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Tone at the Top: Ethical Dilemma

Creating an Ethical Organization Culture

The following piece appeared on the website of the Institute of Internal Auditors on May 1, 2012, through their publication Tone at the Top. The piece is an invaluable guide to ethical corporate behavior so I asked and received permission to repost it here.

What rationalization does a company make to justify a corporate culture where ethics are ignored? In recent years, greed,  fraud, and a lack of ethical conduct have led to the collapse of many organizations. A variety of internal and external pressures can lead companies down the wrong path. And once the first misstep is taken, it’s a slippery slope to hurting stakeholders, the community, and your reputation.

This turmoil and damage could have been avoided if organizations had chosen to maintain an ethical corporate environment, exercising integrity-rich behavior and ensuring the tone at the top was above reproach. This issue of Tone at the Top presents suggestions for creating and promoting an ethical corporate climate and the role internal auditors can play in helping ensure the environment supports ethical decisions and behavior.

Code of Ethics

It’s important to note that internal auditors adhere to their own Code of Ethics, which is included in The IIA’s International Professional Practices Framework (IPPF). The Code of Ethics mandates that internal auditors behave and practice with:

  • Integrity
  • Objectivity
  • Confidentiality
  • Competency

It also delineates rules of conduct under each of the principles. A code of ethics is necessary and appropriate for the profession of internal auditing, founded as it is on the trust placed in its objective assurance about governance, risk management, and control.

Ethical Values

According to the Institute for Global Ethics (IGE), five ethical values exist in any human culture, regardless of age, religious affiliation, gender, or nationality. Those values — which play a role in all dealings, transactions, relationships, and situations — comprise being:

  • Honest and truthful.
  • Responsible and accountable.
  • Fair and equitable.
  • Respectful and mindful.
  • Compassionate and caring.

Just imagine how choices might be altered if every organization made a conscious decision to embrace and foster these five values, and if everyone, individually and collectively, made a concerted effort to incorporate them in all of their encounters and actions.

Case Study: A Lack of Outrage

Larry is a young port engineer who works energetically for his shipping company, overseeing repairs and related projects. He is proud when put in charge of a multimillion-dollar repair order for one of his company’s ships. The repairs are contracted out to a major shipyard, and everything goes smoothly until the end of the project. When Larry is handed the bill, he realizes it has been inflated by about one-third of total project costs.

Larry is shocked. He has never been confronted by such an apparently corrupt practice before. After delaying the “sign off” for a couple of days, he approaches his boss, points out what is going on, and explains why he cannot sign off. His boss asks for specifics, which Larry readily supplies.

A meeting is arranged between shipyard and shipping company officials, who go over the disputed items. They agree the shipping company is being overbilled by millions of dollars. To Larry’s surprise, however, there is little reaction from either side of the table. Nor is there any definitive, ethical stance from his company.

The meeting adjourns until the next day, when shipyard officials meet again and this time offer to split the difference. For approval, both parties turn to Larry who explains he cannot sign off on the adjusted bill. Again, the meeting adjourns with no apparent reaction, and Larry is left in a daze.

By the time of the third meeting, Larry begins to piece things together. Apparently his superiors respect his integrity. They are following orderly procedures to arrive at a final bill. But he cannot help noticing their lack of outrage and conviction. What drives them to such a compromise? (Institute for Global Ethics, 2012)

A Clear Tone

Larry is left wondering about the tone at the top of his organization. Is he out of step with the corporate culture? Will he be protected if he vehemently expresses his disapproval and outrage?

According to The Institute of Internal Auditors Research Foundation’s study, Audit Committee Effectiveness: What Works Best — 4th Edition, culture and compliance are the “soul of accountability” and tone at the top is about “creating a culture where everyone feels responsible for doing the right thing.” Although the board of directors is responsible for overseeing the tone at the top, the board’s audit committee is key to discerning whether the purported tone actually permeates the entire organization.

Internal auditors can assist the audit committee by assessing whether policies are being followed or are ineffective, expose fraudulent activities that could have devastating repercussions on the organization, and identify operational problems like those Larry discovered. They can be the eyes and ears of the board. In some organizations, the auditors assess the entire ethical environment and determine whether the practices, polices, and procedures in place are ethical and effective, and that they contribute to a strong internal control system.

Whistleblower Protection

Provision for anonymity to any individual who willingly comes forward to report a suspicion of fraud is a key to encouraging such reporting and should be a component of the organization’s policy. The most effective whistleblower hotlines preserve the confidentiality of callers and provide assurance to employees that they will not be retaliated against for reporting their suspicions of wrongdoing, including wrongdoing

by their superiors. Another key is demonstrating that their reporting will result in appropriate and timely action being taken. To preserve the integrity of the whistleblower process, it must also provide a means of reporting suspected fraud that involves senior management, possibly reporting directly to the audit committee.

Corporate Accountability

Clearly, there are many ethical dilemmas in today’s business environment, and it’s not always easy to determine the right course of action. This is one reason an ethical tone at the top is critical to an organization’s long-term success.

When those at the top adhere to and promote a strong ethical code with clearly stated values, they have taken the first step toward creating a corporate culture in which employees follow suit. And when they make sure bad things don’t happen to employees like Larry, who step forward and blow the whistle on inappropriate activities, they send to all stakeholders a clear message of unwavering ethics and accountability.

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This article originally appeared in The Institute of Internal Auditors Tone at the Top April 2012 newsletter. With more than 170,000 members in 165 countries, The Institute of Internal Auditors is internationally recognized as the global voice and standard-setting body for the internal audit profession.

Tone at the Top provides executive management, boards of directors, and audit committees with concise, leading-edge information on issues such as ethics, internal control, governance, and the changing role of internal auditing.

Reposted by Steven Mintz, aka Ethics Sage, on May 4, 2012

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