Does your organization have a fully developed culture of ethics and compliance — and do you know how to audit and monitor it? In this article, Jamal Ahmed, Vice President of Internal Audit at Day & Zimmermann, breaks down the nine steps that led his organization to receive a consecutive A ranking from Transparency International.1 Read on to learn how to implement, audit, and monitor a culture of ethics and compliance, and download a list of key questions to ask employees when conducting ethics audits.
What Is an Ethics Audit?
An ethical culture is the foundation of effective internal controls. Every auditor knows that internal controls are best practice and necessary to ensure compliance with applicable laws and regulations and to ensure that there is a system of checks and balances to detect inappropriate transactions. Yet, without a culture of ethics and compliance, people will find ways to circumvent internal controls, policies, and procedures.
While there is no set ethics audit definition, an ethics audit can include reviewing the code of ethics, reviewing past incidents and the response by the individual and the organization, and interviewing employees to understand their perspective on the organization’s ethics. Some choose to utilize different ethics audit types. The ethics audit types vary from assessing individual employee awareness to understanding the overall ethical culture. In the end, ethics auditing is similar to any other audit. We approach the audit by defining an organizational objective, risks, and controls. The objective is to build a strong ethical culture and the risks include lack of awareness, weak incident reporting, and poor commitment from management. When considering the repercussions of a weak ethical culture, why ethics is important in auditing.
What Is the Purpose of an Ethics Audit and Building an Ethical Culture?
The purpose of an ethical culture is to help steer employees to choose to do the right thing by ensuring that company values are embedded in everyday work practices. This raises the question: how does an organization create an ethical culture?
How Does an Organization Create an Ethical Culture?
Whether your company is looking for effective ways to audit and monitor an ethics program or is just getting started building out an ethical controls program, this article will walk you through a process for creating and maintaining an ethical culture. We will dive into the nine steps Day & Zimmermann has adopted from the Defense Industry Initiative (DII) to implement and monitor an ethical culture program, and share a downloadable list of questions to ask employees during a range of ethics audits to ensure that all components are working as intended.
Key Interview Questions for Ethics Audits
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:
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.
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:
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:
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:
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:
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.