EthicsPresented by:

Bob Parks, CPA, Director

June 15, 2011

How Did We Get Here? Current State of Affairs Why Things Go Wrong Getting Things Right Where Internal Audit Fits In The Ethics Audit Questions?

Overview

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Business Ethics?

“There’s no such thing as business ethics –there’s only ethics. People try to use one set of

ethics for their professional life, another for their spiritual life, and still another at home and with their family. That gets them into trouble. Ethics is ethics. If you desire to be ethical, you

live it by one standard across the board.”

John Maxwell in There’s No Such Thing as “Business Ethics”

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HOW DID WE GET HERE?

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“No man is wise enough or good enough to be trusted with unlimited power.”

John Adams

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Businesses privately owned and established to provide a public service

Barred from political contributions Taxes were insignificant Honesty, ethics, and moral values were taught

in classrooms Emphasis on companies’ responsibility to

employees and customers

How Did We Get Here? Business then (19th Century) and now

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Things change after Civil War – Industrial Revolution begins

Federal government assumes stronger position in the private sector

Rich industrialists pressure politicians to pass laws limiting competition

Monopolies created in railroad, steel, oil, and utilities industries.

How Did We Get Here? Business then (19th Century) and now

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Industry leaders use economic influence to promote laws protecting business and controlling labor movement

By end of WWI, U.S. is a global economic power Distrust and animosity between management and

labor increases Unions gain political power Government assumes the role of regulator Taxes begin to take a significant portion of profits

How Did We Get Here? Business then (19th Century) and now

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Use of debt in business escalates Ethics become part of business school

curriculums again Companies begin developing structures for

ethical behavior Executive compensation packages escalate $$$$ Business scandals continue Establishment of Sarbanes-Oxley Act

How Did We Get Here? Business then (19th Century) and now

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CURRENT STATE OF AFFAIRS

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“How many leaders have ruined their lives and damaged the lives of others through immorality? Character has become a crucial issue today precisely because of the leaders in the political, business, and religious worlds who

have fallen morally. Leaders need to realize that they influence many others beyond themselves; they never fall in a vacuum. They also need to

remember that replacing fallen leaders is a slow and difficult process.

“So how can we guard against falling? First we must take care not to emphasize the gifts of a leader over his or her character. We have and

unhealthy tendency to see and reward the gift more than the character, but both must be developed.”

John Maxwell: “The Maxwell Leadership Bible”

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Gallup Survey, Nov. 19 – 21, 2010

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Please tell me how you would rate the honesty and ethical standards of people in these different fields?

% Very High /High

%Average

% Low / Very Low

Nurses 81 16 1

Military officers 73 23 3

Druggists/pharmacists 71 25 4

Grade school teachers 67 24 6

Medical doctors 66 28 5

Police officers 57 33 10

Clergy 53 35 8

Judges 47 37 14

Day care providers 47 41 7

Auto mechanics 28 55 16

Nursing home operators 26 48 24

% Very High /High

%Average

% Low / Very Low

Bankers 23 48 28

TV reporters 23 47 29

Newspaper reporters 22 49 27

Local officeholders 20 55 24

Lawyers 17 47 35

Business executives 15 52 32

State office holders 12 49 37

Advertising practitioners 11 48 37

Members of Congress 9 32 57

Car salespeople 7 42 49

Lobbyists 7 29 61

Misconduct at work is down. Fewer employees witnessed misconduct on the job; the measure fell from 56% in 2007 to 49% in 2009

Whistleblowing is up. More employees reported misconduct when they observed it; 63% in 2009, up from 58% in 2007

Ethical cultures are stronger. Measures of the strength of ethical culture in the workplace increased from 53% in 2007 to 62% in 2009

Pressure to cut corners is lower. Perceived pressure to commit an ethics violation – cut corners or worse – declined from 10% two years ago to 8%

Trends in Key Measures

© DM 2011 13Source - Ethics Resource Center: 2009 National Business Ethics Survey

Percent of Employees Experiencing Company Tactics to Weather the Recession

Realities of the Recession

© DM 2011 14Source - Ethics Resource Center: 2009 National Business Ethics Survey

Plant Closures

Production Slowdowns

Early Retirements or Buyouts

Hiring Freezes

Compensation or Benefit Reductions

Layoffs

Adjusted Work Schedules

12%

36%

20%

52%

34%

42%

42%

• Where employees were subject to recessionary tactics, misconduct rose by 26%. Non-reporting rose by 15%.

• Companies taking actions affecting their employees need to be alert to potential damage to their ethical culture and plan for repairs as the recession finally eases.

