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Converging Ethics, Governance, and Culture
Michael Brozzetti, CIA, CISA, CGEIT
"Safeguarding Reputation and Fiduciary Integrity"
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Disclaimer
The views and opinions expressed herein are solely
those of Boundless LLC and its principal, Michael
Brozzetti, and do not necessarily represent the views
and opinions of their partners, affiliates, or associates.
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A picture is worth a 1,000 words…
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The relation of Law and Ethics…
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Quotes on governance today…
“What we really need is a new paradigm for due diligence when it comes to fraud.” Former SEC enforcement attorney
“It’s really about intentional opaqueness where transparency is legally required. It’s about taking steps to hide the true nature of transactions…” Former Prosecutor of the U.S. Attorney’s Office
“I have discovered that greater government attention to corporate ethics and compliance activities is a smarter investment than endless federal prosecutions, suspensions, and debarments.” Former Federal Inspector General
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Ethical vs. Legal Governance
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Innocent
Not
Guilty
Guilty
Ethical Governance Legal Governance
“Not Guilty, Does Not Mean Innocent”
– University of Pennsylvania Law School Student
Judgment Systems and Governance
Measured to ethics and values
Internally controlled and adjudicated
Minimum exposure to civil and criminal liability
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Ethical Judgment Legal Judgment
Measured to law or regulation
Externally controlled and adjudicated
Maximum exposure to civil and criminal liability
Governance
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Governance
Culture Ethics
Governance Elements
People
Ethics
& Values
Internal Adjudication
Process
Internal
External
Technology
Systems / Devices Information / Data
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What area is most
important for
organizational success?
Governance Elements
People
Ethics
& Values
Internal Adjudication
Process
Internal
External
Technology
Systems / Devices Information / Data
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20th Century Governance Challenges
Ethics
Governance
Risk Management
Compliance
Internal Control
Communication & Trust
What state is the culture in?
Accountability and culpability Case law suggests that not knowing and
ignorance is a defensible claim.
Over 95% of lawsuits are
settled or dismissed
Disclosure, speed, and flow
of risk information Often filtered and distorted.
Level of transparency into the culture No practical way to continual monitor the “Soft controls” that shape
cultural norms and risk appetites.
Limited foresight into the cultural risks
that manifest misconduct and fraud.
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Governance Today: Still a Black Box?
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Ethics
Governance
Risk
Compliance
Internal Control
Communication and Trust
What state is the culture in?
Discovery risk Enterprise risk
The Convergence of EGC
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Governance
Culture Ethics
Governance is rooted in Ethics and Culture
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If you want to know the “Tone at the Top”
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Ethics
Governance
Risk Management
Compliance
Internal Control
Communication & Trust
Corporate Culture
… then listen to the “Song at the Bottom”
AICPA Audit Guide
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“The effectiveness of internal control
cannot rise above the integrity and
ethical values of the people who create,
administer, and monitor them.”
Ethics
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Governance
Culture Ethics
Principles, Values, and Ethics
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• Inform our choice of values, morals, and ethics. Principles
• Attitude sets that influence behavior Values
• Standards by which behavior is evaluated for their morality – their rightness or wrongness
Ethics
“Values motivate, morals and ethics constrain”
– Paul Chippendale
Case Study: Goldman Sachs
The federal government
charged Goldman Sachs
with fraud accusing the
firm of deceiving
investors who bought
mortgage bonds that
select clients already
knew were likely to fail.
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Case Study: Citi Group
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On November 28, 2012 the
Judge Jed Rakoff refused to
approve a settlement deal
between the SEC and
Citigroup for allegations that
Citigroup dumped dubious
assets onto investors whom
lost $700MM, while Citigroup
profiteered $160MM in the
deal.
Case Study: SEC Veteran Blows the Whistle
U.S. SEC
Mr. Darcy Flynn, a 13 year old veteran,
blows whistle to Congress (Committee on the
Judiciary )
Allegations that over 9,000 files related to
Matters Under Inquiry (MUIs) are
systematically destroyed over 17 years
Claims included the destruction of records
relating to Madoff, Goldman, Lehman, and
other important cases
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Honoring Public Service
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(11) Employees shall disclose waste, fraud,
abuse, and corruption to appropriate
authorities.
TITLE 5: ADMINISTRATIVE PERSONNEL: PART 2635—STANDARDS OF
ETHICAL CONDUCT FOR EMPLOYEES OF THE EXECUTIVE BRANCH
Trust in Public Service
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TITLE 5: ADMINISTRATIVE PERSONNEL: PART 2635—STANDARDS OF
ETHICAL CONDUCT FOR EMPLOYEES OF THE EXECUTIVE BRANCH
(c) A violation of this part or of supplemental
agency regulations, as such, does not create
any right or benefit, substantive or
procedural, enforceable at law by any
person against the United States, its
agencies, its officers or employees, or any
other person.
