Does your organization need an ethics officer?

Editor's note: This article is reprinted with permission by The Ohio Society of CPAs, Catalyst: The Leading Edge of Ohio Business, September / October 2004.

By Michael G. Daigneault, Esq.
DeLeon & Stang, CPAs & Advisors

One of the key operational strategies to assist a business or CPA firm in the post-Enron era is the selection of a "go-to" person on ethics issues — often referred to as an "ethics officer."¹

what does an ethics officer do?

Duties of the majority of ethics officers surround the following core responsibilities.

Determining or clarifying the core values of an organization.
Creating synthesizing and memorializing the ethical standards of an organization in a code of conduct
Developing policies and procedures consistent with the code of conduct
Developing and implementing various types of ethics and compliance initiatives
Communicating, providing training on and encouraging management to regularly reinforce the organization's values and ethical standards
Developing and delivering ethics and compliance communications and training programs
Providing guidance and support to employees in making ethical decisions
Overseeing or conducting internal investigations
Managing an internal information and reporting system for employees to ask questions or report wrongdoing
Providing regular briefings for the leadership of the organization
Assessing the effectiveness of the ethics program.

Indeed, the vast majority of Fortune 500 corporations and the Big Four accounting firms have already appointed such an individual. The practice is now filtering out to many other types of businesses and professional practices, as well as non-profit institutions.²

What is an ethics officer and what do he or she do? How do you go about selecting someone for such a position? What are the benefits of having one? How can it help your firm or business be more successful?

What is an ethics officer?

An ethics officer is an individual with access to the ultimate leadership of an organization who helps foster positive ethical values and standards, and assists the leadership and employees of the organization in living up to such standards.

Fostering positive ethical values and business practices is a remarkably difficult task that is often taken for granted — or assumed by many in leadership positions. An ethics officer helps pay attention to the culture of an organization and, in particular, its values and standards.

Ethics vs. compliance

A fundamental distinction to make without delay is the crucial difference between the notions of ethics and compliance. The two are often confused and treated as synonymous.

Compliance is about obeying applicable laws, rules, policies and regulations. Ethics is a significantly broader concept that refers to standards of conduct or principles arising from core values that indicate how we ought to act or decide.

As such, ethics officers are concerned not only with complying with standards but also developing an organizational culture in which the "right thing" is frequently communicated, regularly reinforced and properly implemented.

What does an ethics officer do?

Every organization has ethical standards that define it. Ethics officers help an organization set ethical standards, communicate those standards, integrate the standards into the culture of the business and hold individuals accountable to those standards.

More formally, "(t)he ethics officer is tasked with integrating their organization's ethics and values initiatives, compliance activities, and business conduct practices into the decision-making process at all levels of the organization. Ethics officers are often regarded as collaborators with the executive and line management to integrate ethics, values, and compliance into daily operations."3

To whom should the ethics officer report?

The ethics officer should have direct access to — a regular contact with — the ultimate leadership of an organization. In an ideal ethics office structure, the ethics officer would report to the board of an organization with an administrative reporting relationship to the CEO or general counsel of the organization.⁴

Alternatives certainly exist. Some ethics officers report directly to the CEO or one of the CEO's direct reports, but experience has shown that the further down the administrative chain the ethics officer is positioned, the less effective his or her efforts will tend to be.

Why appoint an ethics officer?

It is nearly impossible for CEOs and the managing partners of professional service firms to spend the amount of time necessary to develop and sustain a robust and effective ethics initiative within their organizations. Nor should they. It simply takes more time than they have to offer.

In addition, the complex web of best practices, heightened expectations, laws, regulations and voluntary standards now requires some genuine expertise in navigating what often amounts to be an ethical minefield.

Lastly, many employees are reluctant to go to the ultimate leadership of an organization with their concerns or questions. While a typical open-door policy by leadership is a welcome addition to an ethics program, it is hardly sufficient. An ethics officer is an expert whom people trust to wrestle with some of the more difficult questions confronting the organization and it many stakeholders.

Full-time or part-time?

Approximately two-thirds of ethics officers polled by the Ethics Officer Association are full-time. The other third designate their ethics responsibilities as part-time. This ratio is likely to change in the coming decade as more small and mid-size businesses appoint ethics officers, the vast majority of whom are likely to be part-time ethics officers with other responsibilities.

