Ethics Auditing

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Ethics Auditing: Identify the benefits and limits of ethics auditing. Is there a strategic role that ethics auditing may play in a company?

Ethics Auditing
By definition, an ethics audit is a “systematic evaluation of an organization’s ethics program and/or performance to determine its effectiveness.” (1) This concept of ethics auditing is fairly new and few companies have conducted an ethics audit. However, performing such audits will likely become more mainstream as recent legislation encourages greater ethical accountability for companies to demonstrate they are abiding by the law and have established programs to improve their ethical decision making. The U.S. Sentencing Commission (the “Commission) has amended the Federal Sentencing Guidelines for Organizations (“FSGO”) whereby an effective compliance and ethics program must “exercise due diligence to prevent, detect, and report criminal conduct and otherwise promote an organizational culture that encourages ethical conduct and a commitment to compliance with all applicable law." (2) The Commission noted there are seven minimum requirements of an effective ethics program:

(1) Standards and procedures to prevent and detect criminal conduct;
(2) Responsibility at all levels of the program, together with adequate program resources and authority for its managers;
(3) Due diligence in hiring and assigning personnel to positions with substantial authority;
(4) Communicating standards and procedures, including a specific requirement for training at all levels;
(5) Monitoring, auditing, and non-retaliatory internal guidance/reporting systems, including periodic evaluation of program effectiveness;
(6) Promotion and enforcement of compliance and ethical conduct; and
(7) Taking reasonable steps to respond appropriately and prevent further misconduct upon detecting a violation. These requirements should be addressed through the ethics audit. Framework for an Ethics Audit

In addition to the requirements noted by the Commission, there are many different questions that can be addressed by an ethics audit. How broad should the audit be? How often should the audit be performed? How will the company communicate the results with its constituencies? As each company has unique needs, each ethics audit should be unique. An example of a framework for an ethics audit is detailed below (4). Companies can adapt this framework to their own needs and circumstances. Step 1: Secure Commitment of Top Managers and Board of Directors As noted in the class slides, “a corporation only acts through those who act for it and it is the latter who must assume responsibility for the corporation.” (3) Essentially, management and the board of directors are responsible for the direction of a corporation. If there is no commitment from the top levels of a corporation, it is very unlikely that an audit would be successful. Step 2: Establish a Committee to Oversee the Ethics Audit

The committee should consist of members who are knowledgeable about ethics auditing and come from various departments. In most cases, companies may not have internal employees that have the skill set to serve on an ethics audit committee. In such circumstances, external consultants, such as the Ethics Resource Center, can be used to assist with the audit. Step 3: Define the Scope of the Audit Process

As mentioned above, each organization is unique and therefore, the scope of an ethics audit will differ from company to company. The committee should establish a scope based on the company’s risks and how those risks will be addressed. The committee should then monitor the progress of the audit based on the scope defined. Step 4: Review Organizational Mission, Values, Goals and Policies and Define Ethical Priorities In this step, the committee should examine and review all of the company’s policies, procedures and practices related to any areas defined in the scope of the audit process. All of...
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