What is the value of an ethical audit?

Definition of an Ethics Audit

There are many types of audits used by and for organizations, such as financial audits, quality audits, project audits, operational audits, performance audits, and ethics audits. An ethics audit is the systematic, independent, and objective examination and evaluation of the ethical content of the object of the audit.

An audit is systematic when it entails typical steps like planning, defining a framework, fieldwork (collecting information and obtaining evidence) using established methods, analysis, judgment, reporting, and documentation. An audit is independent when someone who has no interests on the results of the audit performs it. This is the case when...

References

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1. Business Ethics and Integrity Management, Rotterdam School of Management, Erasmus University, Rotterdam, The Netherlands

   Muel Kaptein

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1. Muel Kaptein

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Correspondence to Muel Kaptein .

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1. Ottawa, ON, Canada

   Prof. Deborah C Poff

2. Ottawa, ON, Canada

   Prof. Alex C. Michalos

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1. Business Ethics and Integrity Management, Rotterdam School of Management, Erasmus University, Rotterdam, The Netherlands

   Muel Kaptein

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Step 1. Company Values

An organization should have clearly stated values to establish its culture of ethics and compliance. Values that shape a company’s ethical culture through daily work practice could include: integrity, respect, diversity, safety, conscientiousness, creativity, and more. For instance, safety is our company’s number one value — it might not seem an obvious choice, but our people work in nuclear plants, manufacturing, and construction worksites that may contain dangerous hazards. Thus, we’ve made safety a top value that is fundamental to our ethics programs and prioritized in our peoples’ everyday work practices. 

Step 2. Code of Ethics and Code of Conduct

The values chosen in Step 1 should be incorporated into the organization’s code of ethics — our guidelines about behavior and principles to govern decision-making — and the code of conduct, which applies the code of ethics to a range of situations and actions. Both documents should also include high-level guidelines regarding ethics and compliance risk areas. For the code of conduct to be effective at guiding everyday work practices, it should give direction to employees on applying the code of ethics to specific issues that are important to the company. For example, if an employee is working in a foreign country, the code of conduct should provide guidance on complying with the Foreign Corrupt Practices Act rules regarding gifts, gratuities, and entertainment.

Of course, having a formal code of conduct doesn’t guarantee real-world compliance. A code of conduct audit will assess whether the code of ethics and code of conduct that exists in paper form is understood and internalized by employees in their lived experience. Internal audit should: 

• Ensure the code of conduct is provided to all employees, directors, and agents.
• Assess what is done to ensure that employees understand the code of conduct and are familiar with its requirements.

Internal audit should also assess whether the employee code of conduct training is effective in ensuring employees understand its requirements.

Download Key Interview Questions for Ethics Audits for a list of questions to help assess the effectiveness of the code of conduct training program in your company.

Step 3. Risk Assessment

Once your company has a code of ethics that employees understand and believe in, the next step is to understand compliance risks as well as risks in the code of conduct guidelines that you provided. To accomplish this, perform a risk assessment to ascertain whether your company is focusing on current business risks as a result of changes in organizations, business practices, and laws and regulations. When preparing each business unit risk assessment for compliance with applicable laws and regulations, be sure to include issues that stem from the code of conduct guidelines such as anti-kickback, anti-bribery, protection of company assets, or harassment issues.

Step 4. Ethics and Business Conduct Policies

An effective ethics and compliance program should include policies and procedures addressing the particular risks facing a company. For example, policies and procedures relevant to international trade should address risks related to import and export controls, anti-boycott measures, and money laundering, among others. 

An ethics and business conduct policies audit will assess whether employees are aware of, understand, and are following these policies. Internal audit should examine the list of policies to see if high risk areas from the risk assessment and the code of conduct are addressed. For current policies, conduct employee interviews to assess awareness of relevant policies. Ask employees how well they understand their responsibilities in connection with ethics and business conduct policies, naming each policy individually.

• If an employee says they are not aware of the company’s guidelines on a listed policy, refer them to the relevant section of the code of conduct and the applicable policy.
• Identify policies with which the majority of the employees were not familiar so that additional training can be provided in these areas.

Step 5. Awareness Training Audit

It is not sufficient for a company simply to have policies in place — there must be a program that trains employees to be aware of relevant ethics and compliance issues. When developing or evaluating a training program, you will want to consider:

• How is this training delivered to employees? Is it an online program or live sessions? Is the delivery method adequate to reach all employees who must take the ethics and compliance courses? 
• How is one considered to have completed a course? Is there a quiz after a training course with a minimum score requirement?
• If a tracking mechanism is used to see the completion status of required courses, what percent of the employees have completed their required courses? What recourse is taken to follow up with employees who have not completed or passed training? 

