Develop Organizational

Leadership

About IMA
IMA®, the association of accountants and financial
professionals in business, is one of the largest and
most respected associations focused exclusively
on advancing the management accounting
profession.
Globally, IMA supports the profession through
research, the CMA® (Certified Management
Accountant) program, continuing education,
networking, and advocacy of the highest ethical
business practices. IMA has a global network of
more than 65,000 members in 120 countries and
200 local chapter communities. IMA provides
localized services through its offices in Montvale,
N.J., USA; Zurich, Switzerland; Dubai, UAE; and
Beijing, China. For more information about IMA,
please visit www.imanet.org.

2 Statements on Management Accounting

 Develop Organizational
Leadership

Values and Ethics

From Inception to Practice

About the Authors

IMA® would like to acknowledge the work of Nick A. Shepherd, FCMC, FCCA, CGA, of EduVision Inc. on
whose work this SMA is based. Thanks also go to Christopher Dowsett, Mike Van Roy, and Curt Verschoor,
who served as reviewers, and to Raef Lawson, Ph.D., CMA, CPA, IMA director of research and professor-
inresidence, who serves as series editor.

Published by Institute of Management Accountants

10 Paragon Drive, Suite 1
Montvale, NJ 07645
www.imanet.org
© 2014 in the United States of America by Institue of Management Accountants All rights reserved

Table of Contents

Executive Summary.........................................1
Introduction....................................................1 Integrating Codes of Ethics into
Values and Ethics in a Changing World....2 Business Planning....................................21
Expectations Change when Society When There Are No Procedures
Changes...................................................3 to Follow................................................ 22
Scope..............................................................4 Measuring and Improving Ethical
Values, Ethics, and Accounting................7 Compliance....................................................22
Defining and Developing the Human Performance Feedback Loop......23
Organization’s Behavioral Values.............9 Survey Tools............................................23
Leadership by Example............................11 Importance of an Outlet: A
Ethical Leadership by Managers and Whistleblowing Framework.....................24
Supervisors.............................................11 Glossary.........................................................24
Ethical Leadership by Finance and References and Resources.............................26
Accounting Professionals.......................13
Ethics and Internal Controls..........................14 Exhibits
Practical Application: Converting Intent
into Operational Reality................................16 Exhibit 1: A Schematic Framework
The Right People...................................16 for the Creation of a
The Critical Role of Employee System for Ethical
Training..................................................17 Conduct.......................................6
Building Ethics into Work Behavior........18 Exhibit 2: Areas of Ethical Behavior
Building Ethics into the Approach to Focus......................................19
Work Management.................................18

Statements on Management Accounting 3

 L E A D E R S H I P, S T R A T E G I E S & E T H I C S

I . E X E C U T I V E S U M M A RY how they impact risk management and internal

In the business reality of the 21st Century, where controls. It explains the steps required for orga-
knowledge management and intangible assets nizations to clarify, define, and develop their val-
are key sources of competitive advantage, the ues and create their codes of ethical conduct.
individual behavior of employees from top man- More importantly, it shows how to move beyond
agement to front-line workers can make or break the creation of words and plaques on the wall to
an organization’s reputation. This has a signifi- a reality where the commitment to ethical values
cant impact on share value, the ability to attract becomes the way the organization operates on a
and retain clients, investors, employees, or cus- day-to-day basis. Through this, risk related to the
tomers, and the risk of compliance violations. behavior and decision making of individual
Globalization increases the potential impact of employees can be linked to the overall manage-
behavioral conflicts. An organization operating in ment processes of planning, organizing, staffing,
different countries may find that the values and directing, and controlling. Issues of ethical deci-
ethical standards of other cultures clash with its sion making can be aligned with leadership
own. Each of these issues contributes to the behavior, organization processes, relationships
need for every organization to define its own prin- between individuals within and without the entity,
ciples of behavior by clearly outlining its organi- and systems of measurement and control.
zational values and creating a code of ethics and
corporate conduct that provides guidance in Organizations that succeed in a broad-based
decision making internally and in relation to deployment of a code of ethics will create a base
external parties and compliance requirements. for enhanced risk assessment, greater trans-
Such guidance is a critical element in the cre- parency for those responsible for organizational
ation of a framework for ethical management. governance, and an increased probability that
commitments made in words are truly being ful-
For those in the management accounting profes- filled in practice. As a result, CEOs and CFOs
sion, the Institute of Management Accountants who are required to sign commitments of compli-
(IMA®) created The Statement of Ethical ance will do so with a greater degree of knowl-
Professional Practice. Other major global edge and certainty that their words and the
accounting bodies also maintain codes of ethical actions of the organization are aligned.
conduct. The intent of this Statement on
Management Accounting (SMA), however, is to II. INTRODUCTION
make all accounting professionals aware of their While ethics is not a new concept in business, it
responsibility to act as change agents within has gained importance and visibility recently as
their organizations, supporting the maintenance a result of public- and private-sector disclosure
of effective internal controls and ensuring that and reporting issues and the passage of The
their organizations have considered, adopted, Sarbanes-Oxley Act (SOX). The lessons learned
and fully implemented a company-wide ethics from Enron and the other accounting scandals
and compliance program, including a code of show that the development of an ethics policy
ethics and a confidential hot/helpline. does not automatically lead to an ethical organi-
zation any more than developing a corporate
This SMA identifies the issues that are driving Vision creates a visionary organization (Collins,
the increased attention to ethical conduct and 2001).

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Ethical behavior is not about abiding by the law. In larger organizations, the problem is magnified.
Individuals and organizations can act legally and If no defined code of conduct and ethical behav-
still be acting unethically. Ethical behavior is driv- ior is developed, employees will act on their own
en by compliance with a set of values that acts beliefs and values, or they will observe and emu-
as the touchstone for situational decisions late the behavior they see around them on a
where rules may not exist to cover every alterna- daily basis.
tive. Ethics is about the integrity of the decision-
making process that is used to resolve any num- If the kinds of scandals that plagued the busi-
ber of issues. ness world in the late 20th and early 21st
Century are to be avoided, organizational behav-
Rushworth Kidder, president of the Institute for ior needs to be defined and deployed in a way
Global Ethics, explains the link between the driv- that drives the individual behavior of employees
ing values of an organization and the behaviors in a manner consistent with defined expecta-
that result: “Ethics, in its broader sense, deals tions of the wider organization. Many individuals
with human conduct in relation to what is moral- at the center of corporate scandals have pro-
ly good and bad, right and wrong. It is the appli- fessed the belief that they were innocent of any
cation of values to decision making. These val- wrongdoing, including Kenneth Lay of Enron or
ues include honesty, fairness, responsibility, Conrad Black of Hollinger. The problem is that
respect, and compassion.” In its Statement of these individuals did not define their behavior by
Ethical Professional Practice, IMA outlines the what most of society would see as “reasonable,”
overarching principles that drive ethical behavior. but rather they followed their own particular
Members of the organization are expected to code—in some cases, limiting the definition of
abide by the Statement and engage these princi- ethical behavior to require compliance with the
ples—both at their jobs and in life itself—even if law and nothing more. When laws may have been
it costs them financially, just as members of broken, it falls to the courts to decide if an act
other professional organizations are expected to was illegal and to assess penalties. In situations
abide by their group’s respective code of ethics, that may be unethical but are not illegal, howev-
such as the American Institute of Certified Public er, there is no legal remedy. The only course of
Accountants’ (AICPA) “Code of Professional action for society is to either pressure the gov-
Conduct.” ernment to enact more rules or to decide not to
do business or develop relationships with uneth-
Establishing a code of conduct in smaller, pri- ical companies and individuals. This is how SOX
vately owned organizations is usually fairly came about, and it is how an organization can
straightforward: The owner “leads by example.” lose the value of its brand.
His or her demonstrated behavior becomes the
model for other employees—even if it is never Values and Ethics in a Changing World
documented—and creates the organizational While the concept of ethics has been around for
“culture.” Challenges arise when these organiza- centuries, the changing conditions of the world
tions grow and employees become disconnected today are creating problems never seen before.
from direct day-to-day contact with the owner. There has never been a greater level of human
mobility in the world. While the majority of the
top 500 corporations still come from the United

