Developing Ethical Systems Barbara W. Scofield, PhD, CPA For Institute of Internal Auditors November 3,

Course Description Part I: Overview of Ethics  OBJ: To understand the sources of ethics and development of ethical systems Part II: IIA Code of Ethics as the basis for Ethical Decision-making  OBJ: To relate the IIA Code of Ethics to general ethical principles Part III: Applying Ethical Decision-making to the Profession of Accountancy  OBJ: To practice applying ethics to internal audit issues. 2

Why Internal Auditors Study Ethics? Internal Auditors have a responsibility to identify high risk situations in which unethical conduct is more likely. 3 Opportunity Rationalization Perceived Need

Why Internal Auditors Study Ethics? The nature of accounting and internal auditing is that the professional has an inherent opportunity to exploit their clients and employers.  Internal auditors have an technical expertise such that is difficult for the non-accountant to verify  Internal auditors draw conclusions using judgment that does not have a single objective result.  Internal auditors are trusted to work in the best interest of employers and/or clients even when clients/employers have other preferences. 4

Why Internal Auditors Study Ethics? The nature of accounting and auditing is that the rationalizations for unethical conduct are prevalent.  “I can get the same result without all of the work of …”  “No one will know how this was done except me.”  “No one is actually harmed.”  “Insurance will pay.” 5

Why Internal Auditors Study Ethics? The nature of accounting and internal auditing is that the profession may be able to connect individuals with perceived needs with the social responsibility of business.  Internal auditors consider the risks to the organization of having employees with unmet needs in health care, addiction treatment, mental health, etc.  Internal auditors interact with all levels of employees and departments. 6

Why Internal Auditors Study Ethics? A focus on ethics helps Internal Auditors  to diminish opportunities for unethical conduct  to expose the rationalizations of others, and  to establish means to meet the needs of others by developing systems that increase accountability and manage the risk. 7

Why Internal Auditors study Ethics Membership in Institute of Internal Auditors includes  Core Principles  Definition of Internal Auditing  Code of Ethics – Principles  Code of Ethics – Rules of Conduct That voluntarily commit members to ethical conduct and decision-making 8

Code of Ethics -- Principles  Integrity  Objectivity  Confidentiality  Competency 9

Core Principles for the Professional Practice of Internal Auditing First Three of Ten Core Principles:  Demonstrates Integrity  Demonstrates Competence and Due Professional Care.  Is Objective and free from undue influence ( Independent ). 10

Definition of Internal Auditing Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes. 11

Ethical Paradoxes Ethics are individual choices. Ethics are shared values. 12

To what extent are ethics shared values? Universal Virtues summarized in  Wisdom  Justice  Fortitude  Temperance Consistency in what represents “the good life.” 13

To what extent are Ethics individual?  Family influences  Regional influences  Cultural influences  Religious influences 14

Application  Mentoring 15

Ethical Paradoxes Ethical actions are those actions taken even when not in one’s immediate self-interest. Ethical actions are always in one’s long-run self-interest. 16

Application  Align incentives 17

Ethical Paradoxes Ethical actions are the result of moral character. Moral character is developed by practicing ethical actions. 18

Application  Expect ethical behavior 19

Part 2: IIA Code of Ethics as a basis for Ethical Decision-Making Primacy of Ethical Principles  Integrity  Objectivity  Confidentiality  Competency 20

Rules of Conduct: Integrity Internal Auditors shall  1.1 Shall perform their work with honesty, diligence, and responsibility  1.2 Shall observe the law and make disclosures expected by the law and the profession 21

Rules of Conduct: Integrity Internal Auditors shall  1.3 Shall not knowingly be a party to any illegal activity, or engage in acts that are discreditable to the profession of internal auditing or to the organization  1.4 Shall respect and contribute to the legitimate and ethical objectives of the organization. 22

Rules of Conduct: Objectivity Internal Auditors 2.1 Shall not participate in any activity or relationship that may impair or be presumed to impair their unbiased assessment. This participation includes those activities or relationships that may be in conflict with the interests of the organization. 23

Rules of Conduct: Objectivity Internal Auditors 2.2 Shall not accept anything that may impair or be presumed to impair their professional judgment. 2.3 Shall disclose all material facts known to them that, if not disclosed, may distort the reporting of activities under review. 24

Rules of Conduct: Confidentiality Internal auditors 3.1 Shall be prudent in the use and protection of information acquired in the course of their duties. 3.2 Shall not use information for any personal gain or in any manner that would be contrary to the law or detrimental to the legitimate and ethical objectives of the organization. 25

Rules of Professional Conduct: Competency Internal Auditors: 4.1 Shall engage only in those services for which they have the necessary knowledge, skills, and experience. 4.2 Shall perform internal audit services in accordance with the International Standards for the Professional Practice of Internal Auditing 4.3 Shall continually improve their proficiency and the effectiveness and quality of their services 26

Part 3: Applying Ethical Decision- making to the Profession of Accountancy Primacy of Ethical Principles  Integrity  Objectivity  Confidentiality  Competency 27

Case Study: Internal Audit The laptop computer policies and procedures at Anytown School District provides a contrast between theory and practice in fixed asset accounting. One laptop is missing, and the internal auditor has investigated. After reading the case description... 28

Case Study: Government Practice Consider the interaction of controls and organizational culture. a.What went wrong at Anytown School District? b.Could the problems have been anticipated? c.How could the problem be fixed? d.Is the only unethical behavior in this case the apparent theft of a laptop? 29

End of Part 3 Time for Questions and Comments Or Contact Barbara W. Scofield, PhD, CPA