Drake Unlimited, LLC (DU) seeks to minimize risk of fraud and misconduct in the organization. Establishing an effective “tone at the top” is key to achieving optimal performance and integrity of financial reporting. The behaviors and actions of management illustrate the organization’s tolerance of deviant conduct. Thus, management is responsible for setting the appropriate example for the organization. This memo describes the importance of demonstrating ethical values and a culture of integrity within the organization, three proposed strategies to promote the values and ethics at DU, and the merits of each.
“Tone at the Top” Overview
Setting the right “tone at the top” of an organization is essential to improve the effectiveness of internal controls (PCAOB, n.d.). Ineffective controls can lead to misconduct and fraud, which can impact an organization’s reputation, market value, and ability to achieve financial goals (PCAOB, n.d.). Many examples of misconduct and fraud in business practices are well known, such as Enron, and others continue to surface today. The 2013 framework of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) is utilized by most public companies in support of compliance with the 2002 Sarbanes-Oxley Act (SOX), section 404(b) (McNally, 2013). Section 404(b) addresses the responsibility of management to establish and maintain effective internal controls. The legislation requires management of public companies to assess the effectiveness of these internal controls, and requires the external auditor of the public companies “to attest to, and report on, management’s assessment of its internal controls” (AICPA, n.d.). Within the COSO framework, the first component of the five key components established to achieve an effective controls framework is the Control Environment. Within the description of an effective control environment is “the commitment to integrity and ethical values” of the organization (McNally, 2013). The SEC specifically points to the increased level of trust that companies gain when there is a Chief Ethics and Compliance Officer (CECO), and a clear culture of integrity and high ethical values. Stephen L. Cohen, Assistant Director of Enforcement of the Securities and Exchange Commission (SEC) states that most often, companies only emphasize the commitment to …show more content…
Setting the tone from leadership of DU will provide the structure and cultural cues for the organization. To that end, the following three strategies are proposed:
Establish Core Values and Code of Conduct
Creating core values that represent the essence of DU, aligned with the corporate mission, will provide the framework for employees. These core values will embody attributes such as integrity, ethics, and accountability. In conjunction, a code of conduct will be implemented, which details the expectations of honesty, fair dealing, respect, and teamwork. The values and code will be made prominent in the work environment. Setting the expectations for behaviors, and values will lead to better performance (McNally, 2013).
Communication and Training
The leadership of DU will communicate the company’s core values, and code of conduct policies. Each employee will be trained accordingly. A test to ensure understanding will be given to employees, which will require an 80% accuracy in order to pass, and each employee must pass. Three attempts are granted. Failure to pass will result in additional training for the employee, and one final opportunity to pass the test. Continued failure may result in termination. Reaffirmation testing will be administered annually. The formal nature of the testing demonstrates the commitment to a culture of ethical
“Tone at the Top” Overview
Setting the right “tone at the top” of an organization is essential to improve the effectiveness of internal controls (PCAOB, n.d.). Ineffective controls can lead to misconduct and fraud, which can impact an organization’s reputation, market value, and ability to achieve financial goals (PCAOB, n.d.). Many examples of misconduct and fraud in business practices are well known, such as Enron, and others continue to surface today. The 2013 framework of the Committee of Sponsoring Organizations of the Treadway Commission (COSO) is utilized by most public companies in support of compliance with the 2002 Sarbanes-Oxley Act (SOX), section 404(b) (McNally, 2013). Section 404(b) addresses the responsibility of management to establish and maintain effective internal controls. The legislation requires management of public companies to assess the effectiveness of these internal controls, and requires the external auditor of the public companies “to attest to, and report on, management’s assessment of its internal controls” (AICPA, n.d.). Within the COSO framework, the first component of the five key components established to achieve an effective controls framework is the Control Environment. Within the description of an effective control environment is “the commitment to integrity and ethical values” of the organization (McNally, 2013). The SEC specifically points to the increased level of trust that companies gain when there is a Chief Ethics and Compliance Officer (CECO), and a clear culture of integrity and high ethical values. Stephen L. Cohen, Assistant Director of Enforcement of the Securities and Exchange Commission (SEC) states that most often, companies only emphasize the commitment to …show more content…
Setting the tone from leadership of DU will provide the structure and cultural cues for the organization. To that end, the following three strategies are proposed:
Establish Core Values and Code of Conduct
Creating core values that represent the essence of DU, aligned with the corporate mission, will provide the framework for employees. These core values will embody attributes such as integrity, ethics, and accountability. In conjunction, a code of conduct will be implemented, which details the expectations of honesty, fair dealing, respect, and teamwork. The values and code will be made prominent in the work environment. Setting the expectations for behaviors, and values will lead to better performance (McNally, 2013).
Communication and Training
The leadership of DU will communicate the company’s core values, and code of conduct policies. Each employee will be trained accordingly. A test to ensure understanding will be given to employees, which will require an 80% accuracy in order to pass, and each employee must pass. Three attempts are granted. Failure to pass will result in additional training for the employee, and one final opportunity to pass the test. Continued failure may result in termination. Reaffirmation testing will be administered annually. The formal nature of the testing demonstrates the commitment to a culture of ethical