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States and the West, companies from emerging conflicting values becomes greatest in cases
nations such as India, China, and Russia are where a society has, for example, a limited sep-
being added (Fortune, July 24, 2007). The prac- aration of “state and religion.” While most of the
tice of outsourcing key activities, such as manu- Western world professes to maintain a barrier
facturing or call center operations, from large between church and state, a number of countries
developed economies to those where labor in other parts of the world have a far greater inte-
costs are significantly lower results in situations gration of the two. In many cases, this creates
where corporate headquarters are based in one national conflict when the two find themselves in
society while other portions of the company oper- disagreement on various issues.
ate in different countries where values, expecta-
tions, and behavioral norms may be vastly differ- All of these changes lead to a melting pot of per-
ent. Added to these changes is the ease of glob- sonal values within societies and organizations,
al communications, which enables daily conver- creating profound challenges for leaders and
sations as well as voice, data, and video trans- resulting in a new aspect of risk management for
missions from one side of the world to the other. organizations. If organizations fail to make the
effort to clearly define their expectations of ethi-
Mobility has also allowed the massive movement cal behavior and provide support and encourage-
of people from one culture to another. In the ment for complying with them, then the vacuum
U.S., the flow of immigrants from a vast array of that is left will lead to unpredictable results.
countries continues to create a broad range of
differing cultural, ethnic, and religious back- Expectations Change when Society Changes
grounds. When groups share the same cultural The approaches to governance, accountability,
background, they tend to share the same values and management control that exist in the U.S.
as well. Consequently, the basis for decision today came about largely from the stock market
making and actions, including alignment with a crash of the 1930s, which gave us the Securities
code of ethical conduct, will be similar. When & Exchange Commission (SEC) and many of the
immigration combines groups from dissimilar labor laws still on the books today. Events
countries or backgrounds, the impact can be sig- showed that the traditional frameworks were no
nificant, and the values and decision making longer adequate for a rapidly developing industri-
processes may not be the same. It has nothing al society, and new rules were needed.
to do with a person being “good” or “bad,” but
rather is a matter of differing “norms” of behav- The 1980s and 1990s saw the savings and loan
ior based on the society in which that person scandal, the Orange County investment fiasco,
grew up. This situation is also observable when the invention of Junk bonds, and global problems
individuals go abroad to receive an education. such as the collapse of Barings Bank. In
response, the focus of management has turned
Some interesting work has been done in this to a better approach to risk management. Efforts
area by the World Values Survey Association, such as the Committee of Sponsoring
which found various “blocks” of cultural values Organizations of the Treadway Commission
that tend to cluster together. (See the website of (COSO) sought to identify the causes of fraudu-
the World Values Survey Association, lent financial reporting and make recommenda-
www.worldvaluessurvey.org.) The challenge of tions to reduce its occurrence, but the problems

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did not go away. The beginning of the 21st cen- Research has shown that ethical organizations
tury was marred by even greater financial scan- have higher levels of productivity, improved inter-
dals, such as Enron, WorldCom, Global Crossing, personal dynamics and group cohesion and
and others. This was not just a U.S. problem— involvement, and lower risks of fraud. Those
similar issues were seen across the globe. moving beyond compliance generally see
improvements in business process streamlining
As manufacturing undergoes radical changes, and higher quality of products and services. All
including outsourcing to less developed coun- these benefits lead to better financial perfor-
tries (LDCs), and traditional industrial societies mance. Some areas are clearly measurable,
move more and more into a service- and some are partly measurable, and some are
knowledge-based economy, the behavior of indi- assessable as a lower-risk potential. If financial
viduals becomes a much more critical, yet hard- and other risks are to be recognized and reduced
er to control, aspect of organizational activity. within an organization, an ethical culture must be
Some of the more established, traditional knowl- imparted into every single aspect of the organi-
edge-based businesses recognized these issues zation’s activities. Management accountants
long ago and have had ethics programs or poli- can have a significant impact on the allocation of
cies in place for many years. Johnson & corporate resources to ensure that ethics
Johnson still uses a corporate “credo” devel- become embedded within an organization’s cul-
oped by General Robert Wood Johnson in 1943. ture, and they can identify areas of internal con-
To this day, those principles guide the destiny of trol risk associated with behavioral issues that
the company no matter where it operates in the need to be addressed through a focus on ethical
world. conduct.

Most observers agree that ethics cannot be III. SCOPE

merely a compliance requirement, but that it This SMA is addressed to financial and manage-
must be embedded within the culture of an ment accounting professionals who want to
organization. Section 406 of the Sarbanes-Oxley achieve improved assurance of ethical compli-
Act requires that a positive culture be created ance and are seeking ways to create an ethical
“at the top” of a company. When prosecuting culture within their organization that delivers
companies, the Department of Justice considers enhanced performance and permeates every
the environment within which business decisions aspect of the organization’s activities. Many of
are made, and the revised Federal Sentencing the concepts are designed to address and align
Guidelines issued in 2004 now recognize the with Enterprise Risk Management (ERM) initia-
criticality of ethics training at every level for every tives, where individual behavior becomes a key
individual within an organization. Creation of a aspect of exposure to risk and must be consid-
code of ethics and organizational corporate con- ered when evaluating and implementing internal
duct, supported by verified statements of the control. The concepts and approaches outlined
CEO and CFO, is no longer enough to ensure that in this SMA are universal and apply to:
an organization is actually behaving ethically in
its daily operations. ● Financial and management accounting
professionals;
● Public and private organizations;

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● Profit and not-for-profit organizations; understanding of the complexity of ethical assur-

● Large and small organizations; ance. This will enable them to move beyond
● Service, knowledge-based, and manufacturing meeting the requirements of an ethical checklist
organizations; and and enter a state in which the COSO environmen-
● Organizations around the world. tal assessment can truly demonstrate the level
to which an ethical culture exists and is mature
This SMA covers the logical building blocks of in its application and scope.
creating an effective, ethical organization. It only
briefly addresses the philosophy behind the the- Each section of the SMA addresses an important
oretical concepts of ethics and the various step in the process of developing an ethical
schools of ethical development and thinking. It culture:
does not address several aspects of ethical driv-
ers, such as religious belief systems and other ● Values, Ethics, and Accounting outlines why
specific areas that may be considered unique to financial and management accounting profes-
a limited group. sionals must move beyond traditional
approaches to control systems and focus on
This SMA discusses the stages required in devel- the softer skill areas for a behavioral under-
oping and implementing a values-based ethics standing of their human capital.
system within an organization in order to meet
compliance requirements and create ethical sus- ● Defining and Developing the Organization’s
tainability as the organization grows and devel- Behavioral Values shows how to 1) assess the
ops. To provide a context for overall risk and existing ethical cultural reality in an organiza-
control assessment, the application of a frame- tion, 2) compare it to the expectations of the
work such as COSO’s Internal Control— owners and key shareholders, and 3) complete
Integrated Framework as a basis for internal con- an analysis of any existing gap between the
trol assessment under SOX Section 404 two.
requires an assessment of the organization’s
culture. This SMA casts light on the ways in ● Leadership by Example deals with the primary
which an ethical culture can be developed, fos- critical success factor of building an ethically-
tered, and improved so as to reap benefits based organization. The alignment of organi-
beyond compliance. As human behavior is zational values and beliefs is not only
increasingly recognized as a driving aspect of the expressed in what those in leadership roles
integrity of control systems, this SMA shows how say, but also in how they manage and act on a
an ethical environment can be created only by a daily basis.
complete and integrated approach to all aspects
of the work-life and decision making of every indi- ● Ethics and Internal Controls deals with the
vidual within an organization. While this respon- critical integration of ethical thinking into the
sibility rests primarily with the management core aspects of business process manage-
accountant in terms of developing internal ment. The key aspects of ERM, process devel-
processes, systems, and controls, the approach opment and improvement (BPR), quality man-
will assist those in assurance roles, such as agement, “mistake proofing” (Poka-Yoke con-
internal and external auditing, to broaden their cepts), and the development of a learning

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EXHIBIT 1: A SCHEMATIC FRAMEWORK FOR THE CREATION

OF A SYSTEM FOR ETHICAL CONDUCT

Where are we today in

ethical thinking?
Design and Development Phase

Legal input/competitive Societal norms and

input/global impact Is this where we want changes and business
assessment to be? environment

Defined statement of
Best practice evaluation
values/code of ethical
and reviews
practice/policies

Development of an “IS”
and “IS NOT”
framework

Development of code of
Hiring, orientation, and
conduct/rules of
training
conduct

Leadership development Manager/leadership

Deployment Phase

for ethical compliance development plans

Operational development Process design and

of ethical practice development

Whistle-blower Monitoring of ethical Performance review

frameworks and systems behavior—reality approaches/culture
vs. perception surveys
Measurement

Feedback and
Phase

Disciplinary approaches Measurement systems

and procedures improvement of ethical and feedback
practice

An ethical culture

organization can all be aligned and integrated, develops position requirements and addresses
leading to an internal control structure that employee attraction, motivation, assessment,
integrates human resource strategy with the review, training/development, and retention as
organization’s objectives. well as a situational-based understanding of
ethical behavior based on employee orientation
● Practical Application: Converting Intent to approaches and work-level task discussions. It
Operational Reality deals with practical issues also aligns ethical expectations with other third-
that must be taken to ensure that ethical party relationships, such as the way an organi-
expectations—and the values they represent— zation involves and communicates with suppli-
are present in a number of required aspects of ers, partners, clients, and others; and consid-
organizational management. This includes an ers ethical and value-based aspects of busi-
ethics-based HR management regime that ness direction as part of the planning process.

