The ethical auditing

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Executive Summary

Ethical Auditing has become quite popular among companies now days. Ethical auditing serves the purpose of identifying the differences between a company's proclaimed and actual ethical behavior. Many of the companies follow unethical practices to get ahead of their competitors, which are morally wrong as well as punishable by law. Ethical Auditing focuses on keeping the working of an organization as transparent as possible and to provide maximum benefit to the stakeholder of the company.

Here we tried to analyze the theory and the concept behind Ethical Auditing. We have also tried to get a hold of as how the Ethical auditing is been done and how the companies and the stakeholders are benefitted from it. Certain feasible and pragmatic solutions have been discussed. The purpose is to incorporate the role of Ethics and Ethical conduct for any organization or individual. The impact on Ethical behavior and Ethical auditing on Business practices like market share, profit, loss, revenues, competition have also been analyzed in detail.

It has been found that the practice of Ethical Auditing is increasingly becoming popular among companies these days. Companies in USA, Europe have already started following Ethical Code of conduct. Ethical Auditing keeps a check on the business practices and the moral behavior of the companies and thus is quite fruitful. There have been cases of extremely unethical behavior of some of the firms in the corporate UAE, it would certainly be a noble idea to draw out the symptoms of such behavior and also find the consequences of pursuing the same in the corporate world. The code of Ethical conduct must be introduced and applied effectively. The sooner we do so, the better it is for our Future.

Introduction

Ethics - is the study of questions about what is right or wrong. It is the moral principles in which an individual or an organization believes in. In today's scenario there is a great need for having firm ethical values and as we have seen in the recent past, there has been a striking increase in the ethical prospects of the professional and the business community. The clients and the customers are more inclined towards the people who have firmly and definitively defined their Code of Ethics. Now the question arises, why is there even a need for the code of ethics? The answer is very simple. As it is with the society, without proper moral values the virtues of any business would come crashing down. The principles or the values are mutually beneficial for us as well as our client. Would it not be best to do business with someone who believes in our ideas, our value?

Ethical auditing is something which deals with the implementation of these codes of ethics. The purpose behind ethical auditing is to identify the difference between a company's proclaimed and actual ethical behavior. The idea is to find whether companies are conducting business ethically and professionally. Recently it has been seen that many of the companies in the USA have dedicated a post of a Senior Manager whose sole responsibility is to promote the ethical values of the company. On the contrary, if we look at Europe, such positions were very rare to find until a few years back. But things are changing and in Europe too, many of the companies have developed their code of ethics and started following them.

One may ask the question that what is the need to examine a company's Ethics?

Any company today is a part of the society and contributes to it in some form or the other. Identifying Ethics prove to be a baseline for any developments in the future. They also help realize the potentials and the stakes of a company in the society. Many companies started following it because of previous bad experiences resulting in a law suit or governmental warning due to the failure of Ethical conduct. But the major reason which emerges out is that most of the companies feel it is the right thing to do. They expect it to bring likeminded people closer and benefit them in business.

Values change into actions. Every company has its own values and beliefs. Ethical auditing measures those values both in and out of the company. It focuses to keep the working of organization as transparent as possible and to provide maximum benefit to the stakeholder of the company. Managing ethics can be tough but it has its benefits too. At a first glance it seems how it could be possible that one person is imparting ethics to another. But looking from a closer angle it becomes clear that ethics management is not as tedious as it seems. The people responsible for managing ethics are thoroughly respected in the ethics world. In today's world where a sound ethics code has become an asset to a company, it has been seen that the ethics managers are one of the most sought after category in the business world. Ethical auditing is the technique which deals with the same. The data is collected keeping in mind the values in regard to the company. And then it is examined on the basis of a prior model developed. The data collection can be done through interviews, questionnaires, forms, and through personal interaction sessions. These are then matched and the result is taken out. Ethical gap is then calculated which the difference is between proclaimed and actual ethical code of conduct of any organization. Knowing this, the company can act accordingly. Following Ethical Code of Conduct has become a Moral responsibility for all the companies today. (How Ethical Auditing Can Help Companies Compete More Effectively At an International Level, 2010)

Background information and theories

Ethical audit is a new idea that is being implemented. There is not a single new thing about the concept of ethical behavior pattern in business, or about the kind of programmers that are designed to improve the ethical approach to help make decisions within companies. In the US in the last few years several companies have appointed a higher level manager with dedicated role for helping to ethical behavior in the company. In Europe this thing is a very new thing and more and more companies are taking to this approach.