Overriding routine procedures – cutoff and timing Ignoring unusual activities happening at higher levels Creating fictitious vendors or invoices Stealing or misappropriating assets Submitting false or misleading invoices to customers Entering into contracts that lack proper terms,

conditions or approvals Violating contract terms with customers or suppliers

Red Flags: Financial Reporting

© DM 2011 15Source - Ethics Resource Center: 2009 National Business Ethics Survey

Of the group observing some type of red flag, 30% said they did not report their observation.

Red Flags: Financial Reporting

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85.6%

0.9%

1.1% 3.8% 8.6%Observed No Red Flags

6-8 Red Flags

4-5 Red Flags

2-3 Red Flags

1 Red Flag

15% of employees who observed & reported misconduct perceived they were retaliated against.

Retaliation

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Experienced physical harm to your person or property

Demoted

Any other form of retaliation

Relocated or reassigned

Verbally abused by other employees

Not given promotions or raises

Almost lost your job

Verbally abused by supervisor or someone else in management

Other employees gave you a cold shoulder

Supervisor or management excluded you from decisions and work activity

4%

18%

20%

27%

42%

43%

48%

55%

60%

62%

Survey Conclusions

© DM 2011 18Source - Ethics Resource Center: 2009 National Business Ethics Survey

We are experiencing an ethics bubble Positive results are likely a temporary connection

between workplace ethics and larger economic cycle: when times are tough, ethics improve

When business thrives and regulatory intervention remains at status quo, ethics erode

This pattern is expected to continue. Executives who don’t make ethical culture a

priority risk long-term business problems

WHY THINGS GO WRONG

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“The tendency to hide the truth where there are potential consequences is a part of human nature, and sadly, one that usually makes us incur more negative consequences than if we had told the

truth.”Dr. Henry Cloud: “Integrity”

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Why unethical choices are made: Doing whatever it takes to win

Everyone hates to lose Doing the most convenient thing

What is the easiest Promises made to gain an outcome Lying or omitting information to cover a mistake

Choice can be rationalized Situational ethics People are generally easier on themselves

Reasoning for Unethical Choices

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Pressure to meet unrealistic business objectives and deadlines

Personal financial gain Desire to further career Desire to protect job Work environment with low morale Lack of training that the act was unethical

Factors Causing Compromised Ethical Standards

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GETTING THINGS RIGHT

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“Every single day we make choices that show we are courageous or cowardly. We choose between the right thing and the convenient thing, sticking

to a conviction or caving in for the sake of comfort, greed, or approval.”

Bill Hybels: “Who You Are When No One’s Looking”

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Leadership supports an ethical culture – tone at the top Leadership models ethical behavior – keeps promises and

commitments Consistent and transparent communications from leaders. Ethics integrated into the organization’s goals, business

processes, and strategies. Ethics are part of the performance management and

reward system. Ethics are part of employee recruitment process and

selection criteria.

Most Important Factors for an Ethical Culture

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Establish a Code of Conduct and require annual employee acknowledgement

Conducting on-going ethics training Establish an Ethics officer and/or an Ethics

committee of the Board Establishing an ethics hotline Conducting ethics audits

Ethical Culture Practices

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Clarify your thinking and decide on an action:1. Have you accurately defined the problem?2. How would you define the problem if you stood on the

other side of the fence?3. How did this situation occur in the first place?4. To whom and to what do you give your loyalty as a

person and as a member of the company?5. What is your intention in making this decision?6. How does this intention compare with the likely results?

Ethical Dilemmas

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(Excerpted from: Nash, L. (1981). Ethics Without the Sermon. Harvard Business Review, 59. ).

7. Who could be injured by your decision or action?8. Can you discuss the problem with affected parties before you

make your decision?9. Are you confident your position will be as valid over along

period of time as it seems now?10. Could you disclose, without qualm, your decision or action to

your boss, your CEO, the board of directors, your family, or society in general?

11. What is the symbolic potential of your action if understood? If misunderstood?

12. Under what conditions would you allow exceptions to your stand?

Ethical Dilemmas

© DM 2011 28(Excerpted from: Nash, L. (1981). Ethics Without the Sermon. Harvard Business Review, 59. ).

‘Do unto others as you would have others do unto you’

Treat others as you would like to be treated – with dignity, respect, understanding, and trust.

The Golden Rule is accepted by most people and cultures

Is a win-win philosophy Should act as a compass when you need direction

The Golden Rule

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Put into practice: Truth cannot be compromised We all have a job to do and no one should benefit at

the expense of others Everyone should be treated with dignity and worth We work to create value for our customers and

owners We all must be willing to serve others

Standards of Integrity

© DM 2011 30Source - C. William Pollard: ServiceMaster: Soul of the Firm

WHERE INTERNAL AUDIT FITS IN

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Henry Silverman, CEO at Cendant, after it paid billions to settle lawsuits:

“The new regulations are kind of like chicken soup. They can’t cure you – but they can’t hurt you either. There will always be fraud in the world. I don’t know

how you regulate human behavior, which is what these rules are trying to do.“

Cendant

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When asked what would prevent bad behavior, Mr. Silverman responded:“Individual morals and ethics of the leaders at companies, and their ability to instill what’s right and what’s wrong.

