Ethical Risk Management · scandal ACFE - September 2013 ©2013 Pr. Messaoud Abda, ... Fairfield Sentry Ltd with Madoff, 200 mlns USD loss 3) Organizational culture of profit and

Ethical Risk Management

Pr. Messaoud Abda

CFE, CGA, CPA, CICA, CSI, M.B.A., FICB

Outline

1

Ethical accountability

2

Underlying issues of the ethical accountability

3

Ethical situation tests: detection and prevention

of the ethical risk

4

Apparent unethical situation: a risk to manage

ACFE - September 2013

www.ACFE.com ©2013 Pr. Messaoud Abda, CFE 2

Learning Objectives

Knowledge: understand ethics, and understand how a cultural

ethic can be incorporated in the organization’s anti-fraud

strategy on a permanent and realistic basis;

Vigilance: develop the ability to identify the threats to ethics that

will evolve in fraud and enforce the safeguard measures

available;

Management: be able to face ethical violations with

professionalism, manage the ethical issues with determination

and success;

Caution: develop the sense of caution in maintaining the ethical

environment in the organization, educate, and convince versus

control and coercion.



Nearly all men can stand adversity, but if you want to

test a man’s character, give him power.

Abraham Lincoln

In law a man is guilty when he violates the rights of

others. In ethics he is guilty if he only thinks of doing

so.

Immanuel Kant



Some logic !



“But it’s not ethical to arrest us for ethical violations!"

The situation

“The current financial crisis has raised questions about the

legitimacy of capitalism.

Ethical failures certainly played a role.

While it remains to be seen whether and how many

people blatantly broke the law, there are abundant signs of

various forms of potentially unethical behavior.

These include greed, unreasonable amounts of leverage,

subtle forms of corruption (such as ratings agencies that

appear to have had a conflict of interest), complex financial

instruments that no one really understood, and herd behavior

where people just followed along and failed to exercise

independent judgment.”

Extract from the Centennial Global Business Report, 2008

Harvard Business School



Introduction

What’s ethics: look back, think, question yourself

Ethics is defined as the branch of philosophy that

consists in the systematic study of behaviour standards

that promote:

− conscious choices

− moral norms that must guide these choices

− the good toward which the choices must tend



Ethics and Fraud



Ethics and Costs / Benefits

Rationalization



BENEFITS COSTS

The Problem

Question: What is the difference between personal

ethics and professional ethics?

− Personal ethics = one’s conscience

− Professional ethics = adherence to a professional

code

Answer: Follow a professional code of ethics when

acting as a professional even though we may

personally disagree.



1. Ethical Accountability




The accountability of an event or an action is defined

as the possibility to assign the responsibility of an

offense to an individual




Example

It is perfectly legal to impose a financial penalty on an

offender regardless of his income, but it might be

unethical to do so if he has no means to pay the

penalty.




Trends

− Criminalize breach of ethical standards

− Increase of legal components in Codes of Ethics

− Increase of accountability requirements

− Involve individuals before the organization



2. Underlying issues of the ethical

accountability



2. Underlying issues of the ethical

accountability

Ethics fundamental principals

− Independence: Independence of mind and

appearance of independence

− Social responsibility: promote and protect the

interests of the society

− Professional judgment and due diligence: best

professional judgment

− Misuse of information: integrity



First come First serve !



Ethics situation VIDEO. (YouTube).

Accountable!



Ethics situation VIDEO. (YouTube).

3. Ethical situation tests: detection and

prevention of the ethical risk Ethical risk exposes the organization to the reputational

risk

Reputational loss has no bottom limit in dollars, could

be total

Ethical risk management is now integrated in the daily

risk management activities

Loss of reputation is far more damaging than a

financial loss, few organizations recovered after a

scandal ACFE - September 2013



prevention of the ethical risk The causes of unethical behaviors

1) Personal enrichment (greed): Norbourg president

Vincent Lacroix, Hollinger president Conrad Black

2) Pressure to meet and exceed profits and performance

targets, Ex: BMO in 2007, loss of 680 mlns CAD

related to its natural gas portfolio. Desjardins fund

Fairfield Sentry Ltd with Madoff, 200 mlns USD loss

3) Organizational culture of profit and performance at the

expense of ethics: Enron, Worldcom, SNC, Nortel




prevention of the ethical risk

Ethical risk

Notable ethical risks

− Misuse of information

− Conflict of interest

− Bribery




prevention of the ethical risk Prevention

It’s mainly about perception:

− A manager must lead by example and make it

visible to the employees

− A manager must regularly question his managerial

behavior and correct it if necessary

− A manager must believe in the deterrence benefits

of leading by example





− Prevention of the ethical risk requires an

understanding of the different attitudes facing

ethical situations

1) Immoral management = opposition to ethics

GlaxoSmithKline LLC (GSK)

2) Moral management = acceptance of ethics

Merck and Co

3) Amoral management = negation of ethics

Casinos, Weapons





Oversee Business ethics vs. Personal ethics

- Business ethics is about Business behaviour that

promotes human good

- Personal ethics is about Personal behaviour that

promotes human good

They should converge; if not we have a red flag.





Formalize and push for BOD duty in ethics oversight

- Use and consult BOD committees:

a) Ethics committee

b) Governance committee

c) Risk committee

d) Audit committee




prevention of the ethical risk

Fundamentals of detection

Three main areas to look for red flags:

1. Decision problems

2. Moral principles

3. Consequences of ethical decisions





4. Apparent unethical situation:

a risk to manage




a risk to manage

Educate do not assume knowledge

Validate understanding

Ensure regular review

Obtain commitment

Conflict of interest

− The most common threat to employees is the conflict

of interest

− Its effect is like an unreliable fuel gauge; it makes you

think that your fuel tank is full when in reality you are

about to run out of fuel




a risk to manage

Conflict of interest definition (Continued):




a risk to manage


a risk to manage



ENRON VIDEO Andy Fastow, The sorcerer’s

Apprentice. (YouTube)

Potential vs. real conflict of interest

We can’t always avoid a conflict of interest and it is not

necessarily bad

− What is wrong is not dealing with it adequately and

on time




a risk to manage

The apparent conflict of interest

An apparent conflict of interest exists when there is no

conflict (actual or potential) interest, but someone other

than the person involved would be justified to conclude

(even tentatively) that there is one.

An apparent conflict of interest is not a conflict of

interest in the strict sense of the term.




a risk to manage

The apparent conflict of interest (Continued)

There is an apparent conflict of interest when, from the

perspective of a reasonably well-informed third person

(external view), there is reasonable fear of conflict of

interest




a risk to manage

Conflict of interest: safeguards

1) Leave, discontinue the situation, or resign

2) Full disclosure of conflict of interest to the parties

concerned

3) Request the issuance of an ethics opinion

involving an impartial person (referee)




a risk to manage


a risk to manage Faced with an apparent failure in ethics it is important to

remember to ensure (handle) with great caution, and

follow sequence, considered individually or with others:

1) Don’t play solo to solve ethics issues AND WATCH

CONFIDENTIALITY

2) Ask and gather support:

Management support

Legal counsel

Ethics expertise: BOD committees, external

experts

HR ACFE - September 2013



a risk to manage Faced with an apparent failure in ethics… (cont’d):

3) Gather relevant facts, NOT perceptions

4) Identify ethical issues involved

5) Identify basic principles related to the problem in

question

6) Assess internal procedures in place

7) Look for various possible ways of action: simple is

also efficient

8) Final solution: Report to the right level indicated in

the ethics policy or the code of ethics



5. Final step



“If necessary, I can be ethical.

Fortunately, it hasn’t come to that!"

5. Final step

Ipsos Reid Survey, July 3rd, 2013

Four in ten (42%) employed Canadians have observed

some form of workplace misconduct

One in five (17%) cite witnessing privacy violations

13% reported witnessing “conflicts of interest” such as

insider trading, while 17% witnessed “fraud,”

The most common form of misconduct was “misuse of

company property,” reported by 28% of respondents

Less than half (48%) of those who’ve witness

misconduct have actually reported it





5. Final step



5. Final step



5. Final step



5. Final step



Your decision matters!

VIDEO David Batstone about Whistleblowing.

(YouTube)

Thank you for your participation!



Documents

Ethical Risk Management · scandal ACFE - September 2013 ©2013 Pr. Messaoud Abda, ... Fairfield Sentry Ltd with Madoff, 200 mlns USD loss 3) Organizational culture of profit and