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● Measuring and Improving Ethical Compliance ture, management accountants working within
deals with development of the “glue” that organizations have an important responsibility to
holds an ethical organization together: how the protect the organization’s assets and ensure
commitment to ethics is verified, validated, they are being used to their fullest extent.
and assessed through various feedback met-
rics. This is a key aspect of effective corporate In most organizations today, labor costs consti-
governance. The board of directors, board tute the majority of operating expenses. Efforts
committees (such as the audit committee), to reduce overhead have led to decentralization
and others tasked with the overall responsibil- of operating decisions and the slimming down of
ity for ensuring ethical compliance need to be supervision. The result is that employees can-
aware of the “facts” related to deployment not be watched and controlled in every aspect of
results of ethics policies. This section their work, and an organization must, to a great
addresses the core issue that many responsi- degree, trust that its employees are acting in its
ble for ethical compliance “don’t know what best interests. Human “capital” is a critical
they don’t know” and, as a result, can only rely asset. Humans create the innovation that gen-
on signed statements and attestations that erates new products or services and finds
“all is well.” unique ways to undertake work in more cost-
effective ways. They bring knowledge to the work-
Readers should recognize that effective imple- place and share it with coworkers. People devel-
mentation of an ethical culture requires a consis- op relationships with each other and with suppli-
tent management philosophy and that it is not a ers, clients, and others on whom the organiza-
short-term program to “fix the ethics issue.” tion depends. Top leadership in particular cre-
ates a climate and culture in which such produc-
Exhibit 1 provides a detailed schematic of the tive applications of human skills can be opti-
steps generally involved in the development and mized to the highest level. So how can an orga-
deployment of a framework for ethical manage- nization be sure that the behavior of its employ-
ment, including the supplemental tools, inputs, ees is consistent with its desired principles in a
and supports that should be considered. The way that perpetuates and grows the human
final phase of implementation must result in an “asset” instead of impeding its effectiveness?
approach and framework for ongoing assess-
ment and evaluation of the degree to which eth- In the past, quality compliance and industrially-
ical management is practiced within the organi- engineered output expectations helped exert a
zation. The results of such a tool can be com- high level of control over direct-production
bined with ongoing training and individual sign employees, but managers still realized that
off by employees on an annual basis to provide effective quality management only occurred
a solid base for assurance of ethical behavior. when employees were “engaged and involved.”
In particular, quality problems were not reported
I V. VA L U E S , E T H I C S , A N D or acknowledged as quickly or frequently if work-
ACCOUNTING ers expected to be penalized personally for the
Whether minimizing the costs of operations in a problems.
nonprofit organization or optimizing profitability
and return on investment in a commercial ven-

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In today’s service economy, control often involves they will work as anticipated and produce the
developing management systems that include desired results. It is not unusual for the plan-
the flowcharting, mapping, and documentation of ning aspects of a $500,000 capital purchase to
processes, activities, and tasks so that individu- comprise at least 5% of the capital cost. If the
als know what to do “on the job.” This works well asset was expected to last five years, this plan-
when everything proceeds as anticipated, but ning cost would be incurred at the beginning and
what does an employee do when unplanned probably amortized over the five years.
events occur? What reference does an individual Accountants would think little of carrying out
look to for help in making decisions? To take a detailed DCF/ROI calculations and developing
phrase from the pioneering work done in process models, spreadsheets, and simulations to verify
management by Geary Rummler and Alan Brache the asset’s potential performance. The goal of
(1995), what does one do “in the white this planning and analysis is to optimize the
spaces”? In most cases, an organization relies investment and reduce the risk of a poor deci-
on the judgment of the individual and/or direct sion. If hiring decisions and employee orienta-
supervisor to develop a course of action that tion and training fail to address the alignment of
they feel represents the “policy” of the organiza- individual values and ethics with organizational
tion. This is why it is important to have a defined expectations, the result can be an equal, if not
set of organizational values and code of ethics— greater, negative impact on an organization’s per-
they create the “touchstone” against which formance. Unmotivated employees can poison
every unanticipated decision must be judged. the atmosphere and reduce the teamwork and
Failure to have every individual in the organiza- cooperation required for knowledge transfer and
tion know and understand these values and eth- innovation, and they can have a significant nega-
ical code leads to inconsistency and, in the tive impact on relationships with suppliers and
worst cases, unethical or fraudulent behavior. customers. In any position of leadership—
No financial manager, management accountant, senior management, managers, supervisors,
or any other manager can afford to allow that risk team leaders, and “influencers”—they can
to exist in their business. Rules can be devel- create confusion and conflict toward the desired
oped for predefined situations (such as most culture an organization wishes to create.
“rule-based” accounting standards that are the
traditional approach of the Financial Accounting Understanding and acting on this aspect of
Standards Board, or FASB). In undefined or human behavior has potential far beyond compli-
unpredictable situations, however, principles- ance with legal or regulatory requirements.
based standards work more effectively. Effective development and deployment of a
Approaches to values and ethics management values-based ethical culture becomes the corner-
should therefore be based on a set of principles stone of an optimized and productive knowledge-
rather than a set of rules. based organization. The challenge is that an eth-
ical culture deals with the performance of intangi-
In organizations where capital investment is a ble assets that in most cases do not appear on
key component of activity, financial managers the balance sheet. Yet as surely as property,
and management accountants spend consider- plant, and equipment are assets whose effective
able time trying to predict the future perfor- use can make or break a business, an organiza-
mance of capital assets in order to ensure that tion’s human assets can have the same effect.

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Even if accounting standards and statutory believe to exist within the company may be differ-
reporting treat these intangible assets as ent from the actual culture experienced by
unquantifiable, management accountants must employees, clients, and suppliers. In other
find ways to help ensure these assets are used words, upper management’s perception of the
as effectively as possible. By following the culture is not reality.
approach outlined in this SMA, management
accountants will be able to: Many of the business scandals of the last 30
years stem from this issue—not because the
● Identify the gaps between the ethical behavior board or senior management were “bad people,”
expected from employees and their actual but because they “did not know what they did not
behavior; know” about the activities going on within their
businesses and made major assumptions that
● Address these gaps through various plans, turned out to be erroneous.
programs, and interventions;
Step one in establishing an ethical culture must
● Have the desired ethical behaviors permeate be an assessment of the existing organizational
every aspect of the organization’s operations; values and culture and the development of a set
and of statements that define the principles the
organization believes in and should act upon.
● Develop indicators to ensure there is no degra- These statements and principles can be devel-
dation in ethical behavior, depleting the value oped by the shareholders, the board, or a govern-
of human capital with its negative impact on ing body within the organization. The cultural
the organization. assessment will ask employees at all levels,
suppliers, customers, and others who deal with
This approach will enhance the operational effec- the organization about their views of what drives
tiveness of the organization and significantly the organization.
improve its risk profile in regard to fraud and
other individual infractions. One of the most effective ways to conduct the
cultural assessment is a combination of focus
V. D E F I N I N G A N D D E V E L O P I N G groups and a broad survey. The focus groups act
T H E O R G A N I Z AT I O N ’ S as a “pilot” to extract the major categories of val-
B E H AV I O R A L VA L U E S ues. Once that data has been collected, it can be
Every organization already has a culture. In merged with input from senior management and
smaller companies—particularly family-owned shareholders regarding their perception of the
businesses—the culture reflects the personal organization’s values. Then a survey can be con-
values and business methods of the owners and ducted using a broad range of employees and
primary operators. In larger companies, it is other key contacts. The following is a list of sam-
more difficult to convey the proper culture from ple questions that can be asked during this
the top. One of the most significant risks in very process:
large organizations, in fact, is that the culture
(and, by definition, the values and ethics) that
the board of directors and senior management

