Compliance Management

Transcription

1 Compliance Management Patterns of noncompliance. - Mimetic compliance - mindless copying; going through the motions; assumes no one checks to see if actually appropriate and satisfies how rules apply in this case. - Fulfillment compliance - looks good, but facade. Follows the rules exactly, but without commitment. - Deceptive compliance - not what it looks like; hiding violations. How do you detect noncompliance? - You can only police what you can monitor; regulation requires reporting -- lots of paperwork -- because it can be monitored. How do you design a compliance program so it works? - Sticks vs. carrots vs. norms - Accepting agency costs -- what can you accept; when do you want to pay more than you get in return?

2 How Do Good Managers Get into Ethical Trouble? They intend to do wrong and get caught. They are lured in by promises of rich rewards. They make choices on limited economic grounds without considering the ethical angles. They treat complex situations as though they were simple. They stumble or back into it, and don t know what it is until too late. They just never pay attention. They push through it, denying what their instincts tell them. They stick with it from fear of losing their jobs. Their organizational culture doesn t support ethical reasoning or decision making.

3 Auditors Rankings of the Relative Importance of Fraud Warning Signs 1. Managers have lied to the auditors or have been overly evasive in response to audit inquiries. 2. The auditor s experience with management indicates a degree of dishonesty. 3. Management places undue emphasis on meeting earnings projections or other quantitative targets. 4. Management has engaged in frequent disputes with auditors, particularly about aggressive application of accounting principles that increase earnings. 5. The client has engaged in opinion shopping. 6. Management s attitude toward financial reporting is unduly aggressive. 7. The client has a weak control environment. 8. A substantial portion of management compensation depends on meeting quantified targets. 9. Management displays significant disrespect for regulatory bodies. 10. Management operating and financial decisions are dominated by a single person or a few persons acting in concert. 11. Client managers display a hostile attitude toward the auditors. 12. Management displays a propensity to take undue risks There are frequent and significant difficult-to-audit transactions Key managers are considered highly unreasonable. 15. The client s organization is decentralized without adequate monitoring. 16. Management and/or key accounting personnel turnover is high. 17. Client personnel display significant resentment of authority. 18. Management places undue pressure on the auditors, particularly through the fee structure or the imposition of unreasonable deadlines. 19. The client s profitability is inadequate or inconsistent relative to its industry. 20. The client is confronted with adverse legal circumstances.

4 21. Management exhibits undue concern with the need to maintain or improve the image/ reputation of the entity. 22. There are adverse conditions in the client s industry or external environment. 23. Accounting personnel exhibit inexperience or laxity in performing their duties. 24. The client entered into one or a few specific transactions that have a material effect on the financial statements. 25. Client management is inexperienced The client is in a period of rapid growth This is a new client with no prior audit history or insufficient information from the predecessor auditor. 28. The client is subject to significant contractual commitments. 29. The client s operating results are highly sensitive to economic factors (inflation, interest rates, unemployment, etc.). 30. The client recently entered into a significant number of acquisition transactions. Source: V. B. Heiman-Hoffman, K. P. Morgan, and J.M. Patton in Journal of Accountancy (1996). Ethical Problems: Early Warning Tests RULE-BASED TESTS Could someone be hurt in this situation? Is anyone being coerced or threatened? Is anyone being manipulated, deceived or lied to?

5 SMELL TESTS Is someone denying you access to important information? Are you (or is someone else) denying an obvious meaning or interpretation for information that you do have? Is someone else telling you there s a problem? Is someone telling you it s not your problem, when you believe that it is? Does the situation feel wrong to you? Is there anything illegal going on? LIGHT-OF-DAY TESTS Would you readily tell your spouse or parents about the situation and your involvement in it? Would you mind if the full story appeared in the Wall Street Journal? Source: Wood, n.d.

