical culture can be defined as a set of experiences, assumptions, and expectations of managers and employees about how the organization prevents them from behaving unethically and encourages them to behave ethically, according to Muel Kaptein, a professor of business ethics and integrity management at Rotterdam School of Management

Ethical culture looks (anthropologically) at how an organization demonstrates and teaches the extent to which it regards its values. Specifically, the ethical culture of an organization:

·         Teaches employees whether doing the right thing matters;

·         Makes doing what is right expected; and

·         Includes formal ethics program elements, reward and punishment systems, and organizational myths.

 

Ethical climate is concerned with the “collective personality” of the organization. It is the psychological view of the organization. Ethical climate particularly focuses on:

·         Ethics-related attitudes;

·         Perceptions; and

·         Decision-making processes in an organization.

Experts have identified five different levels of ethical behavior in an organization: individual, interpersonnel, group, intergroup and the organizational level. These relationships collectively determine the ethical culture/climate.

Ethical Infrastructure

The term “ethical infrastructure” (coined by Ted Schneyer, a law professor at the University of Arizona) refers to formal systems, procedures and policies that an organisation can implement to ensure that the organisation and it’s personnel act ethically

The idea of ethical infrastructure  does not simply refer to the basic rules of public service, it includes all the formal and informal means by which society regulates the use of power by both public and private institutions to ensure it serves the common good.

In the context of acompany, it includes, Board of Directors, CEO, CFO, CTO various Committees of the Board, the roles defined in the organization structure of the firm and the set procedures and formats for communication and decision making used across levels. It includes whistle blower mechanism as well.

 

Ethics/Integrity Management and Control

Rarely do the character flaws of a lone actor fully explain corporate misconduct. More typically, unethical businesspractice involves the tacit, if not explicit, cooperation of others and reflects the values, attitudes, beliefs, language, and behavioral patterns that define an organization’s operating culture. Ethics, then, is as much an organizational as a personal issue. Managers who fail to provide proper leadership and to institute systems that facilitate ethical conduct share responsibility with those who conceive, execute, and knowingly benefit from corporate misdeeds.

The check point list starts from Customer Value Strategy statement, Transparency in accounting practices, Truth-in-Selling, Integrity in management Process, Customer Service Integrity, personal integrity and product Integrity.

 

Pl also read : Management of Ethics or Integrity

Ethics Audit Administration

Generally, no specific mandate to audit ethics in most of the companies. General mandate provide the other audits. Traditionally, the audit of ethics was part of audits such as compliance and financial audits. Ethics is increasingly recognised as element of public organisation performance/potential topic for performance audits.

Audit of ethics may be organised in combination or as part of the main types of audit.