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Notes from chapter 9
There are many reasons why companies should analyze, report on, and improve their ethi- cal conduct. Assessment of an organization’s ethical culture is necessary to improve ethi- cal performance and to document in legal proceedings that a firm has an effective ethics program. Companies can use ethics audits to detect misconduct before it becomes a major problem, and audits provide evidence of a firm’s attempts to identify and deal with major ethical risks. For instance, companies that prove they had corporate ethics and compliance programs and report misconduct when discovered can often receive deferred prosecution agreements (DPAs), in which the company can resolve criminal charges without having to admit guilt. Under a typical DPA, companies admit wrongdoing (but not guilt), pay a fine, cooperate with the Justice Department, and agree to meet certain terms within a certain time frame. After the compliance deadline, if the Justice Department acknowledges the company met all of the terms, the charges against the firm will be dropped.15 This pro- vides significant encouragement for companies to account more for their actions in a wide range of areas, including corporate governance, ethics programs, customer relationships, employee relations, environmental policies, and community involvement. One company may want to achieve the most ethical performance possible, whereas another may use an ethics audit merely to project a good image to hide its corrupt culture. Top managers might use an ethics audit to identify ethical problems in their companies, but identification alone does not mean they will take steps to correct these lapses through
punishments or sanctions.16 Without appropriate action on the part of management, an ethics audit is mere lip service intended to enhance the firm’s reputation without actually improving its ethical conduct. Other firms might conduct audits in an attempt to comply with the FSGO’s requirement that the board of directors oversee the discovery of ethical risk, design and implement an ethics program, and evaluate performance. Some compa- nies view the auditing process as tied to continuous improvement that is closely related to improved financial performance. Companies’ reasons for supporting the FSGO are com- plex and diverse. For example, it is common for firms to conduct audits of business prac- tices with legal ramifications such as employee safety, environmental impact, and financial reporting. Although these practices are important to a firm’s ethics and social responsibil- ity, they are also legally required and therefore constitute the minimum level of commit- ment. However, because stakeholders are demanding increased transparency and taking a more active role through external organizations representing their interests, government regulators are calling on companies to improve their ethical conduct and make more deci- sions based on principles rather than on laws alone.
The auditing process can highlight trends, improve organizational learning, and facili- tate communication and working relationships.18 Auditing can also help companies assess the effectiveness of their programs and policies, which often improves their operating efficiencies and reduces costs. Information from audits and reports can allow a company to ensure it achieves the greatest possible impact with available resources.19 The process of ethics auditing also helps an organization identify potential risks and liabilities and improve its compliance with the law. Furthermore, the audit report may help document a firm’s compliance with legal requirements as well as demonstrate its progress in areas where it previously failed to comply—for example, by describing the systems it is imple- menting to reduce the likelihood of a recurrence of misconduc
For organizations, one of the greatest benefits of the auditing process is improved relationships with stakeholders who desire greater transparency. Many stakeholders have become wary of corporate public relations campaigns. Verbal assurances by corporate management are no longer sufficient to gain stakeholders’ trust. An ethics audit could have saved Countrywide Financial if liar loans and the manipulation of borrowers’ finan- cial data had been identified earlier. When companies and their employees, suppliers, and investors trust each other, the costs of monitoring and managing these relationships are lower. Companies experience less conflict with these stakeholders, resulting in a height- ened capacity for innovation and collaboration. Because of these benefits shareholders and investors have welcomed the increased disclosure that comes with corporate accountability
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