Insights into Ethics Risks amp C hallenges Ethics Essentials Managing Ethical Responsibility and Accountability In Government Crown Agencies and Civil Society
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Ethics Risks in the Accounting Regime:Insights into Ethics Risks & Challenges
Ethics Essentials - Managing Ethical Responsibility and Accountability In Government, Crown Agencies and Civil
Society
Toronto
,
March
25, 2014
Leonard J. Brooks
Professor of Business Ethics & Accounting
Rotman School of Management
University of Toronto
Slide2Ethics Risks & ChallengesWhat’s at StakeNew Enhanced Ethics Risk FrameworkSurvey DataIdentification
Management
Concluding Thoughts
Questions
Prof. Leonard J. Brooks, University of Toronto
2
Slide33
Key Political Figures
Activists
Public
Supportive Agencies
Sponsors
Resource Controllers
Customers
Employees
Government
Agency
Crown Corp.
Hospital
Charity
Others, including the Media,
who can be affected by or who can affect the achievement of the corporation’s objectives
Stakeholder Support is at
Stake
Key Stakeholder Support is Vital to Success
Reputation
Political
Support
Efficiency,
Integrity
Defensible
Actions
©
2014
L.J. Brooks.
Adapted from
Business & Professional Ethics for Directors, Executives & Accountants
, Cengage/Thomson
South-Western, 6e, 2012
Confidence,
Predictability
Positive Achievement
Fairness,Integrity
Credible
Actions
Slide4Prof. Leonard J. Brooks, University of Toronto4
The Stakeholder Success Pyramid
Strategic Objectives
Stakeholder
Support
Trust, Respect, Reputation
Ethical Behaviour Ethical Values
Ethical Corporate Culture & Compliance
$
Stakeholder
Accountability
Is Key
Slide5Ethics & GovernanceEthics is
about right and wrong.
Business Ethics
is about right and wrong or appropriate behaviour in business.
Prof. Leonard J. Brooks, University of Toronto
5
Governance
is about setting or approving appropriate strategies, objectives & policies, ensuring their appropriate achievement & reporting to stakeholders to ensure their continuing support.
Slide6Prof. Leonard J. Brooks, University of Toronto6
Good Ethics & Governance –
How Do They Work?
Guidance for behaviour
Monitoring & enforcement
20/60/20 Rule ………risk reduction/management
Portion of employees who will attempt to steal or commit a fraudulent act will be greatly reduced by good governance and ethics
Never
Always
Will try if they think they
won’t get caught.
Governance determines extent
Slide7Prof. Leonard J. Brooks, University of Toronto7
Success Depends upon Reputation with Stakeholders
Credibility
Reliability
Trustworthiness
Responsibility
Corporate
Reputation
Fombrun, p. 72
What makes a good reputation?
Slide8Prof. Leonard J. Brooks, University of Toronto8
Reputational Ethical
Factors Factors
Responsibility Responsibility
Reliability Predictability
Credibility Honesty, integrity, responsibility Trustworthiness Fairness, compassion, integrity, responsibility
Slide9Important Risk Management TermsRisk is the chance of something happening that will have an impact on
objectives
Risk Management
includes the culture, processes, and structures that are
directed
towards the effective management of potential opportunities
and adverse effects.Risk Management Process includes the systematic application of management policies, procedures, and practices to the tasks of establishing the context, identifying, analyzing, assessing, managing, monitoring, and communicating risk.
Source: Managing Risk in the New Economy, AICPA & CICA, 2001, p. 4Prof. Leonard J. Brooks, University of Toronto9
Slide10COSO Enterprise Risk Management (ERM) ModelDoesn’t Address Potential Deficiencies
Deficiencies to Remedy:
ID of Mindsets
ID of Expectations
ID of Ethics Risks
MGT of Motivations
Cultural Deficiencies
Failsafe systems
COSO ERM Framework
Need to Enhance
Prof. Leonard J. Brooks, University of Toronto10
Slide11Enhanced Ethics Risk Management
Ethics Risks
exist
when ethical
expectations of stakeholders are not met:
-
Resulting in loss of reputation and stakeholder support. - Preventing full and/or efficient achievement of strategic objectives.Important Ethics Risks:
Organizational culture risks exist when an organization’s culture fails to provide sufficient support and guidance to ensure a culture of integrity.Mindset risks exist when decision makers, employees, and agents are: improperly motivated, or use ethically unsound rationales for decisions.
Systemic risks often originate outside an organization and affect an entire system of activity. Prof. Leonard J. Brooks, University of Toronto11© L.J. Brooks, 2014
Slide12Organization Culture/Culture of Integrity
Organizational
Culture
– those shared beliefs, values, and other means that guide the actions of a corporation’s employees and agents.
