CHAPTER 9
Managing and Controlling Ethics Programs
SUMMARY
This chapter examines the concept of an ethics audit as a way to help implement an effective ethics
program. The chapter begins by discussing the implementation of ethics programs. We define the term
ethics audit and explore its relationship to a social audit. Next, we examine the benefits and limitations
INSTRUCTOR NOTES FOR “AN ETHICAL DILEMMA”
Mei-li has been placed in a difficult position by her coworker and boss. Mei-li is a consultant with
Business Equipment Corporation (BEC) and is working with Kyle, an engineer, to develop and produce
a new copy machine with greatly improved technology. However, a competitor of BEC, Hiyota, is
about to release a new copy machine that may be as good as their product, if not better. Kyle has told
Mei-li to pretend to be a potential customer, call Hiyota to set up an appointment to meet with a
salesperson, and learn about their copy quality, novel product features, pricing, and advertising strategy
so that BEC can modify their machine and defeat Hiyota. Mei-li is not comfortable pretending to be a
LECTURE OUTLINE
I. Implementing an Ethics Program
A. In order to implement a successful ethics program, an organization must have ways of
managing, evaluating, and controlling business ethics programs.
B. Viewing a business ethics program as a part of strategic planning and management activities
is critical to the success of any firm.
1. Five items have a significant impact on whether an ethics program is successful:
48 Chapter 9: Implementing and Auditing Ethics Programs
2. Shared values among employees are the “glue” of successful management and control
of business ethics programs. When the business ethics program helps to align and
direct activities toward an ethical culture, there will be a commitment to the long-term
ethical progress of the firm.
C. Three types of controls are involved with implementing and managing an ethics program.
1. Formal controls for business ethics include input controls that provide the proper
3. Output controls involve setting standards against actual behavior. One of the most
popular methods of evaluating ethical performance is an ethics audit.
II. The Ethics Audit
A. An ethics audit is a systematic evaluation of an organization’s ethics program and
1. Social reports often discuss issues related to a firm’s performance in the four
2. In contrast, ethics audits focus on more narrow issues related to assessing and reporting
on a firm’s performance in terms of ethical and legal conduct.
3. An ethics audit can be a component of a social audit. Ethics auditing is similar to
financial auditing in that it employs similar procedures and processes to create a
system of integrity that includes objective reporting.
III. Benefits of Ethics Auditing
A. There are many reasons why companies choose to understand, report on, and improve their
ethical conduct.
2. Accounting scandals and legal and ethical transgressions have encouraged companies
to better account for their actions in a wide range of areas including corporate
3. Measuring the ethical work climate is one way to learn about the ethical culture of an
organization. The auditing process can highlight trends, improve organizational
learning, and facilitate communication and working relationships
B. One of the greatest benefits of the auditing process is improved relationships with
stakeholders.
1. A greater number of investors are considering nonfinancial measures—such as the
2. Regular audits permit shareholders and investors to judge whether a firm is achieving
the goals it established, and whether it abides by the values that it specified as
important.
C. Ethical Crisis Management and Recovery
1. 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.
a. Ethical disasters follow recognizable phases of escalation, from ethical-issue
recognition and the decision to act unethically to the organization’s discovery of
and response to the act.
i) Anticipation of and intervention during these situations can stave off
D. Measuring Nonfinancial Ethical Performance
1. Although much of the regulatory focus of corporate ethics and compliance is driven by
2. The word integrity implies a balanced organization that not only makes ethical
financial decisions but is also ethical in the more subjective aspects of its corporate
culture.
a. The Sarbanes–Oxley Act has focused on questionable accounting and the metrics
3. The purpose of nonfinancial measures is to determine the wholeness and soundness of
4. 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.
5. ISO 19600 provides international guidelines for compliance management.
a. ISO 19600 was based on an Australian compliance standard and emphasizes a
6. Open Compliance Ethics Group created a universal framework for compliance and
ethics management.
a. Focus on nonfinancial compliance and qualitative elements of internal controls.
E. Risks and Requirements in Ethics Auditing
1. Although ethics audits provide many benefits for individual companies and their
stakeholders, they do have the potential to create risks.
a. A firm may uncover a serious ethical problem that it would prefer not to disclose
until it can remedy the situation.
2. 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.
3. Although ethics and social responsibility are defined and perceived differently by
various stakeholders, a core of minimum standards for ethical performance is evolving.
a. These standards represent a fundamental step in the development of minimum
ethics requirements that are specific, measurable, achievable, and meaningful
IV. The Auditing Process
A. Questions to be addressed during an audit:
2. What standards of performance should be applied?
3. How often the audit should be conducted?
B. An ethics audit should be unique to each company, reflecting its size, industry, corporate
culture, and identified risks as well as the regulatory environment in which it operates.