The purposes for examining the condition of a company's ethics are external social pressures, management of risk, stakeholder obligations, and trying to identify a reference to judge future improvements. In a few cases, companies have had to face loss of customers or a very strict government action which has led them to follow this approach. But mostly companies follow this approach because they think it is the right approach to do and this is likely to bring business benefits for the company in the long run.

Ethical auditing is a very new process which has been created to measure the internal as well as the external performance of an organization's value. Its objectives are 2-fold: It intent is to increase the accountability and transparent showing towards the stakeholders who have invested a portion of their income in the company and have every right to know how the business is being conducted and is also meant for internal check, to meet the ethical objectives of the company

The benefit of the ethical auditing is mainly that it helps the company to see itself through various perspectives to judge the company's ethical profile. Companies value the significance of their financial image for their investors, profile for the customers, and the profile as an employer for their employees. An ethical profile brings together all the factors which make up a company's reputation and increases the value of the company. By taking all the factors a company can..

  • Tell the people the values which the company works on.
  • Provide a reference to judge future performance.
  • Learn how to meet goals that have not been met so far.
  • Give stakeholders the chance to clarify their stand.
  • Identify specific problem areas that are hurting the company.
  • Learn about how the employees can be motivated.
  • Identify areas of vulnerability.
  • International Business

    Multinational companies have a tough time facing ethical auditing while dealing with different geographies. So they have to truly understand the kind of environment that they are doing business in. It is these kind of special issues which make ethical auditing so worthy to the multinationals as it gives them a very good image in the eyes of the customers and instant public recognition. Executives of such organizations are also well aware of the complications while operating across different cultures .The problems tend to multiply tenfold when dealing with different set of cultures and backgrounds. There was a time when you could apply different principles in different companies but in these global environment when the whole world is connected by a mouse and information reaches everywhere by the flash of the light - and in this era of global interdependence of the world the same set of standards are expected in every continent no matter how big or small or whether developed or developing.

    One of the major issues that plague the companies while doing business in rogue countries is the issue of corruption and how to run a business smoothly when everything goes across various channels and everything is done illegally. The USA has brought in a new lag which forbids its companies from doing business in such companies especially the public sector in such companies and the act is known as the Foreign Corrupt Practices Act.

    The other major areas of concern are the working practices and the maintenance of human rights. Some companies have strict principles that lead to their withdrawal from nation where they could have made a very huge profit , as they were not prepared to work with the kind of rules that were imposed on them and the kind of practice they would have had to follow had they works there as Levi Strauss did in China. A large number of companies withdrew from South Africa, because they didn't want to be associated with the practice of apartheid. They wanted to set an example for the world to see that they wanted equal opportunities for the blacks and they were with them in their fight. Protest from outraged consumers lead to many companies shunning their work from countries like India or Thailand because of the kind of child practices followed.

    Companies alone can't ever fight for the right against all the evils of society. Many of the decisions they have to be taken have no right or wrong .It all depends on the perspective. What really matters is the clear set of rules should be defined and the company tries its best to follow them.

    Consumer Power

    Consumer power has been a very strong to influence company policies and the kind of ethical practices they follow. The boycott mechanism is by far the best approach that can setback any company in the world. Companies are forced to take back the poor quality they were earlier selling to the third world and oil companies are not being allowed to dispose their waste in the developing world. Almost all the consumers have boycotted the company's products due to the company's not following the ethical practices and this has made a huge influence on the world over.

    Pressure groups have become more professional and vociferous. Whereas in the past unethical behavior was kept quiet for so long by public relations experts that everybody forgot about what had happened but now there is a greater chance that somebody might blow the whistle and once out the social media campaigns will play a significant role in spreading the word around with the speed of the light. (Sheena Carmichael)

    Ethical audit is a new found technology which is getting developed these days at the many of the Universities for the development of the Business Ethics. Nothing is new about the ethical behavior in company, nor about the programmers that are designing to develop and possibly formalize the ethical approach to assessment making within many other companies. These days in the United States, in general, in latest years many firms have now appointed a senior manager with committed responsibility for promoting the ethical behavior all through the company. Such appointments are the exemption rather than the regulation, but many, possibly a majority, of main companies have started to have an ethical code or in other words code of conduct.