A
Culture of Integrity
depends upon the set of
beliefs and values that drive norms and actions.A Culture of Integrity can help remedy deficiencies.
12Prof. Leonard J. Brooks, University of Toronto
Slide13A Culture of Integrity/Ethical Culture is Essential
For
The
enthusiastic support of some employees, customers, and other stakeholders.
Guidance about values or integrity expectations:
When to adhere to the corporate code.
How to make decisions that protect the company’s reputation and further its strategic objectives.
Sound risk management.Meeting governance expectations/requirements.
13Prof. Leonard J. Brooks, University of Toronto
Slide14Identification of Org. Culture RisksCultural RisksExist when a corporation’s culture fails to provide sufficient support and guidance to ensure
a
culture of integrity.
Cultural Risk Red
Flags
Code, but no commitment
No responsibility for the culture
Values – profit/cause at any costLack of ethical leadershipProf. Leonard J. Brooks, University of Toronto14
Slide15Reviewable Culture of Integrity Mechanisms
Cultural
Values, tone at the top, reinforcement...
Structural
Code, Ethics Officer, Programs
Procedural
Ethical decision making - ordinary + crisis mgt.
Ethics inquiry...Internal Controls … 20/60/20 RuleFailsafe SystemsWhistle blower protection...to Board…Enron, GEEthics/values audit
15Prof. Leonard J. Brooks, University of Toronto
Slide16Mindset RisksExist when decision makers, employees, and agents are
improperly
motivated, or use ethically unsound rationales for decisions.
Identification
Tools – Fraud Triangle, 7 Bad Rationalizations Continued awareness
Red Flags
a
bnormal ego, greed, status or other needs, living beyond meansUse of bad rationalizationsFailsafe systemsProf. Leonard J. Brooks, University of Toronto16
Slide17Mindset Risks – Fraud Triangle
Rationalization
Opportunity
Motive
D.L. Crumbley et al, 2005, p. 3-131 – comments in yellow added
7 Basic
Rationales
Usual Focus of Risk Management
Greed, Ego,
Status, etc.
17
Prof. Leonard J. Brooks, University of Toronto
Slide18Mindset Risks – Bad Rationalizations
7 Common Rationalizations of Immoral Decisions
Denial of responsibility
Denial of injury
Denial of the victim
Condemnation of the condemners
Appeal to higher loyalties
Everyone else is doing itEntitlement Red Flags
"
Business Ethics and Moral Motivation: A Criminological Perspective", Joseph Heath, Journal of Business Ethics, (2008), 83:595-614
18Prof. Leonard J. Brooks, University of Toronto
Slide19Ethics Risks ©
Exist when the ethical expectations of stakeholders are not met:
Resulting in loss of reputation and stakeholder support.
Preventing full achievement of strategic objectives
.
Red
Flags
Lack of integrityLittle understanding of Ethical Decision Making, or of virtues expected
Prof. Leonard J. Brooks, University of Toronto
19© L. J. Brooks, 2014
Slide20Ethics Risk Review – Gaps from Stakeholder’s Ethics Expectations
Compare
Stakeholders
’
Expectations vs.
Actual Performance
Values expected:
Reputational: Fombrun’s ModelHypernorms: honesty, fairness, compassion, integrity, predictability, responsibilityEthical decision making: consequences, rights including fairness, virtues & rationalizations expectedMindsets expected: respect, fairness, efficiency
Functions: Decision making, stewardship, environmental protectionOrganizational structures: whistle blowing program, incentives
20Prof. Leonard J. Brooks, University of Toronto
Slide21Common Accounting Risks Survey Data Type of RiskTo follow To follow
Prof. Leonard J. Brooks, University of Toronto
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Slide22Ethics Risk & Mindset Management
ID, Assessment
of Stakeholder
Expectations
& Shortfalls
Communication
of Expectations
Monitoring
Reinforcement
Discipline
Values
Ethical Dec. Making
Incl. Virtues & Rat’sReputationalHypernormsFunctions
Efficient, Effective
Tone at the Top
CodesTrainingNewslettersAwardsMerit Policies
Reporting Req’dProgram ChampionBudgetP. Reports to BoardWhistle blowing Enc.RewardsPunishmentTermination
22
Prof. Leonard J. Brooks, University of Toronto
Slide23Key Management Risk PracticesAnticipate risks and provide avoidance and mitigation guidelinesSearch actively and regularly search for risksFailsafe SystemsWhistleblowers
Encouragement
P
rotection systems
Prof. Leonard J. Brooks, University of Toronto
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Slide24Concluding ThoughtsQuestions
For further information, contact
Leonard J. Brooks
Professor of Business Ethics & Accounting
Rotman School of Management
University of Toronto
len.brooks@utoronto.ca
Prof. Leonard J. Brooks, University of Toronto24