Auditing of Organizational Ethics and Compliance Programs

Auditing of Organizational Ethics and Compliance Programs

Ethical auditing is a process which measures the internal and external consistency of an organization’s values base. The key points are that it is value-linked, and that it incorporates a stakeholder approach. Its objectives are two-fold: It is intended for accountability and transparency towards stakeholders and it is intended for internal control, to meet the ethical objectives of the organization.

The value of the ethical audit is that it enables the company to see itself through a variety of lenses: it captures the company’s ethical profile. Companies recognize the importance of their financial profile for their investors, of their service profile for their customers, and of their profile as an employer for their current and potential employees. An ethical profile brings together all the factors which affect a company’s reputation, by examining the way in which it does business. By taking a picture of the value system at a given point in time, it can:

– clarify the actual values to which the company operates
– provide a baseline by which to measure future improvement
– learn how to meet any societal expectations which are not currently being met
– give stakeholders the opportunity to clarify their expectations of the company’s behavior
– identify specific problem areas within the company
– learn about the issues which motivate employees
– identify general areas of vulnerability, particularly related to lack of openness

1. The conceptual framework

In contrast to social auditing which aims primarily at measuring the social impact of a company on its environment, the ethical audit from the outset is value-linked. It measures the “ethical climate” of a company by analyzing the values on which the organizational actions are based and by testing the moral quality of these actions against values that should be taken into consideration.

Since someone’s values form the basis of his or her ethical behavior, aligning workforce values is important, if a company wants to behave ethically across the board. This requires openness about values and consistency between them. 

2. Stakeholder perspective

The objectives of the ethical audit are two-fold. On the one hand the audit is intended for accountability and transparency towards stakeholders; on the other hand, the audit is intended for internal control in order to meet the ethical objectives of the organization of the aims of the ethical audit is to give a company the opportunity to track progress through the years and to find out where there is still some work to do with regard to the company’s ethical objectives.

Accountability requires that stakeholders are provided with such information as they have a right to. The rights to information are determined by (a) the social environment within which the relationship between the organization and the stakeholder is set, (thus current legal standards would represent a minimum basis for accountability); plus (b) the organization’s own decisions about which stakeholders it particularly wishes to recognize and emphasize. Thus, stakeholder groups do not have an absolute claim on businesses to provide them with information, because the extent to which a company is accountable to stakeholders depends on the social environment of the company, on the company’s conception of relevant stakeholders and on the social responsibility the company is willing to take for justifying its actions towards a stakeholder-group. Therefore, stakeholders’ right to information is in a large measure related to a positive duty that the company has committed itself to

3. Comprehensive and integral

It is important to note that ethical auditing is a comprehensive and integral approach: integral, because it combines different approaches with different methodologies and comprehensive, because it takes the entire organization (including its environment) into consideration with all the different perspectives that prevail in different functional areas. The latter especially finds expression in the ethical assessment process. The fact that values and policies are discussed will make sure that they are looked at from different angles, taking various fields of interest into consideration. It is particularly critical that values are checked for economic viability as well, to balance social and ethical aspirations, because ethical policies which are not based upon solid business economic grounds will not endure very long. It is essential that the social mission and the economic mission of a company go hand in hand.

4. Consumer power

Consumer power is increasingly being wielded to affect company behavior. The picture which develops here is of a company at the center of a network of relationships – relationships with employees, with customers, with shareholders, with society at large. Each company may have other groups of people whom it considers to be key stakeholders – for example, a company with environmental concerns may consider future generations to be key stakeholders: other companies may see their retired employees as being important, while still others may have strong links with pressure groups and voluntary organizations.

Ethical auditing enables companies to better comprehend these relationships. All relationships are based on values such as trust and an expectation of fair dealing – understanding these dynamics and finding out where expectations and perceptions differ give a company a head start on maintaining strong and stable relationships.

5.  International business

Multinational companies face special issues in relation to ethical auditing. Executives of such companies are aware of the added complications which operating across a number of cultures brings. But problems tend to multiply when differing value bases are permitted to take hold within different cultures. A multinational company must test its values across all its areas of operation, if it wants the findings of its ethical audit to be comprehensive and provide the greatest payback in terms of identifying potential areas of vulnerability to consumer pressure.

References

Carmichael, S., Hummels, H., Klooster, A., & Luijk, H. (n.d.). How Ethical Auditing Can help Companies Compete More Effectively at anInternational Level. Retrieved from http://training.itcilo.it/actrav_cdrom1/english/global/code/audit.htm

Read the article titled, “10 Steps to Good Governance,” located here. Next, develop a checklist for an ethics audit that incorporates the ten (10) steps identified in the article. Provide a rationale for your response.

Start with a detailed foundation. An ethics audit is a comparison between actual employee behavior and the guidance for employee behavior provided in policies and procedures. The more descriptive and specific ethics-related policies and procedures are, the easier it is to make these comparisons.

Develop metrics. Ethics audits may not be as black-and-white as financial or operational audits, but they run more smoothly when tangible ethics measures are in place. Consider adding ethics goals to annual performance reviews and, where possible, tying compensation to ethical behavior.

Create a cross-functional team. Include an HR professional familiar with people in the business unit being audited. Most ethics audit teams include an ethics and compliance manager where possible as well as an internal auditor and legal managers.

Audit efficiently. Audits frequently disrupt normal operations in business areas subjected to review. Before scheduling an audit, find out if internal auditors or the finance team may be conducting reviews of the same area. If so, combine these efforts to limit disruptions. Once the audit has been scheduled, create a plan that spells out employees to be interviewed, information that requires review and any processes that require observation.

Look for other issues. Keep an eye out for other improvement opportunities, and share those with relevant colleagues. For example, ethics issues in a sales area may have revenue-recognition implications from a financial reporting perspective.

Respond consistently and communicate. Discipline ethics violations in complete accord with policies and procedures and the code of conduct every time. Also, use ethics issues, when possible, as grist for “lessons learned” in ethics-related communications and training.

The primary mission is to compare ethics guidelines with actual behaviors, but team members also look for other issues that may need to be addressed through communications, training or subsequent audits.

References

Carmichael, S., Hummels, H., Klooster, A., & Luijk, H. (n.d.). How Ethical Auditing Can help Companies Compete More Effectively at anInternational Level. Retrieved from http://training.itcilo.it/actrav_cdrom1/english/global/code/audit.htm

Krell, E. (2010, April 1). How to Conduct an Ethics Audit. Retrieved from https://www.shrm.org/hr-today/news/hr-magazine/pages/0410agenda_social.aspx