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● What values does this organization believe in? examples related to day-to-day decision making
● What principles drive this organization’s deci- and activities.
sion making?
● By what ethical standards does this organiza- One of the major challenges at this stage is ensur-
tion live? ing that the values adopted for the code of ethics
● What principles/beliefs do managers and lead- are more than bite-sized platitudes. Senior man-
ers demonstrate? agement must understand what each statement
means in terms of operational implementation. If
The input from this activity provides a series of the statements do not clearly convey the type of
“is” answers—the reality within the organization everyday environment that is expected from an
as seen by people on an everyday basis. ethical commitment, they will lead to misunder-
Nothing makes these answers right or wrong; standing, conflict, and confusion.
they provide a snapshot of the current thinking
and behavior driving the organization’s daily An ethical culture requires the ability to link the
operations. decisions being made on a daily basis to a par-
ticular aspect of ethical commitment. For exam-
The same approach should be used with the ple, staff layoffs may appear to be inconsistent
organizational leadership to create a series of with statements related to an ethical commit-
“should” answers—the business leaders’ per- ment of people management. Handling the
ception of what the culture should be. The gap process of reducing the workforce with consider-
between the “is” answers and “should” answers ation, empathy, and understanding, however, is
defines the areas that the organization needs to actually an example of ethics applied in practice.
address in order to create a credible and aligned
set of values that form the basis of an organiza- If ethical behavior is negotiable, then the values
tional code of ethics. it represents mean very little. Senior manage-
ment must be sure that the company can live
From this information, organizational leaders with any ethical commitments it makes.
should develop a defined set of ethical principles Examining the actual behaviors that support or
(or values) that will form the foundation of the detract from the stated ethical principles
framework for ethical management and leader- becomes a vital step in ensuring that key man-
ship. These short statements will still be capa- agers have thoroughly considered the dangers
ble of unique interpretation by many individuals, inherent in making a values-based statement of
so the next step is to have senior management intent and evaluated the consequences of real-
develop a behavioral profile based on each prin- life situations that might occur. Developing an
ciple. This profile would be structured in a way ethics policy that allows deviations for exception-
that respondents are asked what types of behav- al circumstances is worse than having no stated
ior would support this ethical statement (i.e., policy at all.
what sorts of activity would demonstrate consis-
tency with the statement). They would also be Once a code of ethics has been developed, it
asked what sort of action would be considered should then be deployed throughout the organi-
inconsistent with this statement. In this way a zation. This is best achieved by a cascading
general statement can be operationalized into deployment, where each level of management

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and supervision presents and explains the ● Setting a good example

expectations to their subordinates. This should ● Keeping promises and commitments, and
be supported by online training along with pre- ● Supporting others in adhering to ethics
and post-testing to ensure that all employees standards.
have read, internalized, and understood the fun-
damental aspects of the code. All three rely heavily on the leadership skills of
managers and supervisors within an organiza-
VI. LEADERSHIP BY EXAMPLE tion. An ethics code ensures that every manager
Ethical behavior is not something that applies to and supervisor has a set of basic practices to
someone else—every single individual is respon- fall back on when making ethical judgments.
sible for behaving ethically. Nowhere is this more “Management is ultimately responsible for the
important than the demonstration of ethical firm’s moral maturity level, and therefore needs
behavior that managers and supervisors exhibit to be held to a higher ethical standard than reg-
in the way they execute their day-to-day work, ular employees, not the lower standard we too
including: often see among corporate leaders” (Bottorff,
2006). It is impossible for any organization’s
● Communication with others all levels— ethics policy to retain credibility unless employ-
internally and externally; ees see the principles demonstrated on a day-to-
● Involving others in decision-making processes; day basis by the company leaders.
● How they coach and support others;
● Dealing with staff development, performance SOX 404 compliance begins with an internal con-
issues, and reviews; and trols assessment that examines the reality of the
● Their personal behavior at the office. control environment within which the work of the
organization takes place. Leaders—especially
Many of us in today’s workforce have seen orga- those in the most senior positions—are expected
nizations operating with a lack of ethical commit- to set the “tone at the top,” demonstrating
ment. As a result, there often is a high level of through their actions a commitment to the organi-
skepticism toward what is said by those in man- zation’s ethical framework and other controls.
agement and leadership positions: People tend Senior managers must avoid creating the percep-
to believe what they see rather than what they tion that they are “above the rules.”
are told in the company “pep talk.” In order for a
code of ethics to be effective, its application The 2004 updates to the Federal Sentencing
must be demonstrated by those in positions of Guidelines identify the importance of an organiza-
power and leadership. Leaders must be seen liv- tion’s “effective compliance and ethics program”
ing and managing by the code of ethics. as a mitigating factor for potential penalties
should criminal conduct be proven. The intent is
Ethical Leadership by Managers and that leadership comes not just from the “admin-
Supervisors istrators” who establish the systems and con-
The 2005 National Business Ethics Survey iden- trols, but from the board of directors and most
tified three key ethics-related actions that senior management. CEOs, COOs, and
support the effective deployment of a code of CFOs add credibility to the systems and controls
ethics (Ethics Resource Center, 2005): by demonstrating their own personal compliance.

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Internal controls—especially in knowledge-based as a major problem. Making the call on these

organizations—rely on the integrity and behavior managers is the most difficult of all. They deliver
of the people within the organization. Having a results, but they do it while ignoring values. They
credible, communicated, understood, and rein- are a destructive force because they poison the
forced ethics policy becomes an essential ele- environment, wear people down, stifle creativity,
ment of addressing compliance. More than this, and cause valuable talent down the line to flee
however, the ability of both the CEO and CFO to an organization.
sign their declaration of ethical compliance
becomes less of a risk when such a framework This might sound strong and potentially unrea-
is in place and operating. “Leadership must sonable—these managers do deliver results,
know how the myriad human behaviors and inter- after all—but it goes to the heart of ethical lead-
actions fit together like puzzle pieces to create a ership. If an organization seeks to move beyond
whole picture. An organization moves towards words, it must be prepared to demand perfor-
an ethical culture only if it understands the full mance that balances both the delivery of results
range of values and behaviors needed to meet (task) as well as the building and development of
its ethical goals” (Gebler, 2006). “relationships” that reflect its stated values. An
excellent tool to assist management and individ-
This role is further reinforced in the third inner uals in recognizing and dealing with this issue is
ring of the model of “Five Levees for Improving the “Insights Self Assessment” program devel-
Ethical Performance” that support the first two oped after extensive studies by the Insights
steps of hiring “ethical” employees and ensuring Learning and Development Ltd.
a code of ethics is in place (Collins, 2006).
Denis Collins refers to this factor as the “manag- Many organizations have attempted to strength-
er as moral role model.” en their ethical leadership by appointing an
“ethics officer.” There are several key factors
An organizational code of ethics must therefore that are needed for an ethics officer to be effec-
be used as a benchmark for hiring decisions. tive, including the mandate, accountability, and
This ensures candidates have a personal code responsibility of the position. In order for the
that aligns with the organizational expectations. position to remain truly independent, the ethics
The code must also form the basis of orientation officer should have unfettered ability to identify
and training for managers and supervisors, as issues at all levels of the organization. To do so,
well as be a key factor in performance evalua- the position should report directly to the audit
tions, coaching, and career-progression deci- committee and/or a special committee of the
sions. An excellent example of putting such a board of directors (such as the committee on
tool into practice is the four-square matrix of corporate governance). In addition, organizations
managerial performance used by GE. This tool can demonstrate their understanding of legal
divides behavior into two axes of “task” and obligations vs. moral obligations by ensuring that
“relationships,” and seeks to assess each man- the position is not seen as being a legal compli-
ager against both criteria. Managers who rate ance mandate but is instead part of a broad
as low relationship/high task—those that mandate to prevent unethical acts—regardless
typically get the job done but fail to behave in a of their legality.
way “consistent with GE Values”--are identified

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Finally, the ultimate ethical example is displayed IMA members must always ensure that they are
by the CEO or equivalent position. Boards of maintaining their commitment to the Statement.
directors are responsible for ensuring that such For example, if a member’s employer decided to
leadership behavior is displayed, but there still withhold information that “…could reasonably be
remains an excessive focus on organizational expected to influence an intended user’s under-
“outcomes” and results. According to a survey standing of reports, analyses, or recommenda-
by Booz Allen Hamilton (2005), the primary rea- tions,” it is the duty of the member to identify the
son CEOs are fired is because of underperfor- “unethical” situation and strive to resolve it.
mance and not a lack of ethical behavior. Such conduct might lead to challenging circum-
Boards must ensure that an ethics policy is in stances. As in all ethical situations, an effort
place; that their chosen representative agrees must be made to collect all the facts before tak-
with and abides by such a policy; and that ade- ing action, and professional guidance should be
quate feedback is obtained from the organization sought where possible.
regarding the CEO’s performance and demon-
stration of ethical principles, using 360° surveys In June 2005, the International Federation of
and other similar tools. Accountants (IFAC) issued The Code of Ethics for
Professional Accountants. Developed by the IFAC
Ethical Leadership by Finance and International Standards Board for Accountants, it
Accounting Professionals established a baseline for ethical behavior for
Demonstrating commitment to a code of ethics accountants: “A distinguishing mark of the
is equally important to management account- accountancy profession is its acceptance of the
ants and other finance professionals. Members responsibility to act in the public interest.
of IMA are expected to abide by the Statement of Therefore, a professional accountant’s responsi-
Ethical Professional Practice and apply it to situ- bility is not exclusively to satisfy the needs of an
ations in their workplace. The Statement out- individual client or employer. In acting in the pub-
lines IMA’s four overarching principles: honesty, lic interest, a professional accountant should
fairness, objectivity, and responsibility. It also observe and comply with the ethical require-
states the four ethical standards that form the ments of this code.” Many other organizations
foundation to guide the ethical professional prac- have adapted this Code to help guide the actions
tice of management accountants: competence, of its own members. As a member of IFAC, the
confidentiality, integrity, and credibility. IMA Statement is consistent with the IFAC Code.

