U.S. SEC Takes a Second Look into Ethics

http://myemail.constantcontact.com/U-S--SEC-Takes-a-Second-Look-into-Ethics.html?soid=1101113538777&aid=ZWz7FI8sBxw

Risk 101: It's All About People

In 1913, James Cash Penney, the Founder of JC Penney, raises this point best within The Penney Idea which states, "To improve constantly the human factor in our business."  This philosophy has helped JCPenney prosper over a century.  More recently, Warren Buffett,has been quoted saying "We can afford to lose money - even a lot of money.  But we can't afford to lose reputation - even a shred of reputation."  Whether you love or loath Mr. Buffett, his philosophy has withstood the test of time and proven successful for Berkshire Hathaway.  In fact, all business problems, particularly reputational ones, share a common denominator - people.  Assuming the human factors always work or you can always trust people is probably the most significant and overlooked risk by Boards and Management.  Trust is not a control and you can't control behavior, but you can govern it - by accepting or rejecting an individual or groups conduct and methods of dealing.  After all, your reputation might just be at stake.  This is why I often recommend routinely engaging all employees to solicit feedback, ethics complaints, and suggestions to gain visibility into culture to help discover where reputational risk might be hiding or starting to fester.

http://myemail.constantcontact.com/From-the-Desk-of-Michael-Brozzetti-of-Boundless-LLC.html?soid=1101113538777&aid=XqzYGKbU9gc

http://myemail.constantcontact.com/From-the-Desk-of-Michael-Brozzetti-of-Boundless-LLC.html?soid=1101113538777&aid=XqzYGKbU9gc

Ethics & Governance Leadership - Speaker Demo

New Era Internal Auditor - Speaker Demo

Corporate Culture Index Overview

Check out this SlideShare Presentation:

Corporate Culture Index Overview

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MoneyMattersTV talks about Internal Auditing (1 of 2)

Ethics and Internal Auditing

The internal auditor have a duty to gather, analyze, and document relevant, reliable, and sufficient information to support their assertions, opinions, and recommendations to the Board and Management. It is critical the internal auditor has full and unrestricted access to all company records, property, and personnel to prevent the opportunity for a company employee to falsify, manipulate, or distort information. This level of unrestricted authority should be granted by a formal internal audit charter, approved and communicated by the Board and Management of the company at least annually. As trusted custodians of company information internal auditors must hold themselves accountable to a strict Code of Ethics. If the internal auditor is a Certified Internal Auditor, then they must apply and uphold the 4 following principles as defined by the Institute of Internal Auditors:


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.

Internal Audit's Role in Corporate Governance

The International Professional Practices Framework (IPPF) is the conceptual framework that organizes authoritative guidance promulgated by The Institute of Internal Auditors. The IPPF guidance includes mandatory guidance, which includes the Definition of Internal Auditing, the Code of Ethics, and the Standards.

With respect to Governance Standard 2110, "the internal audit activity must assess and make appropriate recommendations for improving the governance process in its accomplishment of the following objectives:

• Promoting appropriate ethics and values within the organization;
• Ensuring effective organizational performance management and accountability;
• Communicating risk and control information to appropriate areas of the organization; and
• Coordinating the activities of and communicating information among the board, external and internal auditors, and management."

Earlier in 2010, Boundless LLC asked Paul Washington, Chair for Society of Corporate Secretaries and Governance Professionals and the Corporate Secretary and Deputy Counsel for Time Warner how Internal Audit should be involved in assessing and making recommendations regarding board composition and governance structures, and his view was that "The board is not immune to internal audit and it is appropriate for Internal Audit to assess the rigor around board structure and processes." This can truly be the starting point for internal audit to understand the culture and the "tone at the top." While auditing the Board may be easier said than done, we must appreciate the fact that this is part of our professional obligation as such we need to communicate this to our Boards to engage in candid and constructive dialogue with key stakeholders.

Governance & Internal Audit Evolution: Rules or Principles?

My view is that the voluntary adoption, disclosure, and enforcement of self-guided principles are the solution to restoring good governance and internal audit activities within our U.S. Free Enterprise System. Rule-based systems, while often well-intended, are generally designed to be negative reinforcement systems, often are prone to “loop-holes,” exploitation, and have bad consequence (i.e. punishment or penalization) As internal auditors, we know that recognizing “deficiencies,” and in some case “failure” are often what create the opportunities for organizational betterment. Principle-based systems are generally designed to be positive reinforcement systems, are less prone to exploitation because it encourages transparency and reasoning for actions, and have good consequence (i.e. commendation, recognition, and reward.) Public trust and confidence can be restored when organizations can publicly declare “Here is what we do, here is why we do it, here are the reasons we believe it is the right thing to do, and here is how we are going to show it to you” – this is the essence of good principle-based systems.  To say we are “compliant” with a rule-based system does not always meet the “intent” of the rule.