The Regulatory Ethics Effect on Boards
The fiduciary duty of corporate directors has
been understood to embrace the adoption and
maintenance of corporate compliance
programs that are designed to detect
corporate wrongdoing.
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Culture
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Governance
Culture Ethics
Cultural Tones
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Undertone Overtone
– Complacency, Laziness, and
satisfaction with status-quo
– Loose controls with
insatiable appetite for risk
– Short-term decision making
at the expense of long-term
benefit sustainability
– Autocratic and self-focused
cultures, internal politics,
power struggles
+ Strong cultural work ethic
that challenges assumptions
+ Tight controls with
thoughtful risk appetite
+ Balanced decision making
considering short and long
term benefit sustainability
+ Collegial and team-focused
cultures, “conscientious
employees,” balanced power
NACD Comment Letter to SEC
“A strong corporate culture is one of the best tools
a company has for combating fraud.”
- NACD Barbara Hackman Franklin
Rating Scale
1 2 3 4 5 6 7 8 9 10
Poor Excellent
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External Culture Benchmarks Industry Culture Benchmarks
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Note: Chart is for illustrative purposes only. Y = Year.
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Internal Culture Benchmarks Cultural Trend Analysis
Note: Chart is for illustrative purposes only. PY = Prior Year and CY = Current Year trending.
Cultural Assurance
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BU #3 Executive Survey CEO CFO COO VP HR CIO
Ethics & Governance 8.6 8.2 2.1 1.6 5.8
Risk Management 8.0 7.2 3.1 3.0 5.8 Strategic Planning 7.4 7.6 3.6 3.4 5.2 Management 7.6 7.8 1.4 1.8 5.4 Communication 5.4 6.0 1.1 1.0 4.8 Organization 6.2 7.8 1.8 2.0 5.8 Empowerment 7.2 7.6 2.5 2.0 5.4 Compliance (Audit & Quality) 8.0 4.8 2.3 2.0 6.6
CCI™ Composite Rating 7.3 7.1 2.3 2.1 5.6
Business Unit Survey Business Unit 1 Business Unit 2 Business Unit 3 Business Unit 4 Business Unit 5
Ethics & Governance 4.6 4.7 2.4 5.3 4.3
Risk Management 4.3 4.9 1.0 5.3 3.9
Strategic Planning 3.7 4.0 2.8 5.0 3.9
Management 3.6 4.1 1.3 4.9 3.5
Communication 5.0 5.6 4.3 5.9 5.2
Organization 4.0 4.8 2.5 5.1 4.1
Empowerment 4.5 4.9 2.8 5.6 4.5
Compliance (Audit & Quality) 5.2 5.4 3.8 5.6 5.0
CCI™ Composite Rating 4.4 4.8 2.6 5.3 4.3
Drill down and gain dynamic views into the
organizational corporate culture for internal
benchmarking
Internal Adjudication
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Code of Conduct
Code of Ethics (Per Professional
Practice Standards)
Company Policy
Regulation
Law
Business Issues
Legal Issues
Ethics Compliance
Ethics Compliance
Management (Independent of Incident)
Audit, Risk, &
Compliance
General Counsel External Legal Counsel
General Counsel
Independent Committee
Independent Committee
Independent Committee
Transparency into Incident Reporting
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# 1 # 2 # 3 # 4 # 5
Report Filings 16 12 28 25 21
Code of Conduct 5 4 15 5 8
Professional Conduct 4 5 6 5 6
Policy 4 2 3 12 4
Regulation 1 0 4 3 1
Law 2 1 0 0 2
Report Status
Open – In Queue 9 6 11 8 15
In Due Diligence 2 2 7 3 5
Resolved 5 4 10 14 1
Report Resolution (YTD) 1 2 9 2 4
Authority Change 0 1 3 0 2
Disciplinary Action Taken 1 0 4 1 2
Restitution 0 1 0 0 0
Prosecution 0 0 2 1 0
Average Cycle Time (Days) 102 82 55 77 89
Quality for the Ethics Compliance System
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Mission and Code
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Closing Quote
“A self-aware person will act completely within their
capabilities to their pinnacle, while an ignorant person
will flounder and encounter difficulty.”
- Socrates, Greek Philosopher
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Thank you! Michael Brozzetti, CIA, CISA, CGEIT Boundless LLC [email protected]
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"Safeguarding Reputation and Fiduciary Integrity"
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