According to the Statement, “Members shall act As globalization of the profession continues, its
in accordance with these principles and shall members must continue to take a leadership
encourage others within their organizations to role in addressing the need for effective ethical
adhere to them.” This emphasizes the responsi- frameworks within the workplace. IMA and IFAC
bility of management accountants to act as lead- are only two examples of the accounting profes-
ers within their organization. This is done not sion holding itself to high ethical standards.
only by demonstrating appropriate ethical behav- Members of these and other accounting organi-
ior, but also by helping the organization develop zations must fully understand and act in accor-
and put into practice its own set of ethical prin- dance with the ethical codes that apply. This
ciples, values, and code. includes acting as a professional within their

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place of work to ensure that they are never in a Risk exists in every facet of an organization’s
position of noncompliance personally and to activity, as does the need for controls. While
encourage the development, adoption, deploy- SOX defines the breadth and depth of a risk
ment, and sustainment of an effective organiza- assessment, there is a variety of tools that can
tional code. be used to determine what actually needs to be
assessed.
VII. ETHICS AND INTERNAL
CONTROLS At the heart of most organizations are the core
Human behavior is amazing. Individuals are able processes that involve the central, key work per-
to rationalize any decision they make to align formed by the organization. This can include
with what they personally accept as a given manufacturing a product, processing a health
value. A criminal who has determined that socie- care claim, hiring an employee, or paying a ven-
ty owes him or her something will have no trou- dor. In almost all cases, process management
ble rationalizing theft. Individuals who believe provides the basis of determining what work is
that the ends justify the means will have no com- being done and, therefore, what risks might
punction about cheating. exist. Process management and process think-
ing become an essential aspect of determining
The COSO model used by the Public Company risk and internal controls. The following three
Accounting Oversight Board (PCAOB) as one of tools can be used to combine aspects of
the bases for conducting the internal controls process development, risk assessment, and
assessment under SOX 404 provides a frame- internal controls.
work for determining what risks exist within an
organization and how to best manage them. Business Process Reengineering (BPR), which
Although compliance with SOX has become an became popular in the 1990s, provides a struc-
incredibly burdensome initiative for many organi- tured view of organizational processes and
zations, and the application of COSO might be reveals the existence of tasks and activities that
considered an excessive requirement, the are carried out in order to transform inputs into
approach of assessing risk within an organiza- outputs. At each task and activity level, there are
tion is valid. Much of the work leading to the cre- potential risks that the management accountant
ation of the initial COSO framework took place will want to consider. In all cases, however, the
as a result of the scandals and organizational behavioral aspects must provide a context for the
failures of the 1980s. The ability of any organiza- risk and its control. The typical question to ask is,
tion to determine what risks existed and what “What would a reasonable person do in this situ-
controls needed to be in place to address them ation?” In many cases, any controls implemented
became an important issue, leading to the emer- would be based on such behavior, but other ques-
gence of ERM initiatives in the 1990s. A number tions will remain: Is the management accountant
of excellent case studies outlining the adoption assured that a reasonable person is performing
of risk frameworks and practical implementa- this task? How were individuals selected to per-
tions were published by Keith Wade and Andy form the task? What competencies are pos-
Wynne in their book Control Self Assessment. sessed by the individual assigned to this task?
Are these competencies adequate (and have they
been tested and verified) for the “normal” execu-

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tion of this task? The existence of an ethics pol- ● Assessment of probability of detection using
icy and assurance that staff are selected and current controls
employed based on that policy will establish a ● Identified action to be taken based on assess-
baseline against which these contextual assess- ment (if any)
ments can be made.
Using this tool and considering risk from a
Quality Management provides another view of behavioral aspect can assist in identifying what
process management that can provide manage- types of controls should be in place and where
ment accountants with an excellent variety of they would be best provided. Rather than relying
options that assist in creating greater visibility on traditional accounting approaches such as
on process performance and risk. In fact, quality control batch totals, authorization and security
management and management accounting have levels, etc., this approach uses the perspective
much in common. The quality manager seeks to of behavioral deviation from an anticipated norm.
ensure that a process achieves “zero defects”
by avoiding unplanned mistakes and costly Continual Process Improvement (CPI) is the
rework. This includes ensuring that any potential third area that can significantly contribute to
risks that can lead to mistakes occurring or not identifying process controls related to ethical
being identified are assessed and evaluated— and behavioral issues. This concept relates to
goals shared by management accountants. the development of a “learning organization”—
where continual monitoring and assessment of
Quality management tools include Failure Mode process performance leads to the identification
and Effects Analysis (FMEA), Poka Yoke assess- of potential process management and control
ment (understanding the process and “mistake issues and the ongoing development of modified
proofing” the work to ensure no failures), and Six work and control structures that reduce cost,
Sigma process analysis techniques (when con- increase process cycles times, and, from the
sidered financially viable based on process cost ethics perspective, identify unanticipated behav-
or impact of the process outcome). iors that render existing controls (including how
work is assigned and how staff are hired and
A simplified system can involve taking elements deployed) excessive or inadequate. Because tra-
of both process management and risk manage- ditional controls in most organizations evolve
ment to create an Excel-based worksheet for from the reality and experience of staff that may
analyzing every process under review using the have been in place for some considerable time,
following headings: CPI is an area that management accountants
should pay particular attention to. As an organi-
● Process activity zation progresses—hiring new employees or
✓ Tasks within the activity adapting itself to competitive pressures—the
● Potential errors or risks at each task level business environment changes. These changes
● Risk assessment of the impact of a failure have the potential to make current internal con-
(Using either a simplified “High, Medium, or trols ineffective or unacceptable. For example,
Low,” or the more traditional “Impact” and as the workforce changes, the traditional
“Occurrence” scales of 1-3) reliance on the behavior of experienced staff may
no longer be sufficient; new staff may not behave

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in a way that achieves the desired outcomes— needed to ensure alignment and consistency
especially if there is an inadequate approach to between “intent” and action.
ethical hiring, leadership, and compliance.
Management accountants are concerned with
Creating an ethical working environment is part balancing an adequate level of control with a
of the foundation of any system of internal con- level of investment that can allow the organiza-
trols; there is no defined predictability of human tion to remain profitable and constrain expense
behavior unless a baseline of expectations is growth. Auditors also have to balance the issue
established and used as a framework for deter- of assessing an adequate level of control. Some
mining what a “reasonable person” would do in level of risk will always be inherent in any
a defined situation. This situation is further enterprise—the challenge is determining exactly
impacted as employee turnover increases and where to place the investments required for
as the organization operates in different soci- effective control.
eties and is exposed to the different values and
“norms” of ethical behavior that may exist. For No system of enterprise-wide controls can be
internal control purposes, a management developed and implemented effectively without
accountant can no longer assume that a particu- conducting an enterprise risk assessment, and
lar behavior will be consistent or predictable— this should be the starting point. One aspect of
whether based on a generic societal norm or risk is the impact of employee behavior, and one
past experience. area of investment includes initiatives required
to minimize the risk of unplanned and unaccept-
The question that must be answered when devel- able behavior.
oping a set of management controls to protect
shareholder worth is simple: “Do I really know The Right People
what values individuals within this organization An organization’s ethics policy must be applied in
will use to make decisions?” A system of inter- the hiring stage. This requires some level of
nal control cannot be expected to function with a questioning or testing to assess a candidate’s
high degree of confidence until a comprehensive alignment with the organization’s code of ethical
framework for corporate ethical behavior is in behavior. This could include:
place.
● Interview questions that encourage candidates
V I I I . P R A C T I C A L A P P L I C AT I O N : to define how they would respond to specific
CONVERTING INTENT INTO circumstances
O P E R AT I O N A L R E A L I T Y ● Asking individuals what their own personal
Creating a meaningful ethics policy is important, code of ethics (or values) might be
but additional work is needed to convert that pol- ● Asking candidates to comment about what
icy from a piece of paper into something that workplace behaviors would be unethical
lives and breathes throughout the organization. ● Creating a multiple choice test where candi-
It is not enough to communicate a policy and dates state their level of agreement or dis-
then expect managers to make certain that ethi- agreement with various ethical statements
cal conduct permeates every aspect of the busi- (Gale, 2002)
ness. This section identifies the steps that are

