Business Ethics and the Accounting Department v1.1

Business Ethics
and the
Accounting Department
August 23, 2013
Hawaii Society of CPAs

Donny C. Shimamoto, CPA/CITP, CGMA
Managing Director, IntrapriseTechKnowlogies LLC

v1.1-CPA

Based on information and data from: “Managing Responsible Business: A global survey on business ethics”,
CGMA, 2012

Speaker Biography
Donny C. Shimamoto,






CPA/CITP, CGMA

Donny is the founder of IntrapriseTechKnowlogies LLC, an CPA firm
focused on organizational development and advisory services for the
middle market. An active CPA, Certified IT Professional (CITP), and
Chartered Global Management Accountant (CGMA), Donny helps many
organizations by bridging accounting and IT to: strengthen organizational
governance and risk management, improve business processes through IT,
and increase the effectiveness of decision making through business
intelligence.
Donny also serves as an outsourced IT Audit “Partner” and advisor for
smaller regional/local firms and internal audit departments who lack inhouse IT management and IT audit expertise; Helping with IT risk
assessments, and enabling increased staff proficiency with IT tools
supporting internal operations and client engagements.
Donny received was recognized as one of 25 Top Thought Leaders in
Public Accounting by CPA Practice Advisor in 2012 & 2013, received the
2009-2010 President’s Award from the Hawaii Society of CPAs, was named
to CPA Technology Advisor’s 40 Under 40 list in 2007 & 2009 and was also
a Hawaii Top High Tech Leader in 2004
© 2013 IntrapriseTechKnowlogies LLC. All Rights Reserved.

Business Ethics and the Acct Dept



Ethical drivers in the new economy
Four business challenges related to ethics
1.
2.

Ethical dilemmas and pressures

4.

3

Accounting for Ethics

3.



Ethical Culture

Business issues

Role of the accountant in ethics
management


Ethical Drivers in the New Economy
Adapted from: “Managing Responsible Business: A global survey on business ethics”, CIMA, 2012



Business scandals highlight the impact and
cost of not behaving ethically
–

Public distrust and protest against corporate
and government misdemeanors


–



Occupy Wall Street and India’s Anna Hazare

Business failures and scandals

Increased government action
–

2011 UK Bribery Act

–

U.S. Foreign Corrupt Practices Act


4

Increased U.S. Justice Department investigations




Growing awareness of ethics & governance
–
–

Adoption of codes of conduct

–



Ethics/governance-related legislation
Definition and enforcement of ethics-related
business policies and procedures

Leadership, ethics, and organization culture
–
–

Leaders must behave openly and transparently

–
5

Set by “tone at top” whether senior
management, branch managers, team leaders
Demonstrated both internally and externally


“Doing business ethically is not just something
which is handled by someone in compliance or
legal, it should be a part of the way everybody
works within an organization.”
Philippa Foster Back OBE, Director, Institute of Business Ethics



Creating a sustainable environment for
ethical behavior requires:
–
–

Embedding business ethics throughout the org

–
6

Clear leadership support

True organizational culture change

Four Business Challenges Related To Ethics



Four business challenges to focus on:
1.

Ethical Culture – framework and architecture,
roles & responsibilities, codes of conduct,
other polices & procedures

2.

Accounting for Ethics – information that is
collected, analyzed, reviewed, and used

3.

Ethical Dilemmas and Pressures – threats and
challenges (i.e. risks) to ethical behavior

4.

Business Issues – information security,
bribery, social pressure on business, etc.

Addressing these challenges are key to the
sustainable success of the organization!
7


Business Challenge #1
Ethical Culture
Elements of Ethical Culture
• Codes, policies, training, and hotlines
• Responsibility for ethical standards
• Collection and use of ethics information

8


Challenge #1: Ethical Culture



Code of Ethics & Statements of Ethics
–
–



80% of respondents’ orgs have code of ethics
Up from 72% in 2008

Increased efforts for U.S. ethical awareness
(Source: Ethics Resource Center research findings, via CIMA)

–
–

9

42% of employees reported increased efforts by
their companies to raise awareness
1/3 of employees say management now
watches them more closely



Does your organization provide a code of ethics or similar document
to guide staff about ethical standards in their work?

10





Who is responsible for Ethical Standards?
–
–

CFO/Finance Director

–

HR Director

–

Audit Committee

–

11

Chief Executive

–



Board of Directors

Internal Audit

Who should be responsible?



Who has formal responsibility for ethical standards
across your organization?

