The Fall of British Petroleum’s Ethics

British Petroleum (BP), a global energy group based in London, is no stranger to environmental hazards. Over the last 20 years, dating back from the Exxon Valdez oil spill to the present day Gulf Coast oil spill that followed the explosion of an off-shore drilling site late last month, BP has found themselves in a number of unethical decisions that have caused a drop in their reputation. Companies are formed to turn profits for their stakeholders. However, we must ensure that unethical decisions do not hold back profits by damaging the company’s reputation. I will attempt to explain how unethical decisions can be linked to a company’s reputation and inevitably affect profits.

Down Hill Slide

In 2005, an independent research and rating company named Management & Excellence S.A. (S&E) was founded in Madrid in 2000. S&E released the 2005 results of their ethical study that covered ethics within some of the top oil companies in the world. The S&E ethical study was titled, “Ethics in the Oil Industry 2005” and upon it was BP at number three on the list. The only two oil companies ahead of BP were Royal Dutch Shell at number one and Exxon Mobil at number two. (Manage & Excellence, 2005) BP has displayed that they take ethics very seriously, at least enough to be recognized in the study. This will be our apex to the slippery slope in which the reputations of BP will start its decent.

Also, in 2005, BP faced its worst disaster to date when one of BP’s refineries located in Texas City, Texas, exploded killing 15 people and injuring another 180 individuals and forced thousands of nearby residents to take up shelter within their homes. (Mauer & Tinsley, 2010) An Investigation lead by the U.S. Chemical Safety and Hazard Investigation Board found, “organizational and safety deficiencies at all levels of the BP corporation.” British Petroleum pleaded guilty to felony acts that violated the Clean Air Act and was fined $50 million while only receiving a three year probation sentence. The Occupational Health and Safety Administration (OSHA) issued the largest fine in OSHA history, $87 million, to BP after conducting their investigation. (Mauer & Tinsley, 2010) OSHA discovered over 270 violations that had been previously cited but not fixed and 439 new violations. Ethical problems can be seen with the 270 violations that were ignored and not fixed by BP.

In 2006, BP pleads guilty to a federal misdemeanor that cost BP $20 million in criminal penalties due to an estimated 201,000 gallons of oil that leaked out into the Alaskan Tundra. The Anchorage Daily News stated, “Prosecutors said BP manager failed to heed “many red flags and warning signs” that key pipelines within the nation’s largest oil field were going bad.” (Loy, 2007) BP continues to show ethical problems by ignoring red flags and warning signs that could have stopped the leaks from occurring.

In 2007, BP faced increased problems concerning pollution at a refinery in Whiting, Indiana. British Petroleum uses this refinery to refine heavy crude oil from Canada and is the nation’s fourth largest refinery. (Verschoor, 2007) The refinery is also one of the largest polluters in the Midwest, and now with BP looking to expand the refinery, would release 54% more ammonia and 35% more “sludge” into Lake Michigan. (Verschoor, 2007) Ammonia allows for the growth of algae blooms that can kill fish and trigger beach closings and the sludge contains concentrated heavy metals like lead, nickel, and vanadium. How does BP get away with mixing toxic waste into Lake Michigan when this type of process BP uses is banned in Lake Michigan? Regulators gifted BP with the first ever exemption for the process of mixing waste with clean lake water 200ft offshore Lake Michigan. BP continues to create ethical problems in all forms of environmental issues. How did BP obtain the exemption and why didn’t they respect the laws already in place for the Lake?

After three years of unethical decisions being conducted by BP, we are starting to see a clear ethical drop in BP’s practices. Another report by M&E released in 2007 titled, “World’s Most Sustainable and Ethical Oil Companies 2007,” again positioned the top oil companies in the world from highest to lowest in Ethics using a 120 point evaluation process. (Management & Excellence, 2007) The 2007 report shows that BP has fallen to number four on the list. Shell, Petrobras, and Total hold the top three spots now. These reports coincide with the unethical behavior being conducted by BP. Furthermore, in 2008, BP had no major unethical environmental outbursts and the M&E report for 2008 placed BP at number three on the list.

