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
of this implementation tool. The challenges of measuring nonfinancial ethical performance are
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 and 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
LECTURE OUTLINE
I. Implementing Ethics Programs
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.
48 Chapter 9: Implementing and Auditing Ethics Programs
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 tools and resources (proper selection of employees, ethics training, and
structural systems, including communication systems).
II. The Ethics Audit
A. An ethics audit is a systematic evaluation of an organization’s ethics program and
performance to determine whether it is effective.
B. It includes regular, complete, and documented measurements of compliance, measuring
conformity to the firm’s desired ethical standards.
D. A social audit is the process of assessing and reporting a business’s performance in
fulfilling the economic, legal, ethical, and philanthropic responsibilities expected of it by its
stakeholders.
1. Social reports often discuss issues related to a firm’s performance in the four
dimensions of social responsibility as well as to specific social responsibility and
ethical issues such as staff issues, community economic development, volunteerism,
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.
1. One reason is to detect ethical misconduct before it becomes a major problem.
2. Accounting scandals and legal and ethical transgressions have encouraged companies
learning, and facilitate communication and working relationships
B. One of the greatest benefits of the auditing process is improved relationships with
stakeholders.
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
Chapter 9: Implementing and Auditing Ethics Programs 49
result in substantial legal and financial costs, disrupt operations, reduce productivity,
destroy organizational reputation, and erode stakeholder confidence.
a. Despite the high costs of misconduct, U.S. companies are failing to identify and
manage ethical, social, economic, and environmental concerns.
audit, and developing contingency plans for potential ethical disasters.
D. Measuring Nonfinancial Ethical Performance
1. Although much of the regulatory focus of corporate ethics and compliance is driven by
financial measures, the integrity of an organization also has to focus on nonfinancial
areas of performance.
2. The word integrity implies a balanced organization that not only makes ethical
financial decisions but also is ethical in the more subjective aspects of its corporate
culture.
a. The Sarbanes–Oxley Act has focused on questionable accounting and the metrics
that destroy shareholder value. On the other hand, models exist (Six Sigma, the
Balanced Scorecard, and the Triple Bottom Line) to capture structural and
social.
3. The purpose of nonfinancial measures is to determine the wholeness and soundness of
the many aspects of a business that enhance ethics and profits without increasing risk.
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.
a. Businesses can use the GRI to come up with a more standardized method of
reporting nonfinancial results in a way that users of the reports can understand.
50 Chapter 9: Implementing and Auditing Ethics Programs
a. The AA1000 process standards link the definition and embedding of an
organization’s values to the development of performance targets and to the
assessment and communication of organizational performance.
b. AA1000 ties social and ethical issues into the organization’s strategic
management and operations.
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.
b. It may find that one or more of its stakeholders’ criticisms cannot be dismissed or
easily addressed.
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. Specific, measurable, achievable, and meaningful measurements in terms of
business impact on communities, employees, consumers, the environment, and
IV. The Auditing Process
A. Questions to be addressed during an audit:
1. How broad the audit should be?
2. What standards of performance should be applied?
3. How often the audit should be conducted?
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.
a. Pressure for an ethics audit may come from the board of directors in response to
stakeholder concerns or legally mandated corporate governance reforms related
Chapter 9: Implementing and Auditing Ethics Programs 51
to the Sarbanes–Oxley Act, which suggests that boards of directors should
provide oversight for all auditing activities.
b. Court decisions related to the FSGO hold board members responsible for the
ethical and legal compliance programs of the firms they oversee.
2. Pressure for an audit may come from top managers looking for ways to track and
improve ethical performance, and to give their firm an advantage over competitors that
the support of top management.
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.
relationships with top managers or board members.
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
available opportunities to manage ethics.
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,
but these may also be found in separate documents, including those that focus on social
responsibility.
2. This step should examine all formal documents that make explicit commitments with
regard to ethical, legal, or social responsibility, as well as less formal documents,
priorities.
52 Chapter 9: Implementing and Auditing Ethics Programs
a. Because there may be no legal requirements for ethical priorities, it is up to
management’s strategic planning processes to determine appropriate standards,
principles, duties, and required action to deal with ethics issues.
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
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.
b. Customers are a primary stakeholder group because their patronage and loyalty
determines the company’s financial success. Providing meaningful feedback is
critical for creating and maintaining customer satisfaction.
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. May involve descriptive assessments of the findings (the costs and benefits of the
company’s ethics program, the strengths and weaknesses of the firm’s policies
and practices, feedback from stakeholders, and issues that should be addressed in
future audits).
I. Verify the Results
1. The next step is to have an independent party (social/ethics audit consultant, a financial
accounting firm that offers social auditing services, or a nonprofit special-interest
group with auditing experience) verify the results of the data analysis.
Chapter 9: Implementing and Auditing Ethics Programs 53
b. Verification by an independent party gives stakeholders confidence in a
company’s ethics or social audit and lends the audit report credibility and
objectivity.
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.
a. Reporting the audit findings to the relevant internal parties and, if approved, to
external stakeholders in a formal report.
2. The report should spell out the purpose and scope of the audit, the methods used in the
audit process (evidence gathering and evaluation), the role of the (preferably
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.
areas of a business, or it can focus on one or two specific areas.
F. Ethics audits can present several problems.
1. They can be expensive and time consuming
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
54 Chapter 9: Implementing and Auditing Ethics Programs
3. The process can also help companies fulfill their mission statements in ways that boost
profits and reduce risks.
4. Can pinpoint areas where improving operating practices can improve both bottom-line
profits and stakeholder relationships
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
that it is easier and more helpful to use a checklist of items that address specific areas of the company.
“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
make sure the company looks good. After working for Butterfly Corporation for two years, Charles is
excited to research and prepare a though plan for conducting the ethics audit. Unfortunately, it appears
Doug views the board’s requested audit as a formality and does not support its need.