3. THE ETHICS AUDIT
• Ethics audit is an evaluation of an organization’s ethics program and
performance to determine whether it is effective or not. It measure the
compliance of the company’s policies and procedures and It also measures
conformity with the firms desired ethical standard
• Ethics auditing emerged from the movement to audit and report on the
company’s social responsibility.
• Ethics auditing is the The tool the company’s used to identify and measure
their ethical commitments to stakeholders, employees, customers, investors,
suppliers, community members, activist, the media, and regulators are
increasingly demanding that companies be ethical and and accountable for
their conduct in response.
SOCIAL AUDIT
• Social audit it is a process of assessing and reporting the business
performance in fulfilling the economic, legal, ethical and
philanthropic responsibilities expected by its stakeholders.
4. BENEFITS OF ETHICS AUDITING
• To avoid lawsuit
• To Project a good image to hide its corrupt culture
• To discover ethical risks, design and implement an ethics program
and to evaluate
• To continuously improve and it is closely related to improve
financial performance
• To avoid legal ramifications, such as employee safety violations,
environmental impact issues, and financial reporting irregularities.
• To highlight trends, improve organizational learning and facilitate
communication and working relationships
• To improve their operating efficiency and reduces cost
• To ensure that the company is achieving the greatest possible
impact with available resources
• It can improved relationships with stakeholders
5. Ethical crisis management and recovery are crucial for companies to prevent and
recover from crises resulting from ethical or legal misconduct. These crises can be
more devastating than natural disasters or technological disruptions, causing
substantial legal and financial costs, disruptions, reduced productivity, and eroded
stakeholder confidence. Companies have experienced ethical and legal crises, with
some companies surviving but paying a high price in terms of compromised
reputation and declining stakeholder trust. Top leaders can magnify ethical
misconduct to disastrous dimensions, leading to organizational disasters. An
ethics audit can identify rogue employees violating ethical standards and policies.
Ethical disasters follow a recognizable phase of escalation, from ethical issue
recognition to the organization's discovery and response. Contingency planning
assesses risks, plans for potential occurrences, and provides tools for responding
to ethical crises. The global financial crisis has impacted U.S. businesses, with 60%
of executives feeling the country has lost competitiveness over the past five years.
ETHICAL CRISIS MANAGEMENT AND RECOVERY
6. Corporate ethics and compliance often focus on financial measures, but an
organization's integrity includes nonfinancial performance areas. Models
like Six Sigma, Balanced Scorecard, and Triple Bottom Line capture
structural and behavioral ethical performance. Six Sigma aims to deliver
world-class performance, reliability, and value to customers. The Balanced
Scorecard focuses on all elements contributing to organizational success,
including financial, customer, market, and internal processes. The Triple
Bottom Line considers the social, environmental, and economic impact of
the decision. Companies with strong ethical cultures and environmental
commitments may realize gains in customer commitment and avoid
negative publicity and costs associated with wrongdoing.
NON FINANCIAL
PERFORMANCE
7. RISKS AND REQUIREMENTS IN ETHICS AUDITING
Ethics Audits offer both benefits and risks. Firms may discover ethical
issues, face stakeholder criticisms, and incur burdensome costs. Auditing
does not entirely avoid ethical challenges. Companies facing misconduct
allegations conduct ethics audits to show commitment to improvement.
These help them to set achievable goals and provide a basis for
reporting efforts to stakeholders. The FSGO's seven steps for ethical
compliance and the Sarbanes-Oxley Act offer guidelines for ethics
auditing. Benchmarking of best practices is still in its early stages.
8. THE AUDITING PROCESS
QUESTIONS SHOULD BE ADDRESSED WHEN CONDUCTING AUDIT:
How broad should the audit be?
What performance standards will be applied?
How frequently should audits be conducted?
How the audit’s results should be reported to stakeholders?
What actions should be taken in response to audit results?
An ethics audit should be particular to the company's size, industry, corporate culture, risks,
and regulatory environment. A generic framework can guide the audit process, which may
evolve from a simpler ethics audit to a more comprehensive social audit that addresses
ethical, economic, legal, and philanthropic issues. The process is individualized and requires
careful consideration of the specific challenges faced by the firm, encompassing a wide range
of business responsibilities and relationships.
9. FRAMEWORK FOR CONDUCTING AN ETHICS AUDIT
• Secure commitment of top managers and board of directors.
• Establish a committee to oversee the ethics audit.
• Define the scope of the audit process, including subject matter areas important to
the ethics audit.
• Review the organization's mission, policies, goals, and objectives and define its
ethical priorities.
