Ethics auditing is an investigation into how well or poorly an organization kowtows to the set ethical standards of that particular company or the society in general. An ethics audit considers the practices of a company such as how they redress their grievances, finance disclosure mechanism, and the overall culture surrounding the general business dealings. Ethical auditing helps in determining the internal as well as the external consistency of an organization. The process starts internally by reviewing papers, people, and the processes taking place in an organization. Ethical audits provide important information to the management regarding the company’s performance; both socially and ethically.
Benefits and limitations of ethics auditing
The importance of ethical auditing is that it enables an organization to view itself in different perspectives. It completely captures the ethical profile of a company. An organization’s ethical profile combines all factors affecting its reputation by critically examining its way of doing business. The benefits of ethical auditing include:
- It clarifies the actual values that the organization operates
- Provides a baseline to measure the future improvements of an organization
- It helps the organization to meet the societal expectations
- It assists the different stakeholders to make clear their expectations regarding the company’s behavior
- It helps in highlighting priority areas within the company
- Helps to identify motivational issues
- Finally, ethical auditing plays a huge role in identification of vulnerable areas in an organization especially relating to lack of openness
Despite these advantages, ethics auditing have some limitations. They include: Ethics audits may expose ethical problems that a company cannot correct. Stakeholders may also be discontented with the information provided from the audit. Furthermore, conducting the audits adds other financial and record keeping burden to the company.
Challenges of measuring non-financial performance
To start with, identifying the right performance measure is in itself a challenge. Even though there are numerous advantages of non-financial performance measures, they are not without challenges. The major challenge is time and cost. Development alone consumes a substantial amount of time and financial expenses. Non-financial performance measures are also affected by bureaucracies; bureaucracies cause the whole process to be corrupt thereby having very little impact to accomplishment of strategic goals. Another challenge with non-financial measures is that, unlike financial measures, they can be done in several ways; there is no shared denominator. Lack of casual links is another challenge in this type of performance measurement. Many organizations make the mistake of adopting non-financial measures without considering the relationship between these measures and price performance. This further leads to problems in performance evaluation such as focusing on the wrong objectives. Lastly, non-financial measures lack statistical reliability.
Stages of ethics auditing
Ethics auditing takes place in seven steps as follows:
- Securing commitment from the top management and the board
- Establishing an ethics audit committee
- Define the scope of the audit
- Review the organizational mission, goals, and values
- Collect and analyze relevant information
- Verify the results through an outside agent
- Report the findings to the audit committee, managers, and other stakeholders
Strategic Importance of Ethics Auditing
For an ethics audit to be successful it should be conducted regularly. An effective ethics audit Provide a baseline for the general effectiveness of ethics initiatives in an organization. It also acts as an important asset in resource allocation and development of programs. Lastly, it exhibits the positive effect of ethical conduct and corporate social responsibility ingenuities on the company’s bottom line.
Satava, D., Caldwell, C., & Richards, L. (2006). Ethics and the Auditing Culture: Rethinking the Foundation of Accounting and Auditing. Journal Of Business Ethics, 64(3), 271-284. http://dx.doi.org/10.1007/s10551-005-0556-y