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● Team-based interviews where one interviewer organization is convicted of improper conduct

poses an ethical question, other members (The Conference Board, 2006).
offer alternatives, and the candidate is asked
to add his or her personal view. Ethics training for employees should focus on
covering ethical concepts, the organization’s
Management accountants should work with HR code, and compliance. To achieve this, training
professionals to ensure that the approaches should include:
used to reinforce “ethical hiring” meet legal (such ● Ethical concepts and thinking: What is
as EEO) and other policy requirements. Although “behind” the issue of ethical action?
still much in their infancy, pre-employment testing ● The organization’s code of ethics and any sup-
tools are being developed that will aid in assess- porting “rules”
ing the behavioral expectations of candidates.
While the area of ethical assessment is fraught Expectations of compliance with the code should
with challenge, results from applying such testing cover:
in other areas of behavior have been successful ● General employee behavior and personal
(such as client services orientation, sales capac- conduct
ity, etc.). Management accountants should ● How ethics are built into work management
ensure that part of the HR budget is allocated for methods
conducting thorough behavioral analysis and that ● How ethics affects specific jobs, processes,
in-depth assessment is mandatory in the case of activities, and relationships
sensitive positions (revealed through the enter- ● How the organization monitors compliance
prise risk assessment). with the code
● What routes are open to employees who have
The Critical Role of Employee Training compliance issues (personal guidance, advice,
Although orientation must be provided to every and “whistleblowing” frameworks)
employee at the time of hiring, it is not enough ● What action is taken when a complaint or
to maintain awareness and commitment to the issue is identified
application of a code of ethics in the workplace. ● The actions and penalties once noncompli-
Every existing member of staff should receive ance is proven.
ongoing training, starting at the board level and
cascading down throughout the organization. Management accountants concerned about
Surveys conducted by the Conference Board effective implementation of their organization’s
appear to indicate that organizations are taking code of ethics should make certain that training
this requirement seriously, especially since the programs are in place and that the training is
revisions to the 2004 Sentencing Guidelines, comprehensive, specific to “real world” situa-
which recommend that ethics training take place tions employees will face, and is based on repe-
throughout the organization as an effective tition and consistency (i.e., the same message
approach to lessening the penalty if an is being delivered repeatedly across the
organization—essential to avoid the defense of
“I didn’t know…”). Finally, as with other areas of
competency development, training in ethics and
ethical behavior should reflect “career bands”—

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ethical training should be customized to the The outcome of these discussions can be used
employee’s scope, seniority, and position. No as training for new candidates and recruits, help-
position should be immune from training require- ing establish specific job-related behaviors that
ments, including senior management. can be incorporated into competencies, job
descriptions, and performance review process-
Building Ethics into Work Behavior es. Such a framework can also help identify
While leadership has been identified as a key areas where specific training might be required
component of effective ethical policy implemen- or situations where existing processes or tools
tation and maintenance, most employees will make it impossible for employees to actually
see ethical issues in terms of their own jobs and behave in accordance with the ethics statement.
positions. Failure often occurs when employees (Employees are usually incredibly creative in find-
are expected to create their own linkage between ing ways around roadblocks to achieve a desired
high-level statements such as “We will treat all outcome, even if that means compromising an
customers with dignity and respect” and their internal control based on a certain type of antic-
own job. This often leads employees to misinter- ipated behavior.)
pret the exact level and extent of behavior that is
required from them. High-level ethical state- Adequate funding should be directed into job-
ments must be cascaded down through the specific training in order to maximize its value.
organization so that employees can understand Generic ethics training might be of some value in
the ethical principles in terms of their day-to-day creating overall awareness and context, but most
responsibilities. employees see the world and behavior issues
from their own specific position and responsibil-
Managers and leaders can use this step as a ities. The ethical aspects of internal controls
valuable way of communicating specific expecta- only work at the work level, so training must be
tions at the employee level. For example, the directed at that level to be effective.
manager of a trucking section can meet with driv-
ers and discuss what the statement “We will Building Ethics into the Approach to Work
treat all customers with dignity and respect” Management
means in terms of their specific jobs. The group A typical example of how an organization can fail
can then start to develop their own specific “is” to commit to a code of ethics is the organization
and “is not” statements that reflect the reality of that prides itself on the claim “Our people are
this ethical practice at their job level, focusing on our most important asset” yet fails to engage its
how the drivers would convert this high-level employees in the design, development, or
statement into practice. This discussion also improvement of their daily work. Apparent con-
helps identify issues and problems at the work flicts between what an organization says and
level that might not have been discussed or antic- what it does lead to a lack of credibility for the
ipated when the organization-level statement was whole code.
developed. A key issue for ethical behavior is that
employees often do not have the opportunity to In order for the intent of an ethics code to
assess ethical issues—this process would allow become a reality in practice, every aspect of an
it to take place (Bowen, 2006). organization’s activity should be impacted by the
code’s deployment. Exhibit 2 provides a simpli-

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EXHIBIT 2: AREAS OF ETHICAL BEHAVIORS FOCUS

Areas of Ethical Design and Execution of Work Post-sales Support

Behaviors focus Development Activity and Service

• Needs of client • Cycle time • Client focus

Client based
• Fair value • Quality specification • Support resolution
• Involvement • Involvement • Work-life planning
Employee based • Adequate controls • Training/safety • Flexibility of solution
• Environment • Noise/other impact • Outage impact
Society based
• Impact on users • Resource usage • Waste/disposal
• Reputation/brand • Lowest cost/no waste • Reputation
Shareholder based • Risk/cost-benefit • Reputation • Value-stream return
• Involvement • Planning/delivery • Involvement
Supplier based
• Negotiations • Problem resolution • Learning/support

fied schematic of how such a deployment might For example, organizations that produce prod-
be considered. The horizontal axis shows three ucts that harm the environment, use excessive
high-level categories of organizational process- natural resources, or cannot be disposed of with-
es: the design and development of products and out a significant negative impact on the environ-
services, the actual manufacturing or delivery of ment would find it hard to convince employees
products and services and post-sale client sup- that it has a high concern with the environment.
port. The vertical axis shows what might be a Management accountants should ensure that
typical series of groupings of major ethical topics processes are in place where issues are
areas. Within the matrix are the considerations addressed within the design and development
of how and where certain linkages between the methodology of the organization. This is when
ethics and values stated within the code and the key decisions regarding materials usage, pro-
their deployment might occur. While this cessing methodology, and requirements for prod-
schematic is illustrative, the only purpose is to uct support and disposal are made. Dealing with
show how alignment between intent and actual these issues later in the design process might
practice must be created. result in significant cost increases and a failure
of a product to meet its stated market objectives
Design and Development Processes for price and volume. The adoption of a tool such
In many cases, an organization demonstrates its as Life-Cycle Costing can assist in developing a
code of ethics through the manner in which it planning process that considers such issues as
brings products and services to the marketplace. part of the product design phase.

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Work Planning and Execution regulatory requirements that apply to its prod-
Once a product or service has moved beyond the ucts, processes, and activities and should
design phase and into production/delivery, ethi- include such requirements as part of the quality
cal behavior and internal controls need to be management system. Consideration should also
considered in areas such as: be given to: the promotion of ethical, effective,
● Selection of materials suppliers and contract and efficient compliant compliance with current
negotiations and prospective requirements…” (ISO 9004,
● Selection of and negotiations with subcontrac- 2000, paragraph 5.2.3). It is clear that con-
tors and distributors trolled conditions include consideration of the
● Traditional controls on all areas of processing, ethical aspects of behavior when developing all
such as theft of materials and byproducts levels of compliant process management.
● Fraudulent creation of customers or customer
relationships Post-Sales Support and Client Service
● Potential for illegal or unethical negotiations In many cases, organizations have an obligation
with potential clients to continue to support their products and servic-
● Fraudulent transactions within both the buying es after a sale is completed. This is another key
and selling processes area where the manner in which an organization
● Creation or use of fraudulent or unethical enti- designs its processes and conducts business
ties to conduct business can demonstrate compliance with its stated orga-
● Illegal or unethical approaches to handling nizational ethics. A well-known example would be
waste and/or scrap Johnson & Johnson’s (J&J) recall of Tylenol follow-
● Illegal or unethical uses of organizational ing the deaths of several people who had taken
assets for noncorporate use cyanide-laced capsules of Extra-Strength Tylenol.
● Misappropriation of funds designated for orga- While outsiders might not be able to determine
nizational purposes exactly which aspect of the company’s code
● Creation of work processes and their impact called for a complete and unquestioned recall of
on employees (safety, etc.) the product, that was the result. No debate. No
● Creation of work processes and their impact question. One can imagine the internal discus-
on third parties sions regarding the impact a recall would have on
● Ensuring processes are “designed” in a way quarterly earnings and the probability that most
that minimizes cost and ensures quality product in the marketplace had not been tam-
pered with. If the company was going to continue
Ethical practice occurs when daily business deci- living by its overall credo, however, it had to do
sions and work processes reinforce ethical “what was right under the circumstances.” This
expectations. In the ISO 9000 standards, the can be contrasted with other situations where
International Standards Organization states, failure to act on growing evidence of product prob-
“The organization shall plan and carry out pro- lems or defects led to further deaths or other
duction and service provision under controlled negative impacts. While J&J was able to avoid
conditions” (ISO 9001, 2000, paragraph 7.5.1). long-term effects of the recall—introducing
In addition, the guidelines for implementation tamper-proof packaging as a response to the
state, “Management should ensure that the crisis—many companies that fail to act promptly
organization has knowledge of the statutory and never recover in the marketplace.