Step 6. Inquiry and Reporting Mechanisms

It’s important that your ethics and compliance program includes a process for employees, suppliers, customers and others who do business with your company to ask questions or report concerns about ethics or violations of laws, regulations, and company policies. To assess the process for investigating concerns reported through mechanisms, such as the company hotline, internal audit should consider the following:

• Is there a prioritization of concerns received based on the severity of the issues raised? 
• Is there a formal protocol for deciding who investigates what? 
• Is there a formal protocol to ensure that all investigations are done using certain guidelines and consistent standards for thoroughness?  
• Were investigations documented in formal reports?
  • Were investigations completed in accordance within the established timeline?
  • Were the investigations thorough enough to reach a conclusion regarding the validity of the concerns?
  • Was there any explanation for actions taken, or not taken, as a result of the concerns received and investigations done?
  • Was ensuing actions taken with appropriate management approvals  and consultation with functional experts (e.g. Law, HR)?
  • Were the callers made aware of the results of the investigations?

Download Key Interview Questions for Ethics Audits for a list of questions to help assess the effectiveness of a Hotline reporting mechanism. 

Step 7. Communication Program

Develop a communication plan to increase ethics awareness and remind employees that ethics and compliance are important to the company. The most effective communication programs should engage all audiences with specific messages about ethics using a variety of media.  Effective communication program components include: 

• Separate pages on ethics and compliance in the company’s internal and external websites.
• Internal ethics blogs from senior executives to help set the tone from the top.
• Incorporate a variety of messages, short videos, and Q&A about ethics issues in the company’s newsletter.
• Ethics posters with the toll-free hotline number and ethics officer contact information should be displayed prominently at locations where employees gather frequently. Posters should clearly state that concerns can be reported anonymously, and that there will be no retaliation for reporting a concern even if it turns out to be unsubstantiated. 
• Ensure that the code of ethics, code of conduct, and ethics messages are distributed in all native languages of employees.

A strong communication program will keep ethics and compliance top of mind for all employees!

Step 8. Ethics and Compliance Program Assessment and Evaluation

At all points in the process of implementing an ethics and compliance culture, it is important to maintain continuous program evaluation. There should be regular internal and external audits of your ethics program, and an assessment of how often internal controls are tested. Conduct employee surveys and focus groups to assess employee impressions of the ethics and compliance culture. A constant vigilance and program evaluation is necessary to maintain a strong culture of ethics. 

Step 9. Leadership Commitment

To achieve and maintain an ethical company culture, there must be strong commitment from the top to create the perception that ethics and compliance is important to the company. Leadership commitment may be the final step in this list, but it is fundamental throughout the previous eight steps that management take responsibility for demonstrating through their actions the importance of ethics and compliance. There are many ways that organizational structure and activities can demonstrate leadership commitment: 

• Have the CEO make a statement to formalize your company’s commitment to the highest ethical conduct in all aspects of your business. 
• The leader of the Ethics organization can report directly to the Board of Directors or Chief Executive Officer.
• An Ethics and Compliance Committee with a senior executive as Committee Chairman can provide leadership and oversight to the ethics program and review the status of ethics program-related activities. The committee itself might consist of senior leaders from Legal, Human Resources, Internal Audit, Operations, Communications, Security, IT and other departments. 

How to Start an Ethics and Compliance Culture

A culture of ethics and compliance starts at the top, but most employees at a company will never meet the CEO — for them, ethical culture is what they see up front every day. The message of ethical behavior should flow from the top leadership down to the lower-level supervisors who directly manage the company’s business on a day-to-day basis, and from them to all employees.

Download Key Interview Questions for Ethics Audits for a list of questions to ask managers to assess the effectiveness of leadership commitment to ethics and compliance. 

Develop a Strong Culture of Ethics

To be effective, ethics can’t just be a program administered by the Ethics and Compliance function — an ethical culture must be a process and a responsibility shared by all employees. Developing a strong culture of ethics that employees believe in will help to ensure that internal controls are not being circumvented due to lax ethical standards on the ground. Following these nine steps will help enable internal audit to implement, audit, and monitor an ethical culture where the organization’s values are embodied in its people’s everyday work practices.

1. Transparency International is an independent, UK-based, non-profit organization known for assessing ethics and compliance and anti-corruption in governments around the world ↩

Jamal Ahmed is the Vice President of Internal Audit at Day & Zimmermann, Inc. (D&Z) in Philadelphia, PA. The D&Z Ethics Program, under Jamal’s leadership, received an A ranking from Transparency International (TI) in its 2015 Defense Companies Anti-Corruption Index.

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