1. Introduction

Ethics is concerned with the requirements for the general well-being, prosperity, health and happiness of people. It requires knowledge of moral principles, and skills in applying them to problems and decisions. (4)

Actions are dictated by values. Identifying organisational values - both proclaimed and actual - will assist a company to ensure that all its actions are commensurate with these values, and enable it to put in place a robust structure to support the operationalisation of the values. Many ethical problems for multinationals and companies trading far from their home base arise because of differing value systems: ethical audit will enable a company to establish clear guidelines about the limits of acceptable behaviour which are consistent world-wide, while recognising where appropriate local societal differences. Ethical audit determines the internal and external consistency of a company's values base. It begins internally, with a review of paper, processes and people. The findings of the audit are then tested out with stakeholder groups, to ensure that the values base is one which is shared by, or at the least acceptable to, all its key stakeholders. The results provide important management information, and can (and ideally should) be used to report on the company's social and ethical performance, either as part of the annual report or as a supplementary report.

The aim of this paper is to develop an ethical analysis to emphasize the importance of appropriate ethical decision making during the audit process. It considers the different categories of ethical theory and study the developments towards ethical audit. Furthermore, this paper provides an opportunity for multi- national companies to standardise the internal audit practice and details issues related to ethical audit at an international level. Moreover, this paper also aims to show how the consumer power dictates the companies to conduct themselves ethically. Finally conceptual framework discusses how an ethical audit is organisation centred and focuses on ethics from boarder stakeholders perception. The paper finds that auditing may benefit from an increased focus on ethical discernment and ethical behaviour. Hence, ethical behaviour may help restore trust and confidence in the capital market system and reduce financial reporting fraud.

2. Literature review

Code of ethics are important since they implicitly set limits or unethical behaviour and are intended to offer guidance in ambiguous situations. Code of ethics can perform several organisational functions, such as making explicit the ethical values that were previously unstated or unclear, alert employees as to what actions are unethical and unpunishable, and helps firms shift accountability of actions from organisation to individual. (3)

Ethics may be described as a systematic attempt to understand moral concepts and to propose and defend principles and theories regarding right and wrong behaviour. (4). An ethical theory expresses the principles that give reasons for choosing to act in specific ways. An ethical framework is a set of norms and principles that serves as guidance for individual actions. (2) Behind every social action there is a purpose.

Individuals act to achieve something they contemplate as good, something valued. To frame an ethical theory one has to identify a purpose. It is of utmost importance to consider this carefully because one will get different theories depending on the purpose. If the purpose is to serve society, you get one kind of ethics; but if the purpose is to perform a duty, one has another kind of ethics. (8)

There is nothing new about ethical behaviour in business, nor about programmes designed to improve and perhaps formalise an ethical approach to decision making within companies. Ethically, things may seem relativelystraightforward at the level of the individual auditors engaged in the practice of auditing. Auditors ought to carry out their standard procedures carefully, diligently and punctually in accordance with their instructions and the appropriate auditing standards and procedures. The virtues of integrity, objectivity, independence, confidentiality, upholding technical and professional standards, competence and due care, which are all highlighted in the Code of Professional Conduct, seem particularly appropriate.

Academics, consultants and corporate executives have provided various definitions to business’s engagement in ethical issues. Among the concepts that have been used – apart from Corporate Social Responsibility – are sustainable development, corporate citizenship, sustainableentrepreneurship, the triple bottom line and business ethics (11)

Even supposing the adequacy of such categorisations of virtues (10), putting these virtues into practice is not a simple matter. There may be morally relevant problems for practicing auditors when tasks are set that go beyond what the time and expertise available render feasible. In these circumstances, should those involved seek to disguise the limitations of their work, thereby risking the displeasure of their superiors and hazarding their career prospects, or should they just do what they can, perhaps in the dim awareness that their superiors might prefer not to be informed of weaknesses in the process that they are not themselves in a position to remedy.

Moral rules are held to be binding independently of the consequences of putting them into practice. It is not for us to calculate the consequences of truthfulness, just to be truthful. A moral person knows what is right and must be what is right simply because it is right (7).

The standard view is that deontology (or ‘rule-morality’) comes into direct conflict with ‘consequentialism’, the theory that an act is right or wrong depending on its consequences for all those affected by the action, including the agent in question (12). The most famous brand of consequentialism – ‘utilitarianism’ holds that the consequences that matter morally are pleasures and pains, the morally right act being that which maximises the balance of pleasure over pain.

