THE BLOG

Your Integrity Blindspot - 5 Ways to Give Misconduct No Place to Hide

18/07/2014 10:30 BST | Updated 16/09/2014 10:59 BST

Misconduct continues to plague organisations around the globe in both the private and public sectors. We all read about incidents in the news where misconduct results in significant damage to a company's product quality, to their market capital, to their reputation or, from time to time, to the wellbeing of their employees. Take for example the recent issues plaguing BNP Paribas - or those that American Apparel is facing.

Recent CEB research sheds light on the misconduct trends that are challenging organisations and keeping Chief Audit Executives and assurance professionals up at night:

• 11%+ of employees observed misconduct in the workplace,

• 13% of employees observed harassment,

• 10% observed a conflict of interest,

• 7% observed fraud.

This research shows that HR-related incidents - like preferential treatment, inappropriate behavior and harassment - occur most frequently. Close behind are conflict-of-interest incidents and misuse of company time/resources.

No matter the type of misconduct, every incident is a direct risk to the organisation and will corrode any attempts to introduce the right culture, ethics and behaviour. We have found that incidents that are observed and not reported (around 60%) or are reported but result in management inaction, will all erode the corporate culture. This leads to an increase in incidents of misconduct and lower reporting rates - a vicious circle.

While misconduct and reporting rates will vary by region, type of incident and grade of employee, it is critical that every CAE understand the status of their corporate culture and embed that culture and behaviour into their audit plan and methodology.

In terms of culture, investing in the right "Tone at the Top" has been and always will be important, but it isn't enough to correct the culture itself. Any expected trickle down (through observed behaviour) to the entire employee population is very limited. Matching that tone in the middle must be equally important. Ask yourself, how do your middle managers demonstrate the right behaviour, or how do they respond to a member of staff discussing an ethical dilemma in the workplace? It is without question that middle management needs to know the policies and undergo the proper training, but unless their behaviour is actually changed no benefit will have been gained.

Getting Ahead of the Curve

Some CAEs are hesitant to move on this topic as they are daunted by the apparent opaque nature of the risk or concerned over staff skills to audit the risks or identify the best way to conduct/report the audit. However leading CAEs are taking action to measure misconduct, put procedures in place to get ahead of these risks and do their part to create a corporate culture based on integrity. Such actions include:

1. Reviewing recent past issues reported by audit and identifying the common root causes,

2. Reviewing any recent employee surveys to extract relevant intelligence about culture across the organisation,

3. Utilising existing metrics as a proxy to identify potential hot spots of concern, for example:

a. Details of accidents, insurance claims, litigation, employee tribunals, exit interviews,

b. Analysis of management success in implementing sustainable actions plans on time to resolve issues reported by audit, regulators and other assurance teams

4. Introducing a second conclusion as part of every audit to report upon management awareness of control,

5. Developing an audit methodology to either build a workprogram for a standalone audit of culture or to embed human capital risks into every audit.

As Forbes recently stated, "a culture of integrity functions as a potent risk management tool." Creating a culture based on integrity - where organizational justice is a priority and employees are comfortable speaking up when they witness potential misconduct - is a difficult and often long road to travel, but will ultimately pay dividends. In fact, our data shows that organisations with transparency and a strong openness of communication deliver shareholder returns an average of five percent higher than their peers. And, a high-integrity culture decreases the most significant forms of misconduct by 41 percent. In short, integrity may be one of, if not the, most critical components of corporate success today.

Ian Beale is a London-based senior director in CEB's Legal, Risk and Compliance practice. CEB, the leading member-based advisory company, equips more than 10,000 organisations around the world with insights and actionable solutions to transform enterprise performance.