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

The last of the three part section deals with Benefits of Ethics Audit, Risk and Requirements of Ethics Audit and the process of Ethics Audit

Benefits of Ethics Audit

#1 Detect Ethical Misconduct Early

•      There are many reasons why companies choose to understand, report on, and improve their ethical conduct.

•      One reason is to detect ethical misconduct before it becomes a major problem.

It is handy in meeting the challenges of the CEOs viz..,

·         Managing Growth

·         Employee Turnover

·         Customer Relationship

·         Social media

·         Regulatory issues

·         Risk management

·         Globalization

·         Reputation

·         Technology Competence

·         Competitive advantage

#2 Improved Relationships with Stakeholders

One of the greatest benefits of the auditing process is improved relationships with stakeholders.

#3 Identify potential ethical issues and improve legal compliance

Just as companies develop crisis management plans to prepare to, respond to, and recover from natural disasters, they should also prepare for ethical disasters, which can result in substantial legal and financial costs, disrupt operations, reduce productivity, destroy organizational reputation, and erode stakeholder confidence

Despite the high costs of misconduct, U.S. companies are failing to identify and manage ethical, social, economic, and environmental concerns. The idea of odentifying ethical issues embodies the view that ethics has real and practical implications in achieving goals, mission and vision of public sector entities

Ethical auditing  encourages ethical behaviour and ethical decision making by strengthening the existing mechanism for monitoring implementation of ethical principles and encourages the establishment of missing processes and/or relevant control activities.

Ethical Auditing  also adds value and contributions to the improvement of management, controls and governance of the audited organization. It Leads to help restoring trust and confidence in public org. it can draw the attention of Parliament and public to the importance of ethical management

Stages of an Ethical Disaster

Ethical disasters follow recognizable phases of escalation from Ethical issue recognition, The decision to act ethically and Organization ‘s discovery of and response to the act

 

#4. Preparing for Ethical Crisis and recovery

Contingency planning is about  anticipation of and intervention during these situations can shave off organizational disasters

Contingency planning includes Assesses risks, Plans for these potential occurrences and Provides ready tools for responding to ethical crisis

The process of ethical disaster recovery involves assessing of organisationa’s values, developing an ethics programme, performing an ethics audit and developiong contingency plans for potential ethical disasters.

#5 Sets goals against which to measure actual performance

•      Although much of the regulatory focus of corporate ethics and compliance is driven by financial measures, the integrity of an organization also has to focus on nonfinancial areas of performance.

•       Nonfinancial performance measures are crucial to a firm’s health

•      To determine the wholeness and soundness of the many aspects of a business that enhance ethics and profits without increasing risk.

Return on Integrity

•      The word integrity implies a balanced organization that not only makes ethical financial decisions but also is ethical in the more subjective aspects of its corporate culture.

Many organizations and regulatory frameworks offer a means of capturing ethical performance in the Structural , Behavioral and Legal context.

The Sarbanes–Oxley Act has focused on questionable accounting and the metrics that destroy shareholder value.

On the other hand, models exist to capture structural and behavioral organizational ethical performance.

The major models available today are discussed below

a.       Six Sigma is a methodology to manage process variations that cause defects, defined as unacceptable deviation from the mean or target, and to systematically work toward managing variation to eliminate those defects.

b.      Balanced Scorecard is a method for measuring a company’s activities in terms of its vision and strategies.

c.       The Triple Bottom Line captures an expanded spectrum of values and criteria for measuring organizational (and societal) success— economic, environmental, and social.

d.      The Global Reporting Initiative (GRI), which advances sustainability reporting, has become a prominent framework that companies have adopted to report their social and sustainability progress.

·         Businesses can use the GRI to come up with a more standardized method of reporting nonfinancial results in a way that users of the reports can understand.

·         Companies benefit because the GRI provides tools for improving their implementation of the triple bottom line, the disclosure of their progress in this area, the ability to compare their sustainability efforts to those of other companies, and the chance to enhance their reputation in the eyes of stakeholders.

·         Users benefit because this standardized sustainability reporting provides them with a benchmark to compare companies’ sustainability initiatives.

e.       AccountAbility is an international membership organization committed to enhancing the performance of organizations and to developing the competencies of individuals in social and ethical accountability and sustainable development.

