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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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Slide1

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

Slide2

Ethics Risks & ChallengesWhat’s at StakeNew Enhanced Ethics Risk FrameworkSurvey DataIdentification

Management

Concluding Thoughts

Questions

Prof. Leonard J. Brooks, University of Toronto

2

Slide3

3

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

Slide4

Prof. 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

Slide5

Ethics & 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.

Slide6

Prof. 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

Slide7

Prof. 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?

Slide8

Prof. Leonard J. Brooks, University of Toronto8

Reputational Ethical

Factors Factors

Responsibility Responsibility

Reliability Predictability

Credibility Honesty, integrity, responsibility Trustworthiness Fairness, compassion, integrity, responsibility

Slide9

Important 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

Slide10

COSO 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

Slide11

Enhanced 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

Slide12

Organization 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

Slide13

A 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

Slide14

Identification 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

Slide15

Reviewable 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

Slide16

Mindset 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

Slide17

Mindset 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

Slide18

Mindset 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

Slide19

Ethics 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

Slide20

Ethics 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

Slide21

Common Accounting Risks Survey Data Type of RiskTo follow To follow

Prof. Leonard J. Brooks, University of Toronto

21

Slide22

Ethics 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

Slide23

Key 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

23

Slide24

Concluding 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

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