6 Some Methods of Controlling Unethical Behavior Using Agents Use agent (e.g., trade assn.) to certify seller. Use agent (expert) to certify the commodity. Use government to certify the commodity or the seller (licensing). Other government regulatory interventions in which government agents control the behavior by directive. Note that the use of agents to certify or to direct, i.e., the delegation to agents, simplifies the decision task for the consumer. But it inserts an additional stage in the choice process, and that can be costly. Using incentives/reward systems Negative rewards for individuals who generate undesirable behaviors/ outcomes (e.g., lower commissions for returns based on misrepresentation). Positive rewards for desirable behavior/outcomes produced by individuals. Tie positive/negative rewards to organizational outcomes (e.g., tax incentives for fewer workplace injuries). Note that the incentives can be set and monitored by agents such as government, but that the nature of incentives means that the choices of response behavior are made by the actors. Those actors can still make inappropriate choices due to insufficient or badly-designed incentives or preferences that diverge from the expected. Although the actors receive positive or negative rewards, the decision task placed on them may remain formidable if they lack the expertise to choose the alternatives that will be best for them.

7 Using interventions based on activity observations Use inspectors who observe the activity in progress. Use inspectors who audit records of activities. The use of inspectors assumes that knowledge of adverse activities will be sufficient to generate corrections either from the actors or from outside agents. Using knowledge provision to empower actors: using disclosure and exposure Use routininized information disclosure of good or bad performers (e.g., experience rating as on the web; third party providers of ratings; media reports). Create threats of exposure: encourage muckraking; provide mechanisms to widely share and publicize misdeeds; create competitions to escape the bottom (e.g., all firms are pressured to achieve 100% participation in the United Way among employees); use reputation for competitive advantage. Educate consumers. Educate sellers. This alternative presumes that actors have sufficient expertise to understand and act on the disclosure, and that they want to do so, i.e., that adverse conditions do not benefit them. This also presumes that reputational effects are meaningful enforcers.

8 Using ethical statements and norms Use a code of conduct/code of ethics. Reinforce the use of norms that demand unselfish, reliable, and/or honest behavior, e.g., the fiduciary norm, promise-keeping, etc. Create organizational and interorganizational systems that demand or reward trust and honesty. Rely on personal networks and relationship building to ensure trustworthy behavior. Such systems can reduce the need to provide external controls, whether by incentive or agent directive, and they reduce the costs of checking on compliance. But they do not necessarily solve the problems of lack of information or expertise. Codes of ethics may be mere window-dressing without enforcement and/or modelling by top leaders. And where relationship building is the mechanism of trustbuilding, it does not guarantee ethical behavior outside the network. Some Features of Effective Ethics Programs Top management support Ethics committee on Board Ethics officer or ombudsperson Code of conduct

9 Formal ethics program: Ethics policies Ethics hotline Required ethics training Specialized ethics materials Incentives/sanctions for compliance Ethics audits/individual evaluations Are managers professionals? What would a manager be like if he or she were a professional? How would professionalization constrain unethical behavior?

10 Whistle-blowing is the disclosure by organization members (former or current) of illegal, immoral, or illegitimate practices under the control of their employers, to persons or organizations that may be able to effect action. Near and Miceli 1985, p.4!! Whistle to who???! INSIDE - coworkers - supervisors - union officers - HR/employee relations staff; EEO staff - Suggestion system - Ombudspersons - Internal auditors/ Inspectors General in the public sector - Top management - Board of directors

11 OUTSIDE - Regulators - External audit team - National union officials or professional organizations - Media - Elected officials: local, state, federal (e.g., members of Congress) Adapted from Blackburn (1988) and Miceli and Near (1992) The Whistle-blower Checklist DISSENT: When whistle-blowers claim their dissent will achieve a public good, they must ask What is the nature of the promised benefit? How accurate are the facts? How serious is the impropriety? How imminent is the threat? How closely linked to the wrongdoing are those accused?

12 LOYALTY: When whistle-blowers breach loyalty to their organization, they must ask Is whistle-blowing the last and only alternative? Is there no time to use routine channels? Are internal channels corrupted? Are there no internal channels? ACCUSATION: When whistle-blowers are publicly accusing others, they must ask Are accusations fair? Does the public have a right to know? Is the whistle-blower not anonymous? Are the motives not self-serving? Bok (1981) and Johnson (2003)