·         The AA1000 process standards link the definition and embedding of an organization’s values to the development of performance targets and to the assessment and communication of organizational performance.

·         AA1000 ties social and ethical issues into the organization’s strategic management and operations.

·         Principles-based frameworks used by global businesses, private enterprises, governments, and other public and private organizations to demonstrate leadership and performance in accountability, responsibility, and sustainability.

·         For over two decades, organizations large and small, private and public, have come to rely on AccountAbility’s standards to guide their approach to sustainability strategy, governance, and operations.

f.       Open Compliance Ethics Group created a universal framework for compliance and ethics management.

·         Focus on non-financial compliance and qualitative elements of internal controls.

·         Guidelines that companies can utilize as they see fit.

·         Offers tools and certification procedures.

 

Risks and Requirements in Ethics Auditing

Although ethics audits provide many benefits for individual companies and their stakeholders, they do have the potential to create risks such as :

·         Risk of having to uncover a serious ethical problem that it would prefer not to disclose until it can remedy the situation

·         Risk of having to find that one or more of its stakeholders criticisms cannot be dismissed or easily addressed

·         Risk of fostering stakeholder dissatisfaction while in the process of conducting an ethics audit

·         Risk of imposing extra burden (especially with regard to record keeping ) and costs for firms that undertake an ethics audit

·         Risk of having no guarantee that the process of auditing and reporting a firm’s ethics programme will help it avoid challenges related to its programs

·         Risk of it being ineffective because this type of auditing is relatively new, and there are a few common standards to judge disclosure and effectiveness or to make comparisons

• Being viewed by the public as needing an audit can motivate companies to conduct one in order to signal their intention to respond to concerns.
• Although ethics and social responsibility are defined and perceived differently by various stakeholders, a core of minimum standards for ethical performance is evolving.
• Specific, measurable, achievable, and meaningful measurements in terms of business impact on communities, employees, consumers, the environment, and economic systems
• The FSGO’s seven steps for effective ethical compliance, the Sarbanes–Oxley Act, and the Dodd-Frank Act provide standards that organizations can use in ethics auditing.

In the Indian context, firms will be going by the conditions laid out by the insurance companies for claiming damages, minimum prescribed systems and procedures laid out by regulatory authorities like SEBI, RBI, IRDA, TRAI, PFRDA , Consumer Protection Agency,  etc in their respective jurisdictions to prove taht adequate care has been taken to prevent malpractices by employees/franchisees/retailers.

The Auditing Process 

Questions to be addressed during an audit:

•      How broad the audit should be?

•      What standards of performance should be applied?

•      How often the audit should be conducted?

•      Whether and how the audit’s results should be reported to stakeholders

•      What actions should be taken in response to audit results?

An ethics audit shouldbe unique to each company, reflecting its size, industry, corporate culture, and identified risks as well as the regulatory environment in which it operates.

The framework in this chapter encompasses a wide range of business responsibilities and relationships.

There is no generic approach that will satisfy every firm’s circumstances.

 

The following steps provide a general framework

#1 Secure management and board commitment

#2 Establish an ethics audit committee

#3 Define the scope of the audit

#4 Review organizational mission, goals, and values

#5 Collect and analyze relevant information

#6 Verify the results through an outside agent

#7 Report the finding

 

The first step in conducting the audit is to secure the commitment of the firm’s top management and, if it is a public corporation, its board of directors.

Pressure for an ethics audit may come from the board of directors in response to stakeholder concerns or legally mandated corporate governance reforms related to the Sarbanes–Oxley Act, which suggests that boards of directors should provide oversight for all auditing activities.

Court decisions related to the FSGO hold board members responsible for the ethical and legal compliance programs of the firms they oversee.

Pressure for an audit may come from top managers looking for ways to track and improve ethical performance, and to give their firm an advantage over competitors that are facing questions about their ethical conduct.

CEOs and CFOs may face prosecution if they knowingly certify misleading financial statements.

Some companies have established an ethics officer in conjunction with an ethics program, and the ethics officer may campaign for an ethics audit as a way to measure the effectiveness of the firm’s ethics program.

Regardless of where the impetus for an audit comes from, its success hinges on the support of top management.