C. The framework in this text encompasses a wide range of business responsibilities and
relationships. There is no generic approach that will satisfy every firm’s circumstances.
D. Secure Commitment of Top Managers and Board of Directors
1. 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.
2. Pressure for an audit may come from top managers looking for ways to track and
3. CEOs and CFOs may face prosecution if they knowingly certify misleading financial
statements.
a. 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
E. Establish a Committee to Oversee the Ethics Audit
1. The next step is to establish a committee or team to oversee the audit process.
a. Ideally, the board of directors’ financial audit committee should oversee the
ethics audit.
b. In most firms, managers or ethics officers conduct social and ethics auditing.
c. This team should include members who are knowledgeable about the nature and
F. Define the Scope of the Audit Process
1. The ethics audit committee should establish the scope of the audit and monitor its
progress to ensure that it stays on track.
a. The scope depends on the type of business, the risks faced by the firm, and
G. Review Organizational Mission, Values, Goals, and Policies, and Define Ethical Priorities
1. The audit process should include a review of the current mission statement and
strategic objectives. The company’s overall mission may incorporate ethics objectives,
2. This step should examine all formal documents that make explicit commitments with
3. It is important to examine all of the firm’s policies and practices for the specific areas
covered by the audit.
4. Concurrent with this step in the auditing process, the firm should define its ethical
priorities.
a. Because there may be no legal requirements for ethical priorities, it is up to
H. Collect and Analyze Relevant Information
1. The next step is to identify the tools or methods for measuring the firm’s progress in
improving employees’ ethical decisions and conduct. The firm should collect relevant
information for each designated subject matter area.
a. A thorough audit will include a review of all relevant reports, including external
documents sent to government agencies and other parties. The information
collected will help determine baseline levels of compliance as well as the internal
2. Because stakeholder integration is so crucial to the ethics audit, a company’s
stakeholders need to be defined and interviewed during the data-collection stage
a. Understanding employee issues is vital to a successful audit.
3. Some investors seek to include in their investment portfolios the stocks of companies
4. Organizations can obtain feedback from stakeholders through standardized surveys,
interviews, and focus groups. Companies can also encourage stakeholder exchanges by
5. Once these data have been collected, the firm should then compare its internal
perceptions to those discovered during the stakeholder assessment stage, and then
summarize findings and draw preliminary conclusions.
a. It may involve descriptive assessments of the findings (the costs and benefits of
Chapter 9: Implementing and Auditing Ethics Programs 53
I. Verify the Results
1. The next step is to have an independent party (social/ethics audit consultant, a financial
2. Verification is an independent assessment of the quality, accuracy, and completeness
of a company’s social report.
a. Independent verification offers a measure of assurance that the company has
3. An increasing number of companies are opting for independent verification of ethics
audits.
a. The process of verifying the results of an audit should involve standard
procedures that control the reliability and validity of the information.
J. Report the Findings
1. The final step is to issue the ethics audit report.
2. The report should spell out the purpose and scope of the audit, the methods used in the
3. Although the ethics audit may be similar to a financial audit, their forms are quite
different. In a financial audit, the Statement of Auditing Standards dictates the content
and placement of every word of a financial audit report.
a. The report issued can be an unqualified opinion, a qualified opinion, an adverse
opinion, or a disclaimer of opinion.
V. The Strategic Importance of Ethics Auditing
A. Although the concept of auditing implies an official examination of ethical performance,
many organizations audit their performance informally.
B. Any attempt to verify outcomes and to compare them with standards can be considered an
auditing activity.
54 Chapter 9: Implementing and Auditing Ethics Programs
E. An audit may be comprehensive and encompass all of the ethics and social responsibility
areas of a business, or it can focus on one or two specific areas.
F. Ethics audits can present several problems.
2. Selecting the auditors may be difficult if objective, qualified personnel are not
available
3. Employees sometimes fear comprehensive evaluations, and in such cases, ethics audits
can be disruptive
G. Auditing ethical performance can also generate many benefits.
1. It provides an assessment of a company’s ethical performance as compared to its core
3. The process can also help companies fulfill their mission statements in ways that boost
profits and reduce risks.
5. It can demonstrate the positive impact of ethical conduct and social responsibility
initiatives on the firm’s bottom line, convincing managers—and other primary
stakeholders—of the value of more ethical and socially responsible business practices.
DEBATE ISSUE: TAKE A STAND
Have your students split into two teams. One team will argue for the first point, and the other will argue
for the opposing view. The purpose is to get students to realize that there are no easy answers to many
of these issues. This debate asks students to choose which ethical auditing guidelines to use for a small
“RESOLVING ETHICAL BUSINESS CHALLENGES” NOTES
In this vignette, Charles has been instructed by the CEO of Butterfly Corporation, Doug, to take
shortcuts in conducting an ethics audit. Doug wants the ethics audit finished quickly and for Charles to