Traditionally held by Accountants*
*Donny’s Interpretation
12





Significant decline in corporate leaders
responsible for ethical standards (2008  2012)
–
–



67%  60% for Board of Directors
55%  49% for Chief Executive

Increase in finance-related responsibility
–
–

34%  39% for CFO/Finance Director

–

24%  28% for Head of Internal Audit

–

13

33%  36% for Audit Committee

20%  24% for Compliance Officer




What is ethics information?
–
–

Training on ethical standards

–

Hotline for reporting ethics violations

–

Helpline for advice on behaving ethically

–

14

Statement of ethical values, business principles,
or commitments to stakeholders

–



Code of ethics

Performance incentives for ethical conduct

Which of these do you have in your org?


Does your
org provide
the
following?

15

%





2008  2012 saw decline in review,
analysis, and monitoring activities
–
–



86%  78% senior management
68%  56% board of directors

Other users of ethics information
–
–

Regulators (27% in U.S. vs. 18% globally)

–

Investors (17% globally)

–

16

Legal department (38% in U.S. vs. 23% globally)

Community or pressure groups (14% globally)




Why establish an ethical culture?
–
–

Economic difficulties in developed economies

–



Increasingly competitive business environment
Rapid growth in emerging economies

Elements of Ethical Culture
–
–

Responsibility for ethical standards

–

17

Codes, policies, training, and hotlines
Collection and use of ethics information


Accounting for Ethics
•
•
•

•
•

18

Why Account for Ethics?
Managing Ethical Performance
Reporting Ethics Information
Challenges with Accounting for Ethics
Collecting Ethics Information


Challenge #2: Accounting for Ethics



Why do we need to account for ethics?
–
–



2011 AIRMIC study of 18 major corporate crises where
lack of ethics was the major causes of the crisis
Yet risks related to failures of ethos, culture, and behavior
tended to go unrecognized

Growing importance of integrated reporting
–

More consumers and investors considering ethics and
social responsibility in their decisions

–

75% of leading CEOs recognize need to put more emphasis
on measuring and demonstrating non-financial value of
the business

–

53% of S&P 500 companies in 2012 utilizing integrated
reporting, up from 19-20% in 2010?*

*Source: “Governance & Accountability Institute’s report: 2012 Corporate Environmental, Social and
Governance / Sustainability / Responsibility Reporting – Does It Matter?”, via AICPA Insights, 6/4/2013
19





Ethical performance can be managed and
monitored by collecting ethics information
–
–

Ethics compliance metrics & measurements

–

Ethics actions/incidents information

–



Risk analyses related to ethics

Supplier (& customer) due diligence

Overall increase in collection & reporting
–
–

20

30%  36% Collection of ethics information
35%  40% Reporting on ethical info and
corporate social responsibility


Does your organization publically report on
ethical performance / corporate social responsibility (CSR)?

21


Donny’s Interpretation



Challenges with accounting for ethics
–

Ethics information reporting frequently sourced
and reported outside of the finance function


Corporate responsibility teams



Human resources



Marketing

–

–

22

Lack of systems supporting collection of data

–



Reporting may not be formal or systematic
Lack of standards for measurement/reporting

Yes, managing ethical behavior is part of
the business (financial) reporting function!


Does your organization collect management information on ethics?

23







If we’re going to be collecting data and
reporting on ethics, then we need internal
controls over that function.
As with any internal control you have to:
–

–



24

Identify metrics to measure behavior consistent
with the stated ethics-related policy

Monitor compliance and progress toward
ethics-related control objectives

Yes, managing ethical behavior is part of
the internal control environment!






25

Is there benefit from collecting
management information on ethics?

Donny’s Advice: Make Accounting for Ethics part
of your Accounting Department responsibilities!



Ethical Dilemmas & Pressures

•
•
•

•

26

Pressure to Act Unethically
Experiences of Ethical Lapses
Reporting Ethical Misconduct
Ethics Risk Management


Challenge #3: Ethical Dilemmas and Pressures



Despite public demand for increased
ethical behavior, there is also increasing
Pressure to Act Unethically

28%  35% Always or
sometimes feel under
pressure to compromise
their organization’s
standards of ethical
conduct

27





28

Pressure to Act Unethically varies by country





29

Pressure to Act Unethically is also impacted
by economic upturn or downturn





So where are people feeling the pressure to
act unethically?

