Ethics & The Auditor: Roles, Responsibilities, and Resolution

1. Ethics & The Auditor: Roles, Responsibilities, and Resolution Lori Cox, CIA, CGAP IIA El Paso Chapter March 27, 2014

2. AGENDA • Ethics Defined • IIA’s Code of Ethics • Creating a Strong Ethical Climate – The Auditor’s Contribution • Evaluating Ethics – The Auditor’s Role • 5 Ethical Principles • Your Ethical Compass • Ethical Dilemmas – What to do. Ethics & The Auditor

3. The discipline dealing with what is good and bad and with moral duty and obligation. Ethics Defined

4. A set of moral principles or values. Ethics Defined

5. Well-founded standards of right and wrong that prescribe what humans ought to do. Ethics Defined

6. Norms for conduct that distinguish between acceptable and unacceptable behavior. Ethics Defined

7. A blueprint for “ethical behavior” by auditors. • The purpose of the IIA Code of Ethics is to promote an ethical culture in the profession of internal auditing. IIA Code of Ethics

8. 1. Integrity The integrity of internal auditors establishes trust and thus provides the basis for reliance on their judgment. 2. Objectivity Internal auditors exhibit the highest level of professional objectivity in gathering, evaluating, and communicating information about the activity or process being examined. Internal auditors make a balanced assessment of all the relevant circumstances and are not unduly influenced by their own interests or by others in forming judgments. 3. Confidentiality Internal auditors respect the value and ownership of information they receive and do not disclose information without appropriate authority unless there is a legal or professional obligation to do so. 4. Competency Internal auditors apply the knowledge, skills, and experience needed in the performance of internal audit services. IIA Code of Ethics - Principles

9. 1. Integrity Internal auditors: 1.1. Shall perform their work with honesty, diligence, and responsibility. 1.2. Shall observe the law and make disclosures expected by the law and the profession. 1.3. Shall not knowingly be a party to any illegal activity, or engage in acts that are discreditable to the profession of internal auditing or to the organization. 1.4. Shall respect and contribute to the legitimate and ethical objectives of the organization. IIA Code of Ethics–Rules of Conduct

10. 2. Objectivity Internal auditors: 2.1. Shall not participate in any activity or relationship that may impair or be presumed to impair their unbiased assessment. This participation includes those activities or relationships that may be in conflict with the interests of the organization. 2.2. Shall not accept anything that may impair or be presumed to impair their professional judgment. 2.3. Shall disclose all material facts known to them that, if not disclosed, may distort the reporting of activities under review. IIA Code of Ethics–Rules of Conduct

11. 3. Confidentiality Internal auditors: 3.1. Shall be prudent in the use and protection of information acquired in the course of their duties. 3.2. Shall not use information for any personal gain or in any manner that would be contrary to the law or detrimental to the legitimate and ethical objectives of the organization. IIA Code of Ethics–Rules of Conduct

12. 4. Competency Internal auditors: 4.1. Shall engage only in those services for which they have the necessary knowledge, skills, and experience. 4.2. Shall perform internal audit services in accordance with the Standards. 4.3. Shall continually improve their proficiency and the effectiveness and quality of their services. IIA Code of Ethics–Rules of Conduct

13. It is the foundation of Governance. • It guides decisions and actions. • It is a key element of risk management and internal control. • It concerns everyone. Why Ethics Important to Internal Auditors

14. Set the example – go above and beyond. • Clearly communicate the organization’s and the IA Activity’s core values. • Empower staff to report unethical behavior. Creating a Strong Ethical Climate- The Auditor’s Contribution

15. Monitoring and evaluation of ethical climate in the organization. • Internal training and publicity. • Be consistent. Creating a Strong Ethical Climate- The Auditor’s Contribution

16. The internal audit activity should evaluate the design, implementation, and effectiveness of the organization’s ethics-related objectives, programs, and activities. Evaluating Ethics – The Auditor’s Role