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When a crisis occurs, management accountants ● Distributors and agents for the organization’s
face the challenge of balancing what the organi- products and services
zation’s ethics code states in regard to the need ● Advertising and communications agencies
to protect the interests of shareholders against that prepare presentations on behalf of the
what it states about the quality of products, the organization
importance and impact of customers, and the ● Service delivery agencies—especially in gov-
organization’s place in society—all of which ernment, where ASD (Alternative Service
contribute to an organization’s reputation. It is Delivery) is being or has been implemented
important in this instance to consider the long- ● Associated organizations operating beyond the
term impact on the shareholders’ overall invest- reach of regular, routine monitoring by the par-
ment instead of focusing on the short-term ent organization
impact on earnings. In today’s economic environ-
ment, where intangible assets make up a growing In all cases, ethical violations by any of these
portion of an organization’s value, unethical third parties will reflect poorly on the primary
actions that impact an organization’s brand or organization—especially in the eyes of the public.
reputation might have a considerable, longer-term In these times of outsourcing, decentralization,
impact than would a short-term earnings hit. and increased focus on core competencies,
organizations must ensure that their governance
Third-Party Ethical Impacts structures have processes in place to deal
Ethical issues can arise even when the actions with the behavior of their “partners” in the
are not controlled directly by the organization. marketplace.
One example would be the impact of using sub-
contractors in less developed countries (LDCs), One concern is the process by which third par-
where work practices may differ from those ties are selected. Criteria for selection should
deemed acceptable in the parent organization’s include traditional approaches such as organiza-
country. For instance, the public has long held tional credibility, financial stability, compliance
companies such as Nike accountable when news with specifications, and pricing, but they should
became public that a subcontractor in a different also extend to include assessments of the
country employed child labor. As the use of out- potential partner’s reputation and its ability and
sourcing continues to grow, organizations need commitment to abide by the behavioral expecta-
to remember that work practices, social condi- tions of the buying organization. Making selec-
tions, and values can differ greatly from country tions solely on price significantly increases risk
to country. Areas where the risks involved with and may create downstream problems when the
potential unethical behavior of third parties effects on customers, the marketplace, or socie-
include: ty at large are inconsistent with expectations.
● Call Centers and other client services support
activities (including technical support) Integrating a Code of Ethics into Business
● Provision of third-party after-sales support by Planning
distant suppliers When developing a business plan, decisions on
● Installation organizations employed as subcon- resource allocation consider a series of key busi-
tractors or “partners” ness priorities typically focused on the optimiza-
tion or even maximization of profitability and min-

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imization of costs. If employees within any orga- area, it is necessary to ensure that expenditure
nization perceive that decision making at the approvals are controlled and transparent and
planning level fails to consider aspects of ethical that the organization has fully considered the
behavior, however, the efforts to maintain the rel- implications that statements within their code of
evancy of the ethics code will suffer and possibly ethics could conflict with operational practices in
fail. Areas that need to include ethical consider- various business cultures. In order for employ-
ations as well as business priorities include ees to see an ethics code as real and robust,
employee testing at the hiring stage, providing they expect to see consistent application across
ethics training to new and existing employees, the whole organization—even if it means that
and, particularly important, the approaches used opportunities at the business-planning level
toward business expansion and contraction. must be passed up when they require the orga-
nization to “bend” or disregard its stated ethical
Business expansion can come from mergers and values.
acquisitions, self-managed geographic growth
(both national and international), and product or When There Are No Procedures to Follow
service expansion. One of the greatest challenges in any system of
controls is knowing what to do when there are no
In mergers and acquisitions, management specific procedures to follow. Forced to make
accountants must ensure that behavioral decisions without a predefined framework to fol-
aspects of the organizational cultures are part of low, an employee must use his or her knowledge
the due diligence investigation. History has of the organization’s ethical principles to help for-
shown that many mergers fail to deliver the mulate a thinking process that will lead to the
desired results—especially in service compa- correct, ethical decision. A failure to effectively
nies. In many cases, problems arise because deploy an ethics policy and provide employees
the different organizational cultures are very dif- with proper ethics training will force employees
ficult to blend, resulting in lower-than-anticipated to rely on their personal values, increasing the
benefits, higher costs of integration, higher staff risk of an inconsistent ethical response. It is
turnover, loss of clients, and, ultimately, the need these “white spaces”—where only about 5% of
to write off a significant portion of the cost of the the individual’s daily work takes place—that cre-
acquisition. Added to this is the negative impact ate the greatest potential ethical challenges and
that trying to merge differing cultures will have risks (Rummler and Brache, 1995).
on engaging new employees.
I X . M E A S U R I N G A N D I M P R OV I N G
Among the greatest issues that can arise from ETHICAL COMPLIANCE
the expansion into new markets are the chal- One of the greatest problems in achieving ethical
lenges posed by entering new markets with dif- compliance is the ability of any organization to
ferent business cultures. In spite of legislation actually be aware of what is happening on a day-
such as the Foreign Corrupt Practices Act, orga- to-day basis and making ethical compliance a
nizations still face the real problem of obtaining core element of its mainstream governance and
business or getting work done where the expec- accountability framework. Passing legislation for
tation of a “commission” is commonplace. tougher audits and stiffer penalties for individu-
When do commissions become bribes? In this als who act improperly can be a deterrent, but it

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is internal controls and operational transparency tracking of employees against ethical training
that will ultimately provide management with the requirements. Examples include:
required level of comfort. The difficulty is that ● The number of new hires and percentage who
“You cannot manage what you cannot measure,” completed orientation within required time
so it can be argued that ethical compliance still frame
rests largely on the CEO’s and CFO’s certifica- ● Percentage of employees who completed
tions that adequate internal controls are in annual refresher training on ethical conduct
place. Is this enough? The approach to corporate ● Number of employees scoring “achieved” and
governance developed in the wake of the stock “exceeded” on annual reviews in ethics criteria
market crash of the 1920s is now becoming out- ● Number of employees given an award for noted
dated in a society where key corporate assets ethical conduct
are intangible and knowledge based—yet the
majority of governance compliance remains root- Survey Tools
ed in purely financial reporting (Shepherd, Ongoing surveys are very valuable tools for
2005). Should organizations be assessing ethi- assessing ethical performance, especially in
cal compliance in other ways such as the U.S. areas such as management and leadership.
Sentencing Guidelines and Stock Exchange Surveys can be created using the organization’s
requirements that are much broader than finan- code of ethics and asking employees to rate how
cial reporting? well the organization is following the contents.
For example, an organization that states “We
While attestation of internal control effective- respect the dignity of each individual employee
ness and external audits remain critical compo- and recognize their merit” can ask employees
nents, there are other methods of compliance the degree to which they agree with statements
that an organization can adopt as part of its such as:
internal controls. The following approaches, ● “This organization respects the dignity of all
using the COSO framework, contribute to the individuals”
“monitoring” requirement under SOX 404. ● “My dignity is respected within this
organization”
Human Performance Feedback Loop ● “My manager respects my dignity”
Performance review and development systems ● “My coworkers respect my dignity”
must be fully aligned with the requirements for ● “My manager recognizes the merit of actions
ethical conduct. Competencies, job descriptions, that I take”
and objectives should include ethical expecta- ● “Merit is rewarded in this organization”
tions, and the regular employee review systems
(conducted on an annual basis at minimum) Respondents can be asked to rate each state-
must assess employees against the same crite- ment on a scale of 1 through 5 or from “Strongly
ria. If the code of ethics dictates that employees Disagree” to “Strongly Agree.” The results
treat all others with dignity and respect, then the become the basis for developing ongoing compli-
review process must include 360° input—includ- ance indicators and can be used to stimulate
ing both internal and external responses—in dialogue with employees about their concerns
order to assess whether that is truly happening. and the possible courses of action that could be
Key Performance Indicators (KPIs) must include taken to improve ethical compliance. This turns

