1 Ethics, Values, and Governance: Do They Align. Lawrence Kalbers, Ph. DEthics, Values, and Governance: Do They Align? Lawrence Kalbers, Ph.D., CPA R. Chad Dreier Chair in Accounting Ethics Director, Center for Accounting Ethics, Governance, and the Public Interest Chair, Department of Accounting Loyola Marymount University November 16, 2016
2 Overview Ethics Ethical/Corporate CultureExamples of Recent Corporate “Issues” Core Values Exercise IIA Study on Pressure on Internal Auditors AICPA and IIA Code of Ethics: Principles Improving organizational ethics and decisions
3 Professional (AICPA, IFAC, etc.) Ethics Personal Professional (AICPA, IFAC, etc.) Organizational (mission, values, codes)
4 Ethical Culture “Ethical culture has been conceptualized as the multidimensional interplay between an organization's formal and informal systems that promote ethical or unethical behavior” Source: Warren, Gasper, and Laufer, 2014, “Is Formal Ethics Training Merely Cosmetic? A Study of Ethics Training and Ethical Organizational Culture” Business Ethics Quarterly, p. 94.
5 Corporate Culture
6 Corporate Culture Think of a corporation, government agency, or non-profit that might fit the descriptions below for “corporate culture.” The Good The Bad The Ugly
7 Recent product recalls – 1
8 Takata Airbags recalls (continued)The issue involves defective inflator and propellent devices that may deploy improperly in the event of a crash, shooting metal fragments into vehicle occupants. Approximately 34 million vehicles are potentially affected in the United States, and another 7 million have been recalled worldwide. The New York Times has published a report suggesting that Takata knew about the airbag issues in 2004, conducting secret tests off work hours to verify the problem. The results confirmed major issues with the inflators, and engineers quickly began researching a solution. But instead of notifying federal safety regulators and moving forward with fixes, Takata executives ordered its engineers to destroy the data and dispose of the physical evidence. This occurred a full four years before Takata publicly acknowledged the problem.
9 Airbags recall (continued)Automakers have already issued recalls for approximately 25 million vehicles that contain defective airbags manufactured by global supplier Takata. Now federal regulators are examining whether an additional 70 to 90 million airbags pose a threat to the driving public. NHTSA imposes a record civil penalty of up to $200 million against Takata. (Of that, $70 million is a cash penalty, with an additional $130 million charge if Takata fails to meet its commitments.) Plus, the government agency requires Takata to phase out the manufacturer and sale of inflators that use the risky propellant and recall all Takata ammonium nitrate inflators currently on the road—unless the company can prove they are safe or can show it has determined why its inflators are prone to rupture.
10 Recent product recalls - 2
11 VW recall (continued) Worldwide repair needed for 11 million “clean” diesel vehicles with “defeat devices” "The scandal clearly also has to do with structural issues at VW . . . There have been warnings about VW's corporate governance for years, but they didn't take it to heart and now you see the result," says Alexander Juschus, director at IVOX, the German proxy adviser. A former chairman of a large German industrial company says "Germany has corporate governance problems but VW has long been uniquely awful“ VW has a “culture of arrogance”
12 Concussions in the NFL A brain injury study conducted at the Boston University School of Medicine showed that 33 of 34 players tested post-mortem showed clear signs of CTE,[1]and additional players have so far been confirmed with CTE separately. Source: https://en.wikipedia.org/wiki/List_of_NFL_players_with_chronic_traumatic_encephalopathy
13 Accidents or Corporate Culture?
14 Corporate Steps to Deal with Safety Issues?Concealment Denial Recall Litigation/settlements Remediation and reform
15 Pharmaceutical Company IssuesNew drug firm business models? Valeant Turing CEO of Turing Pharma Martin Shkreli Other problems?