17. Promote the need for ethical behavior throughout the organization as part of the routine audit work. • Make sure there is adequate expertise in house to conduct ethics audits. • Approach ethics audits with a clear understanding of what is to be accomplished. • Focus on proactive strategies (e.g. surveys, robust hiring process). Evaluating Ethics – The Auditor’s Role

18. Evaluate: • Code of conduct. • Strategies the organization uses to enhance its ethical culture. • The communication and demonstrations of expected ethical attitudes by the organization’s leaders. • Employees’, supplier’s, and customer’s understanding of the requirements for ethical behavior when conducting business. Evaluating Ethics – The Auditor’s Role

19. Consider outsourcing. • Watch out for issues regarding the organization’s relationship with vendors. • Determine how the organization follows through with employee questions and complaints. • Obtain management’s support. • Remember – EVERYBODY IS WATCHING. Evaluating Ethics – Tips

20. Our perception: We see ourselves as the guardians of trust in our organizations – far more likely to disclose ethical misconduct that to misbehave ethically ourselves. Ethical Compass “Evaluation”

21. The Reality: Bounded ethicality or reasoning limitations in our minds can make us unaware of the moral implications of our decisions. (Blind Spots, Max Bazerman and Ann Tenbrunsel, 2011, Princeton University Press) Ethical Compass “Evaluation”

22. Consider… Professionals…tend to view conflicts of interest as an issue of deliberate dishonesty. But…when individuals have a vested interest in viewing a problem in a certain way, they are no longer capable of objectivity. (Blind Spots, Max Bazerman and Ann Tenbrunsel, 2011, Princeton University Press) Ethical Compass “Evaluation”

23. Consider… We may foresee that we will behave in a way that is consistent with our expectations for ourselves. But when the time arises to make a decision, we frequently behave the way we want to behave. (Blind Spots, Max Bazerman and Ann Tenbrunsel, 2011, Princeton University Press) Ethical Compass “Evaluation”

24. Consider… (External) auditor bias develops at an unconscious state where decisions are made and prior to auditors reporting their judgments. Unbiased auditors would be questionable as long as auditors continue to be hired and fired by the organizations they audit. (Blind Spots, Max Bazerman and Ann Tenbrunsel, 2011, Princeton University Press) Ethical Compass “Evaluation”

25. So why do individuals fail to do what’s right even when they “know” what is right? • Ethical breaches are often caused by “Blind Spots”. • Our “Blind Spots” are exposed every day. (Blind Spots, Max Bazerman and Ann Tenbrunsel, 2011, Princeton University Press) Ethical Compass “Evaluation”

26. Recognize that we are prone to behave in ways that serve our own interests. • Consider other perspectives. • Challenge your own thoughts and decision processes. • Slow down and think about it. Recognizing and Addressing Blind Spots

27. Implement controls that force contemplation of ethical decisions. • Readily disclose potential conflicts. • Remember that we are only as strong as our weakest link. Recognizing and Addressing Blind Spots

28. Dilemmas are situations or problems where a person has to make a difficult choice. • An ethical dilemma is a problem where a person has to choose between a moral and an immoral act or between two moral choices. Ethical Dilemmas

29. Employees must deal with pressures to perform and help the company succeed as well as personal temptations to take the easy way out. Ethical Dilemmas

30. Pressure from Management • Internal Conflict • Team Dynamics • Ambition and Discrimination • Negotiation Tactics • Working Conditions Causes of Ethical Dilemmas

31. Questions to ask when considering a course of action… • Will this avoid causing harm? • Will it make things better? • Is it respectful? • Is it fair? • Is it a loving thing to do? Addressing Ethical Dilemmas:Five Ethical Principles

32. Defined ethics, and explored the IIA Code of Ethics. • Discussed ethical climate and evaluating ethics. • Discussed “blind spots” and ethical dilemmas. Summary

33. Contact Information lcox3@pima.edu lkmcox@yahoo.com Thank you!