3. Ethical Audit

Recent high-profile corporate collapses, such as Enron and WorldCom, have brought into question the status and credibility of the accounting profession, especially auditors, “with allegations of accountants’ violations of public trust” (2)

Auditing standards require the auditor to verify that the information provided in the operational and financial review is consistent with the audit report and the other information contained in the annual report. (6)

Ethical auditing is a process which measures the internal and external consistency of an organisation's values base. (2) The key points are that it is value-linked, and that it incorporates a stakeholder approach.

Its objectives are two-fold:

• It is intended for accountability and transparency towards stakeholders

• It is intended for internal control, to meet the ethical objectives of the organisation.

The value of the ethical audit is that it enables the company to see itself through a variety of lenses: it captures the company's ethical profile. Companies recognise the importance of their financial profile for their investors, of their service profile for their customers, and of their profile as an employer for their current and potential employees. An ethical profile brings together all of the factors which affect a company's reputation, by examining the way in which it does business. By taking a picture of the value system at a given point in time, it can:

• clarify the actual values to which the company operates

• provide a baseline by which to measure future improvement learn how to meet any societal expectations which are not currently being met.

• give stakeholders the opportunity to clarify their expectations of the company's behaviour

• identify specific problem areas within the company

• learn about the issues which motivate employees

• identify general areas of vulnerability, particularly related to lack of openness

In relation to the specific factors of the ethical environment, studies on codes of ethics have dominated the ethical accounting and auditing literature. Codes of ethics are important since they implicitly set limits for unethical behaviour and are intended to offer guidance in ambiguous situations.(3)

4. International Business and Ethics

Recent corporate collapses around the world show that there are no national boundaries for these occurrences. Australian corporate collapses including HIH Insurance, One.Tel, Ansett Australia and Harris Scarfe have raised public expectations of investigation of the causes of collapses(13). The main reason for the collapse of HIH was mismanagement with an emphasis more on the directors’ personal qualities such as integrity, honesty and morality rather than tougher legislation and rules. (14)

The worldwide practice of internal auditing is subject to diverse cultural, legal and economic environments. While the Institute of Internal Auditors’s Standards are generic and provide a unifying mechanism for enhancing continuity and consistency across diverse legal and economic environments, research suggests that cultural, legal and economic differences influence the development of internal auditing systems in various countries. Since the promulgation of the Standards, internal auditors worldwide have had the opportunity to standardise internal audit practice.(15)

Multinational companies face special issues in relation to ethical auditing. It is, though, precisely these special issues which can make ethical auditing so valuable to multinationals. Executives of such companies are well aware of the added complications which operating across a number of cultures brings. But problems tend to multiply when differing value bases are permitted to take hold within different cultures.

One of the issues which most concerns multinationals is that of corruption - how to do business in countries where backhanders are expected in the common course of events. Working practices and human rights are other major areas of concern. Some companies make a principled withdrawal from countries where they could otherwise manufacture profitably, because they are not prepared to work within that regime, as Levi Strauss did in China. Protest from outraged consumers may force companies manufacturing in India or Thailand to sack the underage children they were previously employing as machinists.

Companies alone cannot right all the evils of society. Many of the decisions they have to take have no ideally right or ideally good answer. What matters is that they should have a clearly thought out framework of values, and that these values should be consistent wherever they operate. A multinational company must test its values across all its areas of operation, if it wants the findings of its ethical audit to be comprehensive and provide the greatest payback in terms of identifying potential areas of vulnerability to consumer pressure.

The fundamental positioning of the role of internal auditors, it is contended, creates a challenge to their ability to function with independence. First, consider the inherent presence of role conflict. The role of internal auditors in providing audit oversight fortheir organization together with consulting services to management can cause an ongoing conflict. In their audit role, internal auditors must remain independent of management by not subordinating their judgment to management in audit matters. But in their consultative role, they must collaborate with and support management, including accepting the judgment of the audit committee of the board of directors. (17)

5. Consumer Perception of Ethics

Consumer power is increasingly being having an affect on company behaviour. The boycott mechanism has long been a way of protesting politically; for many years, a significant number of consumers avoided buying South African produce. But now boycotts are called to protest against specific company actions: Nestle's sales suffered from the boycott protesting about their policy on selling baby milk in the third world.