• Collect and analyze relevant information in each designated subject matter area.
• Have the results verified by an independent agent.
• Report the findings to the audit committee and, if approved, to managers and
stakeholders.
10. SECURE COMMITMENT OF TOP MANAGERS AND BOARD OF DIRECTORS
Secure commitment of top managers and board of directors is the first step in
conducting an audit. For public corporations, the push for an ethics audit may come
from the board of directors in response to stakeholder concerns or corporate
governance reforms like the Sarbanes-Oxley Act. Court decisions related to the FSGO
hold board members responsible for ethical and legal compliance programs. Sarbanes-
Oxley Act mandates boards to have knowledgeable members overseeing accounting
activities.
Figure 9-3 illustrates Kellogg's broad strategy for identifying risk areas and auditing issues.
11. The Social Responsibility Committee at Kellogg Company is tasked
with identifying and monitoring various trends that could impact
the company's performance.
This includes social, political, environmental, and occupational
safety issues, both domestically and internationally.
The committee makes recommendations for policies and practices
related to environmental protection, employee health, and ethical
business conduct.
It also oversees the company's charitable contributions and
ensures alignment with corporate social responsibility goals.
The committee's comprehensive approach reflects the interests of
diverse stakeholders across the value chain.
12. ESTABLISH A COMMITTEE TO OVERSEE THE ETHICS AUDIT
The next step in our framework is to establish a committee or team to oversee
the audit process. In most companies, managers or ethics officers conduct
social and ethics auditing rather than the board of directors' financial audit
committee. This team should have members knowledgeable about ethics
audits from various departments within the firm. They may recruit individuals
internally or hire outside consultants to coordinate the audit and report
results to the board of directors. The Ethics Resource Center supports ethical
conduct and assists in assessments and audits. Audits should be monitored
by an independent board committee, as recommended by the Sarbanes-Oxley
Act.
13. DEFINE THE SCOPE AND AUDIT PROCESS
The ethics audit committee should establish the scope
of the audit and monitor its progress. The scope of an audit
relies on the type of business, the risks the firm faces, and
the opportunities available to manage ethics. It involves
defining the key subject matter or risk areas essential to the
audit, such as environment, discrimination, product liability,
employee rights, privacy, fraud, financial reporting, and
legal compliance. It can be gathered through direct
consultation, observation, surveys, and focus groups.
14. REVIEW ORGANIZATIONAL MISSION, VALUES,
GOALS, AND POLICIES AND DEFINE ETHICAL
PRIORITIES
An ethics audits involve comparing an organization's
ethical performance to its goals, values, and policies. The
audit process should review the current mission
statement and strategic objectives. A company's overall
mission may incorporate ethics objectives, which may be
located in separate documents focusing on social
responsibility.
15. It examines all formal documents that make precise commitments to ethical,
legal, or social responsibility and the less formal documents, including
marketing materials, workplace policies, and ethics policies and standards
for suppliers or vendors-that may reveal a need to create additional
statements to fill identified gaps or create a new comprehensive mission
statement or ethical policy that addresses any deficiencies. It is up to the
management's strategic planning process to determine risks, appropriate
standards, and communication with stakeholders to deal with ethics issues
since there may be no legal requirements. The ethics audit is a structured
report that proposes quantitative and descriptive assessments. Actions
should be measurable by quantitative indicators. However, it can go beyond
description. The firm must demonstrate action-oriented responsiveness to
those ethics issues as a top priority.
16. COLLECT AND ANALYZE RELEVANT INFORMATION
The ethical audit framework identifies the progress in
improving employees’ moral decisions and conduct. The
firm collects relevant information for each designated
subject matter area. The information collected in this
measurement will help determine the baseline levels of
compliance and the internal and external expectations of
the company. It will also identify if the company met its
commitments, including those dictated by its mission
statement and other policy documents.
17. Techniques for gathering evidence involve examining internal and
external documents, observing the data-collection process (such as by
consulting with stakeholders), and confirming information in the
accounting records. The importance of objective measurement is the key
consideration of the ethics auditor.
Employees were asked whom they would "feel comfortable" reporting
misconduct if they suspected or became aware of it. According to Figure 9-
4, supervisors and local managers received the most favorable response,
indicating the need for organizations to ensure that frontline managers
are equipped to respond appropriately to allegations. It's worth noting
that functions primarily responsible for taking action in response to
alleged misconduct (legal, internal audit, and board or audit committee
functions) were cited as less likely channels that employees would feel
comfortable using to report allegations.