We had a biannual meeting wither all of the senior managers came to the New York office. I made a point to

talk about integrity. I said: ‘if there’s something you’d prefer not to read about on the front page of the Wall

Street Journal, then just don’t do it.’ Most companies, I’m afraid, haven’t instilled that culture in their troops.”

Cendant

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According to Characteristics of an Internal Audit Activity, the first report in the IIA’s five-part Global Internal Audit Survey, the major focus areas for internal auditing in the next five years will be: Corporate governance, Enterprise risk management, Strategic reviews, Ethics audits, and Migration to International Financial Reporting Standards

(IFRS).

IA Focus in the Future

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The internal audit activity should evaluate the design, implementation, and effectiveness of the organization’s ethics-related objectives, programs, and activities.

IIA Practice Advisory 2130-A1

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Internal auditors - evaluate features of ethical culture: Formal Code of Conduct, which is clear and understandable. Communications and demonstrations of expected ethical attitudes and

behavior by leaders. Strategies to support and enhance the ethical culture with regular

programs to renew the organization’s commitment. Ways for people to confidentially report alleged violations of the Code,

policies, and other acts of misconduct. Regular declarations by employees, suppliers, and customers that they are

aware of ethical behavior requirements. Ensure ethical consequences are evaluated, confidential counseling is

provided, allegations of misconduct are investigated, and case findings are properly reported.

IIA Practice Advisory 2130-1

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Internal auditors - evaluate features of ethical culture: Learning opportunities to enable all employees to be ethics

advocates. Practices encouraging every employee to contribute to the

ethical climate of the organization. Regular surveys of employees, suppliers, and customers to

determine the state of the ethical climate in the organization. Regular reviews of processes that could create pressures and

biases that would undermine ethical culture. Reference and background checks as part of hiring procedures,

including integrity tests, drug screening, and similar measures.

IIA Practice Advisory 2130-1

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Internal Audit’s Role Active in support of the ethical culture. High level of trust and integrity to be effective advocates

of ethical conduct. Competence and capacity to appeal to leaders,

managers, and other employees to comply with the legal, ethical, and societal responsibilities.

Chief ethics officer (may conflict with other duties) Member of an internal ethics committee. Assessor of the ethical climate.

IIA Practice Advisory 2130-1

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THE ETHICS AUDIT

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“Right is right, even if everyone is against it; and wrong is wrong, even if everyone is for it.”

William Penn

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Assess the ethics management strategy as a control to mitigate risks from unethical and illegal behavior.

Assess the adequacy of current practices, polices, and procedures.

Determine whether ethics program is in compliance with applicable laws and regulations.

Assess whether the ethics program is administered properly and effective.

Determine if the behaviors included the code of conduct and policies and procedures exist in practice and that behavior forbidden in these documents does not occur.

Objectives

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Review the Code of Conduct and policies and procedures related to ethics compliance.

Document an understanding of procedures for program development, maintenance, implementation, and training.

Document an understanding of the role of the ethics officer (or equivalent), and evidence to support the effectiveness of compliance programs.

Document an understanding of Ethics Committee’s role. Determine appropriateness of executive management,

Board of Directors, Audit Committee and legal counsel participation in the ethics program.

Procedures to Consider

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Review and document ethics training program and practices for ensuring all employees participate.

Document the process in place for personnel to report ethics violations.

Evaluate the procedures for following up on ethics and code of conduct violations.

Select a sample of recent hires and existing employees and trace to signed commitment to the ethics compliance policies and code of conduct.

Inquire about outstanding items such as missing signatures of commitment to compliance, unperformed training, and other delinquent items.

Procedures to Consider

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Determine procedure for tracking reported ethics incidents and reporting to senior management and Ethics Committee.

Select a sample of reported complaints from call reports or logs and consider the adequacy investigation, documentation, reporting and timeliness of resolution.

Evaluate the security and confidentiality of complaint related files.

Review ethics program procedures related to practices for: Expense and travel reporting Vendor due diligence, bidding and selection Employee and related party accounts Other ethical matters

Procedures to Consider

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QUESTIONS?

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“Do all the good you can, by all the means you can, in all the ways you can, in all the places you

can, at all the times you can, to all the people you can, as long as you ever can.”

John Wesley, 1703-1791

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755 West Big Beaver Road Suite 2300

Troy, Michigan 48084

Thank You!

2603 Augusta DriveSuite 1100

Houston, Texas 77057

www.doeren.com Robert Parks, CPADirector, Financial Institutions Group

Office: (248) 244-3049Cell : (248) 709-1046

Email : parks@doeren.com

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