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the company into learning and developing orga- ations” (Datz, 2005). The advisors meet on a
nization. At the organizational level, surveys pro- regular basis to identify and discuss common
vide the board of directors and other top man- issues that the organization should be aware of
agement with information showing how well the and may possibly need to address.
organization’s code of ethics is being implement-
ed and followed. Whichever approach an organization chooses,
the collection, analysis, and summarization of
Management accountants should ensure that ethics issues can provide insight into the opera-
the survey data is at an adequate level of granu- tion of its code of ethics and the degree to which
larity so that it can be linked to focused attention employees are following it. In addition, tracking
and action. An inadequate level of detail leads and monitoring issues raised through a whistle-
to aggregation, which makes it impossible to blowing framework creates opportunities to
identify the pertinent issues that need to be tar- enhance and improve internal controls.
geted for improvement. Not only does this waste Management accountants need to ensure that
time and resources, but any solutions and such processes are in place, that they operate
actions developed may not be targeted at the on a fully confidential basis, and that they are
correct issue. capable of generating statistical or event-based
reporting through which insight into ethical prac-
Importance of an Outlet: A Whistleblowing tice can be created.
Framework
An effective feedback system includes having a CEOs and CFOs have to place their own integrity
confidential framework for employees to report on the line by attesting to compliance with an
possible violations of the organization’s code of adequate level of internal controls (as well as all
ethics and to receive advice on the ethical other certifications). Creating a thorough, inte-
aspects of challenging decisions. Statistics grated system for developing, implementing, sus-
show that a large number of occupational fraud taining, and monitoring ethical performance with-
cases are detected through an employee “hot- in the organization will allow executives to make
line” or other reporting method. In the 2006 such declarations with confidence that a code of
Report to the Nation on Occupational Fraud and ethics is the foundation of the organization’s cul-
Abuse, the Association of Certified Fraud ture and is fully integrated into the thinking
Examiners (ACFE) notes that 44% of discovered process of every employee and business partner.
frauds over $1 million were reported through
confidential hotlines (ACFE, 2006). According to X . G L O S S A RY
David Gebler of Working Values, creating a cul- Accountable—Being answerable for one’s
ture where “employees freely raise issues and actions.
concerns without fear of retaliation” is one of six Bias—An inclination that influences judgment.
key aspects that make up the attributes of creat- Bribe—Something that is given or offered to a
ing an integrity-based organization. American person or organization in a position of trust
Standard, for example, has 65 “ethics advisors” to induce that agent to behave in a manner
that are, according to Rose Shyman, director of inconsistent with that trust.
security, the “go-to folks in the field who provide
guidance to employees dealing with ethical situ-

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Code of Ethics—The codified and published eth- sions about the strategic direction of the
ical principles of an organization, that are organization. They understand the business
intended to dictate how the entity and its formula for delivering value to the customer,
representatives will conduct business. arriving at strategies for identifying, develop-
Complainant—Anyone who raises a concern ing, marketing, and evaluating a product or
inside or outside an organization about service throughout its entire life cycle.
something they believe to be amiss. Negligence—The failure to be sufficiently careful
Confidential—Something that is done or commu- in a matter in which one has a moral or legal
nicated to another in trust; the implication is responsibility to exercise care.
that it is information that for some reason Reasonable Person—Usually used where the
(from personal privacy to competitive advan- question is asked, “Would a professional
tage) the person entrusting the information acting under the same circumstances, with
does not wish at least some others to know. the knowledge available to the field at the
Conflict of Interest—Circumstances in which a time the decision was made, have arrived at
public official, business executive, or other the same conclusion?”
individual in a position of trust might receive Responsibility—The sense in which one is
personal gain from his or her official/profes- accountable for achieving and/or maintain-
sional actions. ing positive results. The idea is that one
Ethics—a system of moral principles; the stan- who is entrusted with achieving or maintain-
dards for behavior of a particular group; any ing this outcome is expected to have rele-
code of behavior (even if it does not claim to vant knowledge and skills and to make a
have moral justification). conscientious effort to achieve it, whether or
Fabrication—a lie; falsified or created data, not the effort is successful.
experiments, or other significant informa- Stakeholder—A person or group who can affect
tion, including records, transactions, and or is affected by an action. Responsible
audits. decision making requires consideration of
Falsification—Changing or misrepresenting data the effects on all stakeholders even though
or other significant matters. not all stakeholders may be equal.
Fraud—An intentional deception conducted to Standard of Care—The degree of care that a rea-
secure an unfair gain. sonably prudent person would exercise in
Management Accountants—Strategic financial managing their own affairs. In negligence
management professionals who integrate law, an individual may be liable for injuries or
accounting expertise with advanced manage- damages if his or her conduct falls below
ment skills to drive business performance such standards.
inside organizations. They serve as trusted Trust—Having confidence and faith in the relia-
partners to executives in all areas of an bility, integrity, honesty, or certainty of a per-
organization, offering the expertise and son or thing.
analysis necessary for sound business deci- Values—The beliefs of a group or individual on
sions, planning, and support. Management which behavior and decisions are based.
accountants monitor, interpret, and commu- Value Judgment—A decision that requires a sub-
nicate operating results, evaluate perfor- jective opinion on what is right or wrong,
mance, control operations, and make deci- good or bad. Moral or ethical values are only

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one type of value, and moral evaluation is Deupree, J., “The Truth can Hurt Even More
only one type of value judgment. When It’s too Late,” The Corporate
Whistle-Blower—A person who reports wrongdo- Compliance and Regulatory Newsletter,
ing or corruption. This includes concerns February 2004.
about safety, financial fraud, mistreatment of Ethics Resource Center, “2005 National
employees, or other improper actions. The Business Ethics Survey (NBES),”
report might be made to an entity either Washington, D.C., 2005.
internal or external to the organization and is Fortune, “Top 500 Global Corporations,” July 24,
typically done anonymously or confidentially. 2007.
Gale, S., “Hiring Tellers: Strong Ethics a Must,”
XI. REFERENCES AND Workforce Management, 2002.
RESOURCES Gebler, D., “Creating an Ethical Culture,”
Adams, R., “Codes of Conduct for CFO’s and Strategic Finance, May 2006.
Others,” Association of Chartered Certified International Organization for Standardization,
Accountants, 2006. ISO 9001, 2000.
Association of Certified Fraud Examiners, International Organization for Standardization,
“Report to the Nation on Occupational ISO 9004, 2006.
Fraud and Abuse,” Johnson, R.W., “Enlightened Self Interest in
www.acfe.com/fraud/report.asp, 2006. Action,” Johnson & Johnson credo, 1943.
Booz Allen Hamilton, “Underperformance, Not Koestenbaum, P., P. Keys, and T. Weirich,
Ethics Gets CEOs Fired,” SmartPros Ltd., “Integrating Sarbanes-Oxley, Leadership and
June 2005, Ethics,” The CPA Journal, April 2005.
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xml. Tone at the Top,” Strategic Finance, March
Bottorff, D. “Nine Attributes of Good Ethics 2005.
Policy,” Ethics Quality, 2006, Pittman, E., and F. Navran, “Corporate Ethics and
www.ethicsquality.com. Sarbanes Oxley,” Wall Street Lawyer, July
Bowen, S., “The Business of Truth—A Guide to 2003.
Ethical Communication,” IABC Research Porter, G., “Ethics Scandals Rock State
Foundation, 2006. Governments,” Strategic Finance, September
Collins, D., “Five Levees for Improving Ethical 2006.
Performance,” Strategic Finance, June 2006. Rummler, G., and A. Brache, Improving
Collins, J., Good to Great: Why Some Companies Performance: How to Manage the White
Make the Leap…and Others Don’t, Harper Space in the Organization Chart, Jossey-
Collins, New York, 2001. Bass, 1995.
Conference Board, “Universal Conduct: An Ethics Shaub, M., F. Collins, O. Holzmann, and
and Compliance Benchmarking Survey,” S. Lowensohn, “Self Interest vs. Concern for
Report #1393-06-RR, Extract published by Others,” Strategic Finance, March 2005.
IMA, November 2006. Shepherd, N., Governance, Accountability, and
Datz, T., “Making a Place for Ethics,” CSO Sustainable Development: A New Agenda for
Magazine, November 2005. the 21st Century, Thomson Carswell,
Toronto, Canada, 2005.

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Verschoor, C., “The Value of an Ethical Culture,”

Strategic Finance, November 2006.
Verschoor, C., “Interactions between Compliance
and Ethics,” Strategic Finance, June 2006.
Verschoor, C., “Surveys Show that Ethics
Problems Persist,” Strategic Finance,
October 2006.
Wade, K., and A. Wynne, Control Self Assessment,
Wiley, New York, 1999.
Working Ventures, “Promoting Ethics Related
Actions through Training,” April 2007.

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