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Board and Fraud is a blog that aims to bring a practical approach to issues facing the board of directors and the audit committee specifically in the area of governance, risk management, compliance, and internal audit, with a strong focus on fraud, ethics, and internal controls.

Ethics! A key component in the Governance Framework


Spending the holidays in Philadelphia, I find myself reflecting on our founding fathers’ legacy, George Washington in particular. I did some digging on his leadership style and beliefs and found an excerpt from his 1789 inaugural address, “…the foundations of our National policy will be laid in the pure and immutable principles of private morality…” Fast forward to today, it’s fair to say that when moral and just people are in authority, employees, customers, and investors rejoice. Conversely, when the immoral rule, bad things eventually happen – right?

Let’s break it down and dispel some myths. Morals and Ethics relate to “right” and “wrong” conduct. While they are sometimes used interchangeably, they are different! Ethics is derived from the Greek word ethos (character), and morals from the Latin word mores (customs).  Many refer to ethics as the rules laid out by an external source (an organization’s codes of conduct) and morals as an individual’s own principles regarding right and wrong (personal code of conduct).  In essence, it is how you conduct yourself when you know the rules, but no one is watching you.

For more than twenty years, I have argued that Business Practices & Ethics drive the other components of the Governance Framework (Communication, Enterprise Risk Management, Legal & Regulatory, Monitoring, Disclosure & Transparency and Board of Directors & Committees). It requires continuous effort, reinforcement, and on-going education and training. Without it, you can and probably will fail because everyone believes they’re ethical, no matter what they’re doing. We have all realized that despite our efforts and the controls in place, regardless of their design, someone is doing something bad – don’t be fooled by “perfect place syndrome” – someone is always doing something bad!.  Thus, it’s not too far-fetched to say that a Successful Corporate Ethics Culture requires companies to go beyond the notion of simple legal compliance and adopt a values-based organizational culture led by people with good morals and sound ethics – values-based leaders like Washington.

So, what does a values-based leader look like, and how can they help shape and enhance a culture of compliance?  According to Harry Kraemer, values-based leaders have four key principles – self-reflection, balance, true self-confidence, and genuine humility.  Kraemer commented on how perfectly Washington lives up to the four principles and provides us with some context.

  • Self-Reflection: Washington wrote more than 130,000 letters during his lifetime (many of which are at the presidential library).
  • Balance: He clearly took the time to seek and to understand all sides of issues. He realized it was important to have strong states’ rights AND a central government to hold the colonies together.
  • True Self-confidence: Washington knew his strengths and the areas in which he was weak. He admitted his shortcomings and surrounded himself with people like Alexander Hamilton and John Adams.
  • Genuine Humility: Despite the American people’s requests to have him continue to serve as president, he was very focused on avoiding creating a monarchy and insisted on stepping down in 1796 after serving 8 years as President of the United States. He died three years later in 1799.

How would your leadership measure up?  Do you think the senior leadership at your organization is values-based?  Would senior leadership rather fail with honor than succeed by fraud, as Sophocles once said? Is senior leadership arrogant enough to think that if they act inappropriately, they will walk away with a PHAT (that’s Philly for large) sum of money and a slap on the wrist?  Evaluating the answers to these questions could reveal a lot.

As far as shaping and enhancing a Culture of Compliance?  Here are some thoughts, and I welcome yours…

  • Set realistic targets, goals, and incentives
  • Maintain a healthy skepticism – “Trust is a Professional Hazard” ™
  • Analyze interests
  • Assess risks
  • Resolve infractions and disputes timely and without retaliation
  • Disciple wrongdoers
  • Collaborate/Share information & thoughts
  • Be transparent
  • Continuously educate others
  • Be a good listener

Happy and Safe New Year!

Jonathan T. Marks, CPA, CFF, CFE



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