19. Understanding employee issues is essential to a successful audit.
Useful indicators for assessing employee issues include staff turnover
and employee satisfaction. High turnover rates could indicate poor
working conditions, an unethical culture, inadequate compensation,
or general employee dissatisfaction. Because of this, companies can
improve the areas that need improvement.
Companies implement human resources policies and procedures
for recruiting, hiring, promoting, compensating, and rewarding
employees that encourage ethical behavior, as employees will behave
in ways that lead to recognition or rewards and avoid behavior that
results in punishment.
20. Investors are becoming more aware of the monetary
benefits of socially responsible management systems and the
negative consequences of a lack of responsibility. Additionally,
many investors do not want to invest in companies that engage
in certain business practices, such as sweatshops or using child
labor, which fail to provide adequate working conditions.
Companies must understand the issues facing this group of
stakeholders and what they expect from corporations they have
invested in(both financially and socially).
21. Regardless of how companies collect information about
stakeholders' views, the primary objective is to generate a variety
of opinions about how the company is perceived and whether it is
fulfilling stakeholders' expectations and then the firm should
compare its internal perceptions to those discovered during the
stakeholder assessment stage and summarize these findings.
Conclusions are drawn and may involve descriptive assessments of
the findings, such as the costs and benefits of the ethics program,
the strengths and weaknesses of a company's policies and
practices, feedback from stakeholders, and issues that should be
addressed in future audits.
22. Although the independent validation of ethics audits is
not required, several companies choose to do so, as they
have their financial reports certified by a reputable
auditing firm. Many public policy experts believe that
independent objective audits can be provided if the
auditor has played no role in the reporting process; in
other words, consulting and auditing should be separate
roles. The Sarbanes-Oxley Act essentially legalized this
belief.
23. - The final step in the Ethics audit framework is issuing a
report of the findings to internal parties, such as the board
of directors, and potentially to external stakeholders.
- The report should adhere to guidelines from the Global
Reporting Initiative and Accountability, detailing the Audit's
purpose methods, Auditor role, and reporting guidelines.
REPORT THE FINDINGS
24. Verify the Results
An independent party such as a social/ethics audit consultant or a
financial accounting firm that offers social auditing services is needed.
Business for Social Responsibility defined verification as an independent
assessment of the quality, accuracy, and completeness of a company's
social report. Independent verification offers assurance that the
company has reported its ethical performance fairly and honestly, as
well as the assessment of the social and environmental reporting
systems. As such, verification by an independent party gives
stakeholders confidence in a company's ethics or social audit and lends
the audit report credibility and objectivity.
25. SUMMARY
An ethics audit is a systematic evaluation of an organization's
ethics program to assess its effectiveness and conformity to
desired ethical standards. It involves steps such as Gaining
management support, forming an oversight committee,
defining the audit's scope, reviewing ethical documents,
collecting data, and reporting findings. While it can improve
stakeholder relationships and mitigate crises, it faces
challenges like lack of standardization. Regular audits can
showcase the benefits of ethical practices on business
performance.
26. A business should showcase its commitment to exceptional
standards benefiting customers, employees, suppliers,
shareholders, and communities. To compete in the
Marketplace Excellence category, businesses must provide
documentation across four key areas:
1. Management Practices
2. Customer/ Vendor/ Suppliers/ Shareholder Relations
3.Marketing/ Advertising/ Communications/ Sales Practices
4. Reputation within Industry and Community
Table 9-6 Better Business Bureau's Torch award Criteria for Ethical
27. Organizations often conduct informal audits to assess their ethical
performance, aided by tools and awards from the Better Business
Bureau (BBB), which help smaller firms. Regular ethics audits,
similar to financial audits, are crucial for continuous evaluation
rather than just crisis response. Despite potential costs and
employee concerns, ethics audits provide valuable insights into a
company's alignment with its core values and stakeholder
expectations, making them a useful management tool for
identifying areas for improvement and resource allocation.
THE STRATEGIC IMPORTANCE OF ETHICS
AUDITING
28. RESOLVING ETHICAL BUSINESS CHALLENGES
Jerry, a board member at Soumey Corporation, regrets his involvement
in an ethics audit after realizing the company has underlying ethical
issues. Initially lured by a friend's invitation, he joined the board and
participated in establishing an ethics compliance officer and hotline.
However, during a company picnic, he overhears troubling
conversations about toxic spills, discrimination, and a lack of trust in
the ethics hotline, leading him to question the board's commitment to
ethics. Despite his concerns, fellow board members prioritize profits,
dismissing the need for a new audit. Jerry's wife encourages him to
address the issues, but he feels conflicted about potential
repercussions on their finances and community ties.