Pressure groups are growing more professional. Where in the past unethical behaviour by a company might have been kept quiet by skilled public relations people, there is now greater likelihood that someone within a company will alert the relevant pressure group (loyalty to employers being lessened, and concern for the public good being greater) and that the pressure group will succeed in generating significant publicity about the incident.

One of the greatest benefits of the ethical audit is that it assists the company to scan the environment to identify the issues which are most likely to provoke action by pressure groups, and in turn gives the company the opportunity to encourage such groups to participate in the decision making process, or at the very least to inform them fully of the company's position.

In the move to total quality, suppliers become key stakeholders. The quality of components or raw materials used is crucial. Their timely delivery is crucial. Their reliability is crucial. The best suppliers want to develop long term relationships with customers whom they can trust to deal fairly with them and to pay on time.

The picture which develops here is of a company at the centre of a network of relationships - relationships with employees, with customers, with shareholders, with society at large. Each company may have other groups of people whom it considers to be key stakeholders - for example, a company with particular environmental concerns may consider future generations to be key stakeholders: other companies may see their retired employees as being important, while still others may have strong links with pressure groups and voluntary organisations.

A new York state audit report released in March 2007 describes how one former assistant superintendent for business was indicted by a grand jury and charged with 20 criminal counts, including receiving bribes, defrauding the government, theft of service and official misconduct. (16)

Therefore, ethical auditing enables companies to better comprehend these relationships. All relationships are based on values such as trust and an expectation of fair dealing - understanding these dynamics and finding out where expectations and perceptions differ give a company a head start on maintaining strong and stable relationships.

6. The Conceptual Framework

In contrast to social auditing which aims primarily at measuring the social impact of a company on its environment, the ethical audit from the outset is value-linked. It measures the "ethical climate" of a company by analysing the values on which the organisational actions are based and by testing the moral quality of these actions against values that should be taken into consideration.(10)

Since someone's values form the basis of his or her ethical behaviour, aligning workforce values is important, if a company wants to behave ethically across the board. This requires openness about values and consistency between them. Furthermore, if a company wants to establish relationships with its stakeholders based on trust, stakeholders need to know the values that a company has committed itself to, in order to have confidence in what future actions the organisation will take. Therefore, the values that a company wants to incorporate must be made explicit, although it is no easy task to determine what the prevailing values in a company are and/or what they should be. In this sense, the ethical audit is organisation-centred, meaning that organisational values are to be found within the company at all levels in stead of being enforced by senior management alone.

In part these values are connected with public opinion on matters such as respect, justice and responsibility and can, to some extent, be derived from the rights and interests of stakeholders, but the bottom-line is that the organisation must formulate its own set of basic values.

7. Stakeholder Perspective of Ethics

Survey studies have established that codes of ethics are thought to be relevant and important to organisations and their employees found that US firms that were more ethically concerned were more likely to possess a code of ethics and 90 per cent of the surveyed managers believed codes of ethics to be an important factor in resisting unethical behavior. (9)

The objectives of the ethical audit are two-fold as follows;

• The audit is intended for accountability and transparency towards stakeholders.

• The audit is intended for internal control in order to meet the ethical objectives of the organisation.

One of the aims of the ethical audit is to give a company the opportunity to track progress through the years and to find out where there is still some work to do with regard to the company's ethical objectives.

Accountability requires that stakeholders are provided with such information as they have a right to. The rights to information are determined by;

• the social environment within which the relationship between the organisation and the stakeholder is set, (thus current legal standards would represent a minimum basis for accountability).

• the organisation's own decisions about whichstakeholders it particularly wishes to recognise .

Thus, stakeholder groups do not have an absolute claim on businesses to provide them with information, because the extent to which a company is accountable to stakeholders depends on the particular social environment of the company, on the company's conception of relevant stakeholders and on the social responsibility the company is willing to take for justifying its actions towards a particular stakeholder-group. Therefore, stakeholders' right to information is in a large measure related to a positive duty that the company has committed itself to.