As an example, consider this – A father, Jack, tells his daughter, Jane, to be home at 10pm because she has school tomorrow. Jane goes home for her 10pm curfew, then she sneaks back-out until 2:30 AM. In the morning, while having breakfast with her parents Jane declares “I was home a few minutes before 10pm last night,” in response to her father’s question “What time did you get home last night?” By all counts Jane followed the rule – didn’t she? Is it human nature to find the “loop-hole” in the rules? How do you think the scenario outcome would change if that evening Jack told Jane “Be home to make sure you’re well rested for school tomorrow,” and then in the morning asked her “How much rest did you get last night Jane?”  While a simple example, hopefully this shares my thought process on the potential and power of the “principle” and the inherent weakness of the “rule.”

We must also ask ourselves where the role of Ethics and Integrity plays in the rule-based and principle-based systems.  An industry colleague, Dan Smith, brought up a great point that principle-based systems "Overtime, without proper safeguards or directives at a social and moral level can collapse in corruption." My view is that as we evolve, for the better, we will see the emergence of ethics committees in organizations that will become the "transparent" and most "trusted" voice to the community and public stakeholders. While the U.S. has its own recognized design flaws and operational deficiencies. However, the design and operation of the 9-member Supreme Court system has continually exemplified integrity, diversity, and thoughtful governance to our Democratic, Capitalist, and Free Society.

With respects to the emergent ethics committee, organizational stakeholders should look to the U.S. Supreme court as a framework for the conceptual design of internal adjudication processes that will serve as the necessary "social and moral" safeguard in which Dan has so diligently observed as necessary to prevent the erosion of integrity that results in corruption.

Check out my March 2010 Newsletter

http://archive.constantcontact.com/fs037/1101113538777/archive/1103131261110.html

What is Internal Auditing and its Value?

A brief introductory session on what internal auditing is and the value it can bring to an organization.

Is there a culture of risk?

The Institute of Internal Auditors recently asked me the question "Is there a culture of risk?" so I decided to share my view. My view is that there is a culture of risk within organizations. If we define culture as "a way of life - the behaviors, beliefs, and values that are passed along by communication and imitation from one generation to the next" and put it into an organizational context then we can assume the term "generation" refers to the hierarchial levels and parent/child relationships that exist within an organization. That said, we can reasonably conclude that an organizational Board of Directors with good governance practices and an ethical tone at the top will minimize the risky behavior that permeate through the organization. We need to be mindful that cultural beliefs and values have a tendency to dilute themselves as they pass from one generation to the next, however this is the opportunity for internal auditors to serve as the feedback mechanism to the Board to protect the organizational well-being. For those organizational Board of Directors with weak governance practices or who disregard strong ethical practices - they have already lost and will eventually become destroyed by the culture of risky behavior they have created.

Governance: A Year in Review

As I attended the 2009 year end National Association of Corporate Directors (NACD) Conference in Washington, DC and the Institute of Internal Auditors (IIA) Eastern Regional Conference in Philadelphia I found it very insightful to compare my mental notes on the Chief Audit Executive and Director view on Corproate Governance. I am discovering a common theme of challenges with Directors sharing personal values, which are an essential part to establishing the core values of an enterprise. Sharing personal values and ones principle belief system certainly can bring a sense of vulnerability that some people may find discerning, however if the enterprise truly wants to engrain core values into its culture, then the core values of the enterprise need to be a reflection of the personal values of its constituency, and not merely just a written code. While we continue to see the microscope on the corporate transparency of Board and Officer activities, we should also expect to see more focus on personal transparency within and amongst the Board Members and Officers themselves. The internal audit activity should recognize and consider this “Inner” transparency when assessing governance structures and processes, and promoting appropriate ethics and values within the organization. The most important lesson learned from my conference experiences is that it can't hurt to have more "humility" and less “pride” in the boardroom to foster an environment that welcomes honest, candid, and constructive dialogue. Board and Officers must be comfortable drawing and elaborating on their failures, equally if not more so then their successes, to be an effective risk manager and contributor to sound corporate governance.