Ethical Risk Management · scandal ACFE - September 2013 ©2013 Pr. Messaoud Abda, ... Fairfield...
Transcript of Ethical Risk Management · scandal ACFE - September 2013 ©2013 Pr. Messaoud Abda, ... Fairfield...
Ethical Risk Management
Pr. Messaoud Abda
CFE, CGA, CPA, CICA, CSI, M.B.A., FICB
Outline
1
Ethical accountability
2
Underlying issues of the ethical accountability
3
Ethical situation tests: detection and prevention
of the ethical risk
4
Apparent unethical situation: a risk to manage
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Learning Objectives
Knowledge: understand ethics, and understand how a cultural
ethic can be incorporated in the organization’s anti-fraud
strategy on a permanent and realistic basis;
Vigilance: develop the ability to identify the threats to ethics that
will evolve in fraud and enforce the safeguard measures
available;
Management: be able to face ethical violations with
professionalism, manage the ethical issues with determination
and success;
Caution: develop the sense of caution in maintaining the ethical
environment in the organization, educate, and convince versus
control and coercion.
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Nearly all men can stand adversity, but if you want to
test a man’s character, give him power.
Abraham Lincoln
In law a man is guilty when he violates the rights of
others. In ethics he is guilty if he only thinks of doing
so.
Immanuel Kant
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Some logic !
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“But it’s not ethical to arrest us for ethical violations!"
The situation
“The current financial crisis has raised questions about the
legitimacy of capitalism.
Ethical failures certainly played a role.
While it remains to be seen whether and how many
people blatantly broke the law, there are abundant signs of
various forms of potentially unethical behavior.
These include greed, unreasonable amounts of leverage,
subtle forms of corruption (such as ratings agencies that
appear to have had a conflict of interest), complex financial
instruments that no one really understood, and herd behavior
where people just followed along and failed to exercise
independent judgment.”
Extract from the Centennial Global Business Report, 2008
Harvard Business School
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Introduction
What’s ethics: look back, think, question yourself
Ethics is defined as the branch of philosophy that
consists in the systematic study of behaviour standards
that promote:
− conscious choices
− moral norms that must guide these choices
− the good toward which the choices must tend
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Ethics and Fraud
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Ethics and Costs / Benefits
Rationalization
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BENEFITS COSTS
The Problem
Question: What is the difference between personal
ethics and professional ethics?
− Personal ethics = one’s conscience
− Professional ethics = adherence to a professional
code
Answer: Follow a professional code of ethics when
acting as a professional even though we may
personally disagree.
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1. Ethical Accountability
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1. Ethical Accountability
The accountability of an event or an action is defined
as the possibility to assign the responsibility of an
offense to an individual
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1. Ethical Accountability
Example
It is perfectly legal to impose a financial penalty on an
offender regardless of his income, but it might be
unethical to do so if he has no means to pay the
penalty.
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1. Ethical Accountability
Trends
− Criminalize breach of ethical standards
− Increase of legal components in Codes of Ethics
− Increase of accountability requirements
− Involve individuals before the organization
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2. Underlying issues of the ethical
accountability
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2. Underlying issues of the ethical
accountability
Ethics fundamental principals
− Independence: Independence of mind and
appearance of independence
− Social responsibility: promote and protect the
interests of the society
− Professional judgment and due diligence: best
professional judgment
− Misuse of information: integrity
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First come First serve !
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Ethics situation VIDEO. (YouTube).
Accountable!
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Ethics situation VIDEO. (YouTube).
3. Ethical situation tests: detection and
prevention of the ethical risk Ethical risk exposes the organization to the reputational
risk
Reputational loss has no bottom limit in dollars, could
be total
Ethical risk management is now integrated in the daily
risk management activities
Loss of reputation is far more damaging than a
financial loss, few organizations recovered after a
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3. Ethical situation tests: detection and
prevention of the ethical risk The causes of unethical behaviors
1) Personal enrichment (greed): Norbourg president
Vincent Lacroix, Hollinger president Conrad Black
2) Pressure to meet and exceed profits and performance
targets, Ex: BMO in 2007, loss of 680 mlns CAD
related to its natural gas portfolio. Desjardins fund
Fairfield Sentry Ltd with Madoff, 200 mlns USD loss
3) Organizational culture of profit and performance at the
expense of ethics: Enron, Worldcom, SNC, Nortel
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3. Ethical situation tests: detection and
prevention of the ethical risk
Ethical risk
Notable ethical risks
− Misuse of information
− Conflict of interest
− Bribery
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3. Ethical situation tests: detection and
prevention of the ethical risk Prevention
It’s mainly about perception:
− A manager must lead by example and make it
visible to the employees
− A manager must regularly question his managerial
behavior and correct it if necessary
− A manager must believe in the deterrence benefits
of leading by example
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3. Ethical situation tests: detection and
prevention of the ethical risk Prevention
− Prevention of the ethical risk requires an
understanding of the different attitudes facing
ethical situations
1) Immoral management = opposition to ethics
GlaxoSmithKline LLC (GSK)
2) Moral management = acceptance of ethics
Merck and Co
3) Amoral management = negation of ethics
Casinos, Weapons
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3. Ethical situation tests: detection and
prevention of the ethical risk Prevention
Oversee Business ethics vs. Personal ethics
- Business ethics is about Business behaviour that
promotes human good
- Personal ethics is about Personal behaviour that
promotes human good
They should converge; if not we have a red flag.