    The reasons for investigative the position of the company's ethics are numerous and diverse. They have included external communal pressures, risk management, stakeholder responsibility, and identifying a ground state to calculate future improvements of the particular firm. In some other cases, companies are motivated to it by an unpleasant failure in ethics, which might have resulted in expensive legal action or stricter government guideline. More frequently, though, companies decide to do it just because it is right, it is significant, and because it is probable to bring the business payback. Ethical auditing is a procedure which measures the internal and external steadiness of an organization's principles base. The important points are that they are value-linked, and that too incorporates a stakeholder approach towards a company. Its main objectives are two-fold: It is planned for liability and lucidity towards the stakeholders and it is proposed for the interior control, so as to meet the ethical primary objectives of that organization.

    The importance of the ethical audit is that it allows the company to see for itself in the course of a variety of lenses: it detains the company's ethical outline. Many of the companies recognize the significance of their financial outline for their investors, of their service outline for their patrons, and of their profile as an employer for their present and prospective employees. An ethical outline brings collectively all of the factors which influence a company's status, by investigating the method in which it does big business. By taking a depiction of the value system at a particular point in time, it can: - elucidate the actual principles, to which the company operates,

    • To provide a baseline through which they can measure future development.
    • To learn how to convene any societal prospect which are not at present being met
    • To give the stakeholders the chance to elucidate their outlook of the company's manners
    • To identify exact problem areas inside the company
    • To learn about the points which can motivate employees
    • To identify common areas of susceptibility, particularly associated to lack of sincerity (ETHICAL AUDIT, 2010)

    Accountancy andauditing are known to be complex and technical method. Ethics, in disparity, might be considered comparatively simple. The tricky part of ethics, it can be argued, is not significant what we should to do, but getting ourselves, and others, to do the correct thing. Truthfulness, the honesty, care, loyalty, reliability: that we know what they want, but we do not be familiar with if and how these requirements that we know can be met. If this is really the case, and we want to encourageethical auditing, then we require to attract civilized people into the profession, educate them well, and not focus them to more persuasion than they can handle with. Further that, all that is essential is a rules of ethics laying down required minimum standards of professional behavior, with a complaints and disciplinary development to deal with any delinquent behavior that comes to the awareness of professional bodies, who jointly issue a Code of Professional Conduct for the assistance of their members. There is adequate truth in this state of affairs to explain, but not to give good reason for, the negligible attention that should be given to ethics in the preparation of accountants and auditors, in spite of the mounting international literature on the theme, and the lack ofethicaldispute and concern inside the profession. Provided the proficiency is there, it is understood that ordinary moral receptivity, together with the fine example of senior colleagues, can take concern of the ethicalpart of the business they are monitoring. Consideration to the ethics of auditinginvolves the proficient firms only with admiration to the risk minimization that corresponds to the relation of the serious prohibited activities of the infrequent 'bad apple' and the possibility of legal liabilities and a common concern for their status. In such kind of state of affairs, it is reasonable that research that are conducting into the ethics of accountants and auditors is paying attention on the discovering how to exploit compliance with normally accepted philosophy of professional conduct.

    The main purpose of such kind of discussing is not only to provide an ethicalbasic coverage for auditors or a methodical account ofauditingethics, but to encourage critical thought and directness to empirical confirmation by bringing out the ethical and company's complexities towards the auditingpurpose. Noethicalrapid fixes are presented and no one on the line of reform is recommended, but all the things raise the important arguments that put up with the ethicalproblems that tackle professional auditors, their patrons, regulators and the civic, whose interests have to to be paramount in the formation and implementation of adequate auditingprinciples and practices. (Campbell)

    Conclusion

    Till now we have discussed what ethical auditing actually means. After that we studied why it is important to conduct ethical auditing and what are its benefits. After that we analyzed what different terms related to ethical auditing actually mean. Then we tried to understand the methodologies involved in conducting ethical auditing. Then we studied its impact on various companies. The ethical auditing of industries and companies has revealed some important points. Let us discuss them one by one.

