Wednesday, July 08, 2009

Ethics – not expenses?

It now seems that the expenses furore has died down. Its effects will be legion. One effect will doubtless be in the audit plans that internal auditors propose and audit committees consider.

Thousands of internal audit days will be devoted to checking the processes for expenses as internal auditors and audit committees will have been unsettled by the Westminster expenses scandals. If anyone needed a reminder of the seriousness of reputational risks, they have had it. (It’s worth noting that the ripples of the expenses row have reached both the BBC and charities.)

Will those internal audit days be well-spent? Definitely, sometimes.

Where expenses policies are poorly worded, inadequately applied and widely disrespected, some lessons may be learned and culprits may be caught. However, I do wonder if elsewhere the internal audit resource might be better deployed looking more widely at the ethical environment of organisations.

How often do internal auditors look at:

1) How a culture of ethical responsibility is fostered across the organisation?

2) How well codes of ethics are agreed, communicated and bought-in to?

3) How responsibility for ethical matters, legal compliance and reputational risk is allocated?

4) How effectively are social, environmental and ethical risks integrated into risk management?

5) How does the board set itself ethical standards (along the lines of the IoD’s Standard for Directors)?

The answer is not very often and maybe not very well. There is a risk that these kind of reviews degenerate into empty tick-boxing.

I am aware that some housing associations have renamed their audit committees as audit and ethics committees. It will be interesting to see if that means more than a nod in the right direction.

Certainly audit committees do need to look at the wider ethical scene rather go searching for duck houses.


elaine said...

hi, excellent post, highlighting the difference between financial and social approaches... in addition to governance aspects, most companies use financial experts (accounting companies) to audit their social and environmental performance .. your post highlights the significant difference in approach when auditing or verifying responsible business practices

Bob Deed said...

As many internal auditors are accountants by profession and/or background (I am one!) and audit committees tend to be very interested in numbers, I think it is easy for the importance of the ethical frameworks to be forgotten.

That said I am not sure why professional auditors would not be suitable to do social and environmental audits. I am not sure that I intended to address that issue in my blog post but I would be interested in hearing more about your views why such firms are not suitable.

elaine said...

hello bob, i am not a financial auditor so i can only speak from my own experience and perspective. Social auditing is as much about process as it is about results. In a social audit, clearly one looks for quantitative results, but i believe there are many "soft" elements related to human resources practices, values, change management practices which yield quantative outcomes long after the audit has been completed. The kinds of questions you raised in your blog relate to culture - i suggest that a person trained in financial audits alone may not have the requisite skills to notice where the culture is supporting or failing the development of a sustainable organization or providing the right infrastructure for ethical behavior. A social audit relies much more heavily on talking to people and much less on anlysing figures and paper trails. Forgive me if i am not doing justice to the accounting profession. Perhaps its the difference between a SOX mentality and a Myers Briggs mentality. I think both are needed in a comprehensive audit which includes financial and social elements. I am not an environmental auditor either but work closely with my partner who is an environmental specialist ... this is a complex area which requires quite some degree of enviromnental risk assessment expertise .. i believe this has to be done with specific understanding of this field.