It is possible and justified to assign different weights to the interests of different stakeholder groups. Firstly this is evident, because not all stakeholders are actually involved in the auditing process. For most companies the external stakeholders which are included will be restricted to the minimum of: shareholders, customers, suppliers and the wider community, although one could think of many more groups that could be of importance to a specific organisation. The fact that the number of stakeholder-groups taken into consideration is limited, indicates that certain stakeholders are perceived as being more important than others. Secondly stakeholder concerns will differ between groups. It is obvious that more important stakeholders will have greater influence on the company's actions and that in the case of conflicting concerns the interests of the stakeholder group with the most influence will prevail. Dialogue with stakeholders is carried out in the external ethical assessment process and in this process the interests of stakeholders are identified and balanced according to the weight the company assigns to each stakeholder group. (1)

The objective of accountability towards stakeholders requires information about general issues such as product safety, the environment, employee relations, etc. An ethical bookkeeping system collects data systematically about the organisation's ethical behaviour, which is relevant for stakeholders. This process is most likely to include "hard" information, including for instance complaints of stakeholders, business accidents or fines for unethical behaviour. A significant quantity of this data will already be present in the organisation's "normal" accounting and management information systems (e.g. human resources information: number and level of female employees, payment ratios for employees of different ethnic origin, etc.). By collecting this kind of information a company is in fact keeping some records on the social impact of its actions and policies and therefore we might consider this social accounting.

Since corporate ethical behaviour depends on the ethical behaviour of individuals, looking at the people in the organisation is essential for instilling organisational values. In the internal ethical assessment process the prevailing values of employees are examined through interviews, surveys, questionnaires etc.(1) The outcomes are then related to the value system of the company, revealed by the accounting process. By doing this the ethics gap (different perceptions on the company's ethics) is identified, as well as conflicting interests within the organisation and values that are inconsistent with each other. But internal ethical assessment is not only concerned with uncovering prevailing values, it also looks at what the organisational values should be. Since the purpose of internal auditing is to measure the compliance of facts with norms, these norms - being the values the company wants to incorporate - must be clear. This might be the case as a result of an earlier participative process (written down in a values statement or not), but it is important that this is an on-going process in order to make sure that the company perseveres with these values. So, internal ethical assessment is also concerned with internal audits. Workshops and small group discussions will further raise ethical awareness and can be an important tool for building consensus.

Since accountability is one of the objectives of the ethical audit, the results of the process which are relevant for stakeholders should be disclosed to them. By using focus groups, stakeholders can then provide important feedback, which automatically sets the audit results in a wider context. Focus group discussions should be about general issues, backed up with information provided by the bookkeeping system, as well as about the underlying values of the company's actions. This is done in the external ethical assessment process in which the organisational set of values is tested against the opinions of relevant stakeholders. Feedback is absolutely necessary for a company that wants to promote organisational learning and the results of the ethical audit exercise (including the findings from the internal audits) should also be reported to all employees, simply because this is the right thing to do. As a result the company as a whole will be able to set goals for further improvement in ethical behaviour. (10)

So, the ethical audit will result in the identification of organisational values on the one hand, and in a general direction as to how the company wants to develop its value system on the other. The findings will therefore need to be translated into action planning for the following year. If the ethical audit is performed every year or every other year, a company should be able to track its progress based upon the baseline information provided by the different elements of the ethical audit. Hence, the ethical audit provides a snapshot of the ethical behaviour of a company, but at the same time ethical bookkeeping, ethical accounting, internal and external ethical assessment, external validation and the resulting action planning can influence organisational values and thus corporate ethical behaviour.

8. Conclusions

The findings of the audit give a snapshot, a view at a particular point in time, of the company's ethics. In the case of a first audit, they will necessarily be of less value for comparison purposes than would future audits, but they ought to give a clear picture of both values andvulnerabilities. An audit report is a factual document. Obviously it reaches a judgement, but it is not intended to be judgmental, in the sense of condemning a company for moral failure. Ethical audit is very far removed from the original social audits which were carried out on companies in the 19^th Century. These were undertaken by outsiders critical of company behaviour, who were seeking ammunition to bring external pressure on the company to change.

I believe that ethical audit will have particular benefits for multinational companies, but it could also be of great value in take-over and merger situations, especially ones which involve partners from different countries where there may be conflicting value systems. Other benefits include enhanced corporate reputation, making the company fraud resistant, and improving staff morale and motivation.

The technology of ethical auditing is still in its infancy. The full payback is not yet known. Values are the basis of all organisational behaviour, and focusing on values will enable management to create an organisation which is excellent in every possible sense.