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3. Ethical situation tests: detection and
prevention of the ethical risk Prevention
Formalize and push for BOD duty in ethics oversight
- Use and consult BOD committees:
a) Ethics committee
b) Governance committee
c) Risk committee
d) Audit committee
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3. Ethical situation tests: detection and
prevention of the ethical risk
Fundamentals of detection
Three main areas to look for red flags:
1. Decision problems
2. Moral principles
3. Consequences of ethical decisions
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4. Apparent unethical situation:
a risk to manage
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4. Apparent unethical situation:
a risk to manage
Educate do not assume knowledge
Validate understanding
Ensure regular review
Obtain commitment
Conflict of interest
− The most common threat to employees is the conflict
of interest
− Its effect is like an unreliable fuel gauge; it makes you
think that your fuel tank is full when in reality you are
about to run out of fuel
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4. Apparent unethical situation:
a risk to manage
Conflict of interest definition (Continued):
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4. Apparent unethical situation:
a risk to manage
4. Apparent unethical situation:
a risk to manage
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ENRON VIDEO Andy Fastow, The sorcerer’s
Apprentice. (YouTube)
Potential vs. real conflict of interest
We can’t always avoid a conflict of interest and it is not
necessarily bad
− What is wrong is not dealing with it adequately and
on time
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4. Apparent unethical situation:
a risk to manage
The apparent conflict of interest
An apparent conflict of interest exists when there is no
conflict (actual or potential) interest, but someone other
than the person involved would be justified to conclude
(even tentatively) that there is one.
An apparent conflict of interest is not a conflict of
interest in the strict sense of the term.
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4. Apparent unethical situation:
a risk to manage
The apparent conflict of interest (Continued)
There is an apparent conflict of interest when, from the
perspective of a reasonably well-informed third person
(external view), there is reasonable fear of conflict of
interest
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4. Apparent unethical situation:
a risk to manage
Conflict of interest: safeguards
1) Leave, discontinue the situation, or resign
2) Full disclosure of conflict of interest to the parties
concerned
3) Request the issuance of an ethics opinion
involving an impartial person (referee)
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4. Apparent unethical situation:
a risk to manage
4. Apparent unethical situation:
a risk to manage Faced with an apparent failure in ethics it is important to
remember to ensure (handle) with great caution, and
follow sequence, considered individually or with others:
1) Don’t play solo to solve ethics issues AND WATCH
CONFIDENTIALITY
2) Ask and gather support:
Management support
Legal counsel
Ethics expertise: BOD committees, external
experts
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4. Apparent unethical situation:
a risk to manage Faced with an apparent failure in ethics… (cont’d):
3) Gather relevant facts, NOT perceptions
4) Identify ethical issues involved
5) Identify basic principles related to the problem in
question
6) Assess internal procedures in place
7) Look for various possible ways of action: simple is
also efficient
8) Final solution: Report to the right level indicated in
the ethics policy or the code of ethics
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5. Final step
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“If necessary, I can be ethical.
Fortunately, it hasn’t come to that!"
5. Final step
Ipsos Reid Survey, July 3rd, 2013
Four in ten (42%) employed Canadians have observed
some form of workplace misconduct
One in five (17%) cite witnessing privacy violations
13% reported witnessing “conflicts of interest” such as
insider trading, while 17% witnessed “fraud,”
The most common form of misconduct was “misuse of
company property,” reported by 28% of respondents
Less than half (48%) of those who’ve witness
misconduct have actually reported it
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5. Final step
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5. Final step
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5. Final step
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5. Final step
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Your decision matters!
VIDEO David Batstone about Whistleblowing.
(YouTube)
Thank you for your participation!
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