Larger corporations tend to have at least one full-time professional (often with other staff reporting to them) charged with the ethics role. Smaller organizations, because of budgetary constraints, are often forced to appoint an existing staff member and delegate part of his or her time to the ethics function. This is effective only if there is genuine time and resources available for this individual to carry out the ethics officer role. A general counsel who is appointed the ethics officer but spends 99 percent of his or her time on legal matters will not be effective and may actually do more harm than good.

Who would make a good ethics officer?

Great ethics officers tend to be great managers, communicators and educators who can generate — and sustain — genuine trust from both management and the employees of an organization. Knowledge of the specific business can sometimes be important, as is a working familiarity with key operational, legal, HR, security and accounting issues within the organization.

Sometimes you want someone who will bring a new and independent perspective on the culture of the organization. As such, the individual can either be a trusted employee or an expert capable of building the requisite internal knowledge and trust over time. While some firms are tempted to appoint a senior HR person as their ethics officer, this can be a mistake as a good percentage (upward of 60 percent in many organizations) of the issues that come before an ethics officer are HR-related.

ask yourself ...

Seven critical questions to help your organization develop an ethics program:

1. What is "success" for our organization?
How do we define it? Is it defined only in economic terms? How do we measure it? What incentives do we have in place? What do we reward?

2. To whom is our organization accountable?
Who are our key stakeholders? To whom do we owe specific obligations? Who can hold our organization accountable?

3. What are our organization's core values?
Have we clearly articulated our vision / mission? Have we developed a clear consensus around our core values? Have we clearly, repeatedly and transparently communicated our core values? If you asked your members what your values are, what would they say?

4. What are our organization's ethical standards?
Do we have a written code of ethics? Have we asked our staff, members and other key stakeholders for their input? Are the ethical implications of decisions openly discussed?

5. Have we adequately communicated our organization's core values and ethical standards internally and externally?
Have we printed and disseminated our mission, ethical standards and policies? Are our standards available on our intranet and Web site? Have we provided training on our ethical standards? Do we regularly communicate the importance and content of our ethical standards to all our stakeholders? Do our employees, leadership and critical vendors sign off on our code of ethics annually?

6. In addition to a code, has our organization established the appropriate policies, procedures and structures to genuinely encourage our values and high ethical standards?
Have we done more than just disseminate a code of ethics? Do we have written policies and procedures that harmonize with and reinforce our core values and ethical standards? Do we have some type of ethics management structure, committee or designated ethics resource? Have we updated our ethics standards, policies, procedures and structures in light of recent regulatory changes?

7. Do our organization's members, employees, vendors, contractors, strategic partners and community know where to go with ethical questions or concerns?
Have we designated an ethics official or officer? Have we communicated to our key stakeholders the name and contact information of this individual? Can people communicate with this person anonymously? Do people trust this individual? Does this individual regularly communicate his / her activities and the types of issues raised with the senior staff and board of the organization?

Why not let my lawyer handle it?

As noted above, ethics is substantially broader than legal compliance. While some legal training can be helpful in navigating the challenges confronting ethics officers, lawyers are often much more focused protecting the organization from legal risks and negotiating business relationships.

Lawyers often do not make effective ethics officers because of the much broader skill set and perspective that an ethics officer must possess. Coordinating with legal is vital, but your ethics function should be separate from the legal function.

Internal or external ethics officer?

One of the fundamental choices you have in appointing an ethics officer is whether you will fill the position with an existing or new employee, or whether you will draw upon the expertise of an external expert.

Increasingly, small and mid-size organizations that do not have the budget and size to have an internal ethics officer are turning to outside talent to fill the role. If you do so, choose carefully to ensure the expert really understands the role of an ethics officer and can garner genuine trust within your organization at all levels.

Do CPA firms have ethics officers?

Yes. Not only have large accounting firms (such as PricewaterhouseCoopers and Deloitte & Touche) appointed ethics officers, mid-size and smaller firms have as well.

Recently, two other firms among the top 10 in the United States have begun their ethics programs, but in different ways.