Core Accounting Function
(high risk for Accountants)*
30

*Donny’s Interpretation

Accounting Involved Function
(moderate risk for Accountants)*




31

Increasing pressure has also resulted in an
increase in the witnessing of ethical lapses







After witnessing ethical lapses, did people
report ethical lapses? Yes, 69% reported it!
Of the 69% reporting lapses:
–
–



26% feared they could be regarded as
troublemakers
Half felt satisfied about the way the ethical
concern was handled; 13% neutral

Why didn’t people report it?
–

32

37% perceived that reporting wouldn’t make a
difference




The accumulation of ethics information
(incl. report of lapses) can be reported on:
–

Internal management reports / scorecards

–

Integrated corporate reporting




E.g. Corporate Responsibility Report, Corporate Social
Responsibility Report

Reporting enables an organization to
–
–

33

Manage its performance on ethical issues
Determine the extent to which it is aligning its
behavior with its stated ethical values and
commitments




Ethical Dilemmas and Pressures drives the
need for Ethics Risk Management
–

Identify situations that have a stronger inherent
risk for unethical conduct


–

Implement controls to prevent or detect
violations of ethical standards


–

Ethical dilemmas, pressures, and business issues

See “Accounting for Ethics” section

Monitor the operating effectiveness of the
controls and report on outcomes



34

internal and/or on a corporate responsibility report
Consider conducting assurance activities on the rpt

Business Issues
•
•
•

35

Business Issues with Ethical Impact
Issue Highlight: Information Security
Issue Highlight: Environmental


Challenge #4: Business Issues

A variety of business issues have an impact on
ethical behavior and management
CGMA
2011/12

CIMA
2008

IBE
2010

Security of information

91%

93% (1)

78% (4)

Safety and security

88%

81% (2)

74% (6)

Bribery

78%

75% (6)

83% (1)

Discrimination

75%

81% (2)

83% (2)

Conflicts of interest

74%

76% (5)

70% (7)

Environmental

73%

77% (4)

76% (5)

Supply chain

72%

69% (7)

70% (8)

Human rights

64%

55% (12)

50% (10)

Responsible marketing

64%

63% (9)

52% (9)

Whistle-blowing

63%

62% (10)

83% (3)

Fairness of remuneration

55%

65% (8)

48% (11)

Work/life balance

53%

59% (11)

37% (12)

Business Issue

36





Issue Highlight: Security of Information
–
–

Increasing volume of sensitive data

–

Growing threat of cyber crime

–



Accelerating technological advances

Increasing risk of fraud

Impact on Accountants
–
–

Greater access to confidential data than others

–
37

Role as guardian of information

Responsible for information integrity




Issue Highlight: Environmental
–
–

Many trying to reduce impact on environment

–



Increased attention on resource utilization and
climate change
Growth of sustainable procurement policies

Impact on Accountants

(*Donny’s Interpretation)

–
–

38

How to measure and report on environmental
impact and sustainability?
Development, implementation and monitoring
of sustainable procurement policies






Orgs of all sizes are dealing with Business
Issues related to ethical management
Donny’s Advice:
–

–

39

There are accounting and reporting impacts
and implications that have to be considered in
addressing these issues.
Consider the how the Accounting Department
can help guide the organization in addressing
these issues (or at least how the issues are
being measured and reported on).

Role of the Accountant in
Ethics Management

•
•

40

Responsibilities of the Accountant
Opportunities for Accountants



Accountants
play a key role
in managing
the ethical
performance
of the
organization

41





42

In which ways do you contribute to
management of ethical performance?


Opportunities for the Accountant



Low involvement of accountants in:
–
–

17% Collecting ethical management information

–



19% Reporting ethical performance against goals
17% Analyzing ethical management information

Donny’s Advice: Explore outside of finance
–
–

Help ensure the accuracy, completeness, etc. of
reporting on ethics information

–
43

Help ensure the integrity of the collection of
ethical management information

Help analyze the impact of actions (or inaction)
toward ethical performance goals

Business Ethics and the Acct Dept




Increasing public focus on Business Ethics
presents some distinct challenges for all
organizations regardless of size or location
Accountants can play a key role by
–
–
–
–



44

Helping to establish an ethical culture
Accounting for ethics
Guiding ethics-related risk mgmt activities
Guiding the addressing of business issues

Call to Action: Write down one way you can
improve the ethical management environment at
your organization. Go back and DO IT!

Thank you for your
attention and participation!
Any Questions?
Donny C. Shimamoto, CPA/CITP, CGMA
IntrapriseTechKnowlogies LLC
email: donny808@cpa.com
voice: (808) 735-8324
twitter: @donnyitk

See also:
• CGMA Report: “Managing Responsible Business: A global survey on business ethics”, 2012
• CGMA Tool: “Ethical management reflection checklist and worksheet”

Business Ethics and the Accounting Department v1.1

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