16 Shkreli Testifies to Congress
17 Valeant (1 of 2) Valeant stock plunges 51% as the drugmaker has 'its worst day ever -- so far‘ The company faces a smorgasbord of problems: falling sales, increased pressure to cut drug prices, massive debt, three ongoing federal probes of its accounting and pricing practices, and shareholder lawsuits in the U.S. and Canada. Valeant Pharmaceuticals International Inc.'s already depressed shares took their biggest one-day tumble ever, falling just over 50% Tuesday after the company finally reported its overdue fourth-quarter results, which missed profit expectations. The Canadian company also slashed all its 2016 financial forecasts and said its business model, based largely on huge price hikes for its drugs, is no longer viable, given strong pushback from payers and other strains. Source: LA Times, March 15, 2016
18 Valeant: Pearson Is Out, Ackman Is In, Controversy Continues Valeant (2 of 2) Valeant: Pearson Is Out, Ackman Is In, Controversy Continues Valeant says the 'the tone at the top of the organization' contributed to its recent woes Valeant statement: The improper conduct of the company’s former Chief Financial Officer and former Corporate Controller, which resulted in the provision of incorrect information to the Committee and the company’s auditors, contributed to the misstatement of results. In addition, as part of this assessment of internal control over financial reporting, the company has determined that the tone at the top of the organization and the performance-based environment at the company, where challenging targets were set and achieving those targets was a key performance expectation, may have been contributing factors resulting in the company’s improper revenue recognition. Source: Wall Street Journal, March 21, 2016
19 The Fraud Triangle Pressure/Need Opportunity Rationalization
20 Rationalization TacticsLegality* Denial of responsibility* Denial of injury* Denial of victim* Social weighting* Appeal to higher loyalties* Balancing the ledger* Everyone else is doing it** Entitlement** *Source: Blake Ashforth and Vikas Anand, “The Normalization of Corruption in Organizations,” Research in Organizational Behavior, 2003, Vol. 25: 1-52. **Source: Joseph Heath, “Business Ethics and Moral Motivation: A Criminological Perspective,” Journal of Business Ethics, 2008, Vol. 83:
21 Aligning Governance, Ethics, and ValuesCorporate Culture Corporate “Behavior”
22 Recent Corporate Culture/Governance Case
23 The Case of Wells Fargo September 8: CFPB, Los Angeles City County Attorney, and OCC announce $185 million fine. November 9: “Wells Fargo Leads Banks Up as Trump Win Seen Curbing Warren” (Bloomberg Headline)
24 Wells Fargo: Vision and Valueshttps://www08.wellsfargomedia.com/assets/pdf/about/corporate/code-of-ethics.pdf
25 Wells Fargo: Making the Right Choicehttps://www08.wellsfargomedia.com/assets/pdf/about/corporate/code-of-ethics.pdf
26 Core Values Exercise Using the handout:Circle the five values that you believe best reflect your personal values Put a check by the five values that your organization espouses (or values, if they have not stated them) How many of the values are the same? Do ethics, values, and governance align in your organization? Briefly discuss your results with your “neighbors."
27 Closer to Home: Pressure on Internal Auditors
28 Pressures Faced by Internal AuditSource: Rittenberg, CBOK 2015 Survey
29 Key Findings of Rittenberg’s CBOK ReportEthics and Culture are key elements of an organization’s success, and the auditor must be aware of both. For many organizations, internal auditors can do their jobs without fear of reprisal. However: Pressure does exist to suppress findings or modify reports. The pressure varies across functions and geographic jurisdictions.
30 AICPA Code of Professional Conduct PrinciplesResponsibilities principle. In carrying out their responsibilities as professionals, members should exercise sensitive professional and moral judgments in all their activities (ET ). The public interest principle. Members should accept the obligation to act in a way that will serve the public interest, honor the public trust, and demonstrate a commitment to professionalism (ET ). Integrity principle. To maintain and broaden public confidence, members should perform all professional responsibilities with the highest sense of integrity (ET ). Objectivity and independence principle. A member should maintain objectivity and be free of conflicts of interest in discharging professional responsibilities. A member in public practice should be independent in fact and appearance when providing auditing and other attestation services (ET ). Due care principle. A member should observe the profession’s technical and ethical standards, strive continually to improve competence and the quality of services, and discharge professional responsibility to the best of the member’s ability (ET ). Scope and nature of services principle. A member in public practice should observe the Principles of the Code of Professional Conduct in determining the scope and nature of services to be provided (ET ).
31 IPPF IIA Code of Ethics: Principles and RulesIntegrity The integrity of internal auditors establishes trust and thus provides the basis for reliance on their judgment. 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. 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. Competency Internal auditors apply the knowledge, skills, and experience needed in the performance of internal audit services.
32 Guidelines for Effective Ethics ManagementUnderstand the existing ethical culture. Communicate the importance of ethical standards. Focus on the reward system. Promote ethical leadership throughout the firm. Source: Trevino, L.K., and M. Brown. Managing to be ethical: Debunking five business ethics myths. Academy of Management Executive, 2004, Vol. 18, No. 2: pp
33 Improving Organizational Ethics and DecisionsMission Tone at the top Leadership (at all levels) Culture, shared values, shared responsibilities Appreciation of cultural differences Policies and procedures Ethical decision models, including consultation/ collaboration Risk assessment, including ethics/reputational risk Proper reward structure Training and reinforcement Hiring and retention practices
34 Questions?