    The studies reveal that in an ideal universe there would be no violation of ethics. However the world in which we live is not exactly ideal. By showing all the entities that have invested one or more of their resources in the company that unethical behavior leads only to loss of all the entities involved in taking the company forward and not only causes loss to the company alone, it was seen that all the stakeholders of the company refrained from indulging in unethical behavior. This not only affected the psychology of the stakeholders but also encouraged them to refrain from indulging in unethical behavior from the very beginning itself. So the first use of ethical auditing is that it leads to awareness among the stakeholders about the effect the unethical behavior has on their financial prospects.

    It has been revealed by ethical auditing that the general cause of unethical behavior in the business is the short sightedness of the company's stakeholders and their short term desires. Unethical behavior may lead to short term success but in the long run it is harmful to both the company and the stakeholders.

    The auditing officer should only interfere in extreme cases of violation of ethics. This auditing of ethics will only work if the person whose ethics are being audited does all the things that he considers ethical and there is no difference in his behavior even if he knows that his behavior is being audited. It should be taken into account that when the ethics auditor can or cannot intervene in a scenario involving violation of ethics. The implication or the risk of the ethics violation should be analyzed first of all. Then the risk should be classified based on if it is low , medium or high. The action to be taken which can range from a simple briefing to a complete ethics training program is then analyzed.

    The action should be able to convey the message to the ethics violator. The culprit may not only be conveyed the fact that he violated an ethic but he must also be conveyed that he must cease to do so in the future. Not only that it must also be made very clear that would be consequences for spreading violation of ethics and that he must use his common sense in the future. Take the example of a crook. To him it would be ethical to be the best crook in the world. But this is not true. This is neither ethical and nor is it enough to save him from consequences after he gets caught.

    What a good ethics auditor does is make the employees understand that their unethical behavior is not acceptable. Just like the thief, their behavior is acceptable to them but is unacceptable in general. They have become so used to certain kinds of unethical behavior that to them their normal unethical behavior is completely acceptable. The ethics officer must ensure that he is able to get through to his trainees and change their unethical and wayward ways.

    Recommendations

    After the extensive study that we have conducted let us try to analyze what else can be done in order to make ethical auditing more convenient and helpful. This section is dedicated to analyzing that part of ethical auditing.

    The first recommendation that can be made is that an ethics auditor must only audit a person who actually wants to change and not just any person. When an ethics auditor feels that the person being audited is not fit for auditing and that he just doesn't want to change even a little, he must be given a refund and let go. Such cases are really common in large companies with a huge pool of employees. Such people must not be granted auditing till there is a radical change in their behavior. They must be confronted about their unethical behavior and then must be granted auditing if they are willing to change and there is a considerable change in their attitudes toward others. A classic example of such a case is bullies. They always try to prey on other people's fears. Such a behavior must be confronted at an early age because at later stages such behavior becomes really very difficult to control or tame.

    The second recommendation is about the hiring of the ethics officer. The ethics officer should be honest and strict. He must have the guts to stand up to his trainees and confront them about their unethical behavior. An ethics officer can be considered good if he has a tough attitude. He should not accept any non sense from any of his employees. He must be able to get to their nerves and make them work cohesively for the benefit of the company.

    The third recommendation is also about the ethics officer. The ethics officer must make sure that he is very clear in his assessment about the employees. He must be able to convey to them that their unethical behavior affects not only the company but has large consequences even for them in the long run. It is only then that the desire to perform for the company comes from within. Only then can an employee work whole heartedly for the benefit of the company. Only then can the shareholders of the company know where they are actually unethical and where they have to improve. (Ethics and Auditing)

    References

    1. How Ethical Auditing Can Help Companies Compete More Effectively At an International Level, (2010) Retrieved on 6th March, 2010 from http://actrav.itcilo.org/actrav-english/telearn/global/ilo/code/audit.htm
    2. How companies can compete, Retrieved on 6th April, 2010 from http://actrav.itcilo.org/actrav-english/telearn/global/ilo/code/audit.htm
    3. Management Paradise official site, Retrieved on 6th April, 2010 from http://www.managementparadise.com/forums/publish-upload-project-download-reference-project/181929-ethical-audit.html
    4. Tom Campbell.(n.d.). Introduction: The ethics of auditing. The ethics of auditing
    5. Ethics and Auditing, (n.d.) Retrieved on 6th April, 2010 from http://www.freezoneearth.org/Clearbird/ethics2004/book/ethicaud.htm

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