​​The Ethical Climate

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​According to The IIA's International Standards for the Professional Practice of Internal Auditing (Standards), the internal audit function is expected — or rather required, as the Standards use the word "must" — to assess the ethical climate at their organization. Not only does this include the tone at the top, but also whether the compensation and other programs incent appropriate or inappropriate behav​​ior.

It is easy to point to the bonuses that led whole organizations to take on more and more risk to achieve their numbers. Today's news is full of reporters' horror at the bonuses granted and the risks taken, which apparently led to the downfall of so many (formerly) great companies.

But do we have a ​similar issue at most companies? Do the bonus and commission programs offered to sales personnel incent them to generate top-line revenue at the expense of bottom-line profits? Are they offering large discounts to generate short-term results at the expense of longer-term value — in addition to the motivation to create side deals that promise additional off-the-books benefits if only the customer would sign now.

So my questions for internal auditors are these:

  1. Does your audit plan include assessments of the ethical climate, and in particular whether compensation programs from the board of directors and the chief executive officer down to junior sales personnel incent behavior detrimental to the organization? By the way, just because the board approves a program doesn't mean it is appropriate, especially if the board does not understand the risks of inappropriate behavior.

  2. If you were to perform such an assessment and find the ethical climate lacking and the compensation program incenting short-term achievements at the expense of longer-term value, would your opinion be heard? Or would it create political problems with executive management and the board?

  3. If you perform such assessments, how do they work for you?



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