Moss Adams LLP in Seattle hired an independent observer with a staff available to do research and surveys. This person also participates in the firm's governance and compensation committees.
BKD LLP in Springfield, Mo., formed an advisory council of independent experts (a partner in a large regional law firm, a professor from a local university, etc.).

Both methods provide these firms with an independent process to look inside the firm and give feedback on whether the program filters throughout the entire organization. At Moss Adams, the independent observer attends most of the executive committee meetings. At BKD, the chair of the advisory council is in regular contact with the managing partner. Both firms give their ethics officers full access to the entire firm. Both firms believe that by having ethic officers in place, they can communicate to clients and potential clients that ethics inside and outside their organizations are highly valued, and that makes their firm a better place to do business.⁵

What are the benefits of an ethics officer?

An ethics officer assists the leadership of an organization in building trust — both internally and externally. An ethics officer also helps ensure that appropriate ethical standards are established and adequately communicated. This process helps build institutional consensus and consistency.

The ethics officer also provides an important resource for employees to go to with their questions or concerns. Indeed, the function helps protect the organization by dealing with ethical concerns quickly and effectively, before they become a larger problem.

Ethics officers also are vital conduits of information to an organization, as they are charged with understanding the changing ethics, regulatory and compliance landscape and providing such information to their organizations.

At the core, ethics officers benefit organizations by helping ensure that they are a great place to work, that everyone does their work with integrity, that ethical dialogue is encouraged and rewarded, and that wrongdoing is discouraged — or actually prevented.

A matter of trust

The business environment surrounding Maryland businesses and CPA service firms is changing rapidly. The Enron collapse, Sept. 11, numerous accounting failures and other business scandals have combined to produce a lasting impact on the U.S. business landscape. Compounding the impact of these outrages are the unavoidable reactions of the public, lawmakers and regulators.

Your organization is not immune to the whirl of changes that will result from these crises. Far from it. Many organizations are already feeling the impact — and will feel it even more in the years ahead. To name just a few: The new economy, novel governance laws and best practices, ground-breaking independence standards and best practices, the USA Patriot Act, new privacy laws and regulations, continuing computer security concerns, the macro impact of Sarbanes-Oxley, and other recent changes are combining to create a very challenging business environment.

Successful compliance with these (and the myriad of other regulations) takes a coordinated and persistent effort. It has been found, however, in many other segments of our economy (i.e. defense, financial services, health care and manufacturing) that a compliance effort alone is not enough.

What is essential for success is a combination of a compliance and ethics effort. Each reinforces and strengthens the other. Genuine ethics programs along with ethical leadership are smart governance and business practices. They also help make compliance programs a great deal more effective.

High ethical standards also help inspire employees, create a constructive business culture and positively reinforce the vital importance of complying with fundamental rules and regulations. Organizations rely not only on the skills, commitment and hard work of their employees — they depend on their integrity and adherence to many ethical and regulatory standards as well.

One proven method of helping ensure that your business or CPA firm is building the internal and external trust it should is to appoint an ethics officer and provide him or her with the needed resources to carry our the role with excellence.

Footnotes

1. The Ethics Officer Association notes that there are more than 100 different titles given to "ethics officers." For the purpose of this article, I will use the all encompassing (and in my opinion - best) title of "ethics officer."

2. In the interest of both brevity and simplicity, I will use the term "organization" to refer to both for-profit and not-for-profit businesses. Included as well are professional services firms such as accounting and legal practices.

3. www.eoa.org/whatis.asp, the Web site of the Ethics Officer Association.

4. As such, the ethics officer might report directly to the chair of an ethics committee or the audit committee of a board.

5. For more information see Telberg, Rich, "Two Firms Launch Ethics Programs," Journal of Accountancy, online issue, July 2004.

Michael G. Daigneault, Esq. is a principal with DeLeon & Stang CPAs & Advisors in Gaithersburg, where he heads up the firm's national practice focused on governance and ethics. He is the ethics officer of the United Way of the National Capital Area and teaches Business Ethics and Corporate Social Responsibility at Georgetown University's McDonough School of Business. He can be reached at (301) 948-9825, ext. 308 or Michael@deleonandstang.com.

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