How Reliable is Your Ethical Compass?
Falling Victim to Your Own “Blind Spots?”
Richard Chambers, CIA, CGAP, CCSA, CRMA
President and CEO
The Institute of Internal Auditors
Agenda
• We are no longer immune from the spotlight
• The IIA’s Code of Ethics: a blueprint for ethical behavior by internal
auditors
• The Reality for Internal Audit: Ethical breaches are often caused
by “Blind Spots”
• Real World Tests of Our “Blind Spots”
• Parting Thoughts: Recognizing and addressing “Blind Spots”
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High-Profile
Ethical Lapses:
We are no longer immune
from the spotlight.
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The 21st Century’s Iconic Ethical Failures
“Enron has found its ‘integrated
audit’ arrangement to be more
cost-efficient and cost-effective
than more traditional roles of
separate internal and external
auditing functions.”
- Ken Lay, Enron CEO, 2000
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But Increasingly, Ethics Charges Implicate Internal Audit
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The IIA’s
Code of Ethics:
A blueprint for “ethical
behavior” by internal auditors
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Ethics
• \’eth-iks\ n 1: the discipline dealing
with what is good and bad and with
moral duty and obligation 2: a set of
moral principles or values
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The IIA’s Code of Ethics
• Purpose: To “promote an ethical
culture in the profession of internal
auditing.”
• Includes:
– Principles
– Rules of Conduct
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The IIA’s Code of Ethics: Integrity
Internal auditors shall:
•
•
•
•
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Perform their work with honesty,
diligence, and responsibility.
Observe the law and make disclosures
expected by the law and the
profession.
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.
Respect and contribute to the
legitimate and ethical objectives of
the organization.
“The integrity of internal
auditors establishes trust
and thus provides the
basis for reliance on their
judgment.”
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The IIA’s Code of Ethics: Objectivity
Internal auditors shall:
•
•
•
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Not participate in any activity or
relationship that may impair or
be presumed to impair their
unbiased assessment.
Not accept anything that may
impair or be presumed to impair
their professional judgment.
Disclose all material facts known
to them that, if not disclosed,
may distort the reporting of
activities under review.
Internal auditors exhibit the highest level
of professional objectivity in gathering,
evaluating, and communicating
information about the activity or process
being examined. Internal auditors make
a balanced assessment of all the
relevant circumstances and are not
unduly influenced by their own interests
or by others in forming judgments.
The IIA’s Code of Ethics: Confidentiality
Internal auditors shall:
• Be prudent in the use and
protection of information acquired
in the course of their duties.
• 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.
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“Internal auditors respect the
value and ownership of
information they receive and
do not disclose information
without appropriate
authority unless there is a
legal or professional
obligation to do so.”
The IIA’s Code of Ethics: Competency
Internal auditors shall:
• Engage only in those services for
which they have the necessary
knowledge, skills, and experience.
• Perform internal audit services in
accordance with the International
Standards for the Professional
Practice of Internal Auditing
(Standards).
• Continually improve their
proficiency and the effectiveness
and quality of their services.
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“Internal auditors apply
the knowledge, skills,
and experience needed in
the performance of
internal audit services.”
The Reality for
Internal Audit:
Ethical breaches are often
caused by “Blind Spots”
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Our Perception:
We see ourselves as the guardians of trust
in our organizations: Far more likely to
disclose ethical misconduct than to
misbehave ethically ourselves!
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The Reality:
“Our minds are subject to bounded
ethicality, or cognitive limitations
that can make us unaware of the
moral implications of our decisions.”
Source: “Blind Spots” Max Bazerman and Ann
Tenbrunsel, © 2011, Princeton University Press
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“Professionals…tend to view
conflicts of interest as a problem of
intentional corruption. But…when
people have a vested interest in
seeing a problem in a certain
manner, they are no longer
capable of objectivity.”
Source: “Blind Spots” Max Bazerman and Ann
Tenbrunsel, © 2011, Princeton University Press
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“We may predict we will behave in
a manner consistent with our
expectations for ourselves. But
when the time comes to make a
decision, we often behave the way
we want to behave.”
Source: “Blind Spots” Max Bazerman and Ann
Tenbrunsel, © 2011, Princeton University Press
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“(External) auditor bias arises at
the unconscious stage where
decisions are made, long before
auditors report their judgments.
Unbiased audits would be unlikely
as long as auditors continued to be
hired and fired by the companies
they audit.”
Source: “Blind Spots” Max Bazerman and Ann
Tenbrunsel, © 2011, Princeton University Press
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In Reality: Our
“Blind Spots” Are
Exposed Every Day
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Blind Spot Scenario #1
• Your internal audit team finds potential
foreign bribery activity in an international business unit:
• The General Counsel advises you not to
worry – these are merely facilitation
payments that are perfectly legal.
• Public disclosure could mean reputation
loss, crippling fines, and general havoc.
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Blind Spot Scenario #2
• You just completed a review of an area
in which you worked several years ago.
• You found major control deficiencies that
were likely present when you were
responsible for the area.
• You realize that disclosure will likely
discredit your performance.
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Blind Spot Scenario #3
• During the course of a travel expense audit,
you find a number of violations.
• You recognize that in at least one of the
areas, you are not in compliance yourself.
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Blind Spot Scenario #4
• Risk assessment identifies an
issue related to performance
during a major holiday.
• Scheduling an audit would mean
sacrificing everyone’s holiday
plans.
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Blind Spot Scenario #5
• You discover a financial control failure that
has resulted in a material misstatement of
financial results.
• The external auditors did not catch it.
• Disclosure would likely devastate
the value of your 401K and stock
options
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Blind Spot Scenario #6
• You audited an area where a family
member or close friend had key
management responsibilities.
• You found major problems that should
have been prevented.
• Disclosure of the issue in the audit will
likely impair or end the career of your
relative or friend.
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Blind Spot Scenario #7
• You are in the final year of a 3-year
rotation in the internal audit
department.
• You just audited the business unit in which
you most want to work
• There were critical findings, and you realize
that disclosure will very likely end any
chance you have of landing an assignment
in the audited activity.
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Two Real-World Blind Spot Scenarios
• Barbara and the IT function
– How far can internal audit go in assisting management?
• Splitting contracts to avoid controls
– How much courage does it take to deliver bad news to
senior management?
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Parting Thoughts:
Strategies for
strengthening our ethical
compass
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Recognizing and
Addressing Blind Spots
• Recognize that we are all prone to behave in ways that serve our own
interests
• Challenge your own thought/decision processes
• Watch and challenge those around you
• Slow down and deliberate (with yourself and others)
• Implement controls that force contemplation of ethical decisions
• Disclose potential ethical conflicts
• Remember that we are only as strong as our weakest
link
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Questions?
The Institute of Internal Auditors
Richard Chambers, CIA, CGAP, CCSA, CRMA
President & Chief Executive Officer
richard.chambers@theiia.org
Twitter: @RFChambers
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