Summary

With the recent Gulf Coast oil spill, BP’s ethical dilemmas are continuing to grow. As authorities try to uncover why the explosion happened and the events that lead up to it, I would bet that a whole new crop of unethical decisions made by BP will be seen. Some of the unethical issues to arise already are BP’s failure to admit that an accidental surface or subsurface oil spill would occur from the well in a report to the federal Minerals Management Service and BP never addressed how to address a spill at 5,000 feet or below. (CBS/AP, 2010) Common sense would tell you that you should address at a minimum how to stop an oil spill at new depths before drilling. Only time will tell what next years M&E ethical report will grade BP, but if I had to guess, I would say it’s going down a few spots.

References

CBS/AP. (2010, April 30). BP Didn't Plan for Major Oil spill. Retrieved May 10, 2010, from CBSNews.com: http://www.cbsnews.com/stories/2010/04/30/national/main6449241.shtml

Loy, W. (2007, October 26). BP Fined $20 million for pipeline corrosion. Retrieved May 10, 2010, from VicVickers.com: http://www.vicvickers.com/files/ADN-20071026-BP-Fine.pdf

Manage & Excellence. (2005, February 24). Studies and Rankings. Retrieved May 10, 2010, from Manage & Excellence: http://www.management-rating.com/index.php?lng=en&cmd=210

Management & Excellence. (2007, February 21). World's Most Sustainable and Ethical Oil Companies 2007. Retrieved May 10, 2010, from Management & Excellence: http://www.management-rating.com/archivo/Brochure%20Oil%20Study%202007l.pdf

Mauer, R., & Tinsley, A. M. (2010, May 10). BP has long history of legal, ethical violations. Retrieved May 10, 2010, from STLToday.com: http://www.stltoday.com/stltoday/news/stories.nsf/nation/story/8B253843F6E57DD58625771E00821C1C?OpenDocument

Verschoor, C. C. (2007, September). Is BP an Acronym for "Big Polluter"? Retrieved May 10, 2010, from imanet.org: http://www.imanet.org/pdf/09_07_ethics.pdf

By: Joseph Dustin

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Ethics Within the SEC During the Madoff Years

On 10 December 2008, the largest “Ponzi-scheme” started to unfold when Bernard L. Madoff reportedly admitted to “one or more employees of BMIS” that he was conducting a Ponzi-scheme and his liabilities estimated around $50 billion (SEC vs. Bernard L. Madoff, 2008). The next day the Securities and Exchange Commission (SEC) filed a complaint against Madoff and Bernard L. Madoff Investment Securities LLC (BMIS) to (a) halt ongoing fraudulent offerings of securities and investment advisory fraud by Madoff and BMIS, (b)expedite relief needed to halt the fraud and prevent the Defendants from unfairly distributing the remaining assets in an unfair and inequitable manner to employees, friend and relatives, at the expense of other customers, and (c) seek emergency relief, including temporary restraining orders and preliminary injunctions, and an order to impose asset freezes; appointing a receiver over BMIS; allowing expedited discovery and preventing the destruction of documents, and requiring the defendants to provide verified accountings (SEC vs. Bernard L. Madoff, 2008).

Prior to his Ponzi-scheme, Madoff’s managed funds were ranked highly in NASDAQ stocks, order flow in the New York Stock Exchange, and in other specialized securities (Ocrant, 2001). Erin Arvedlund, a Barron’s reporter, published an article on May 7, 2001, this article attempts to explain how Madoff delivers above average returns, 10% to 15%, using a secretive split-strike strategy (Arvedlund, 2001). Within the Barron’s article, Erin Arvedlund states, “What’s more, these private accounts have produced compound average annual returns of 15% for more than a decade. Remarkably, some of the larger, billion-dollar Madoff-run funds have never had a down year.”

Madoff Investment Securities reportedly had $6-7 billion in assets that were funneled through him by three feeder funds (Ocrant, 2001). These feeder funds brought in new customers and established a steady stream of cash flow to allow the Ponzi-scheme to carry on for years. Madoff’s knowledge of the markets, regulatory gray area in the securities industry, and the lack of internal ethics within the SEC helped Madoff continue his operation for sixteen years.

The Regulatory Gray Zone

As Madoff conducted his Ponzi-scheme, where were the watchdogs that are supposed to protect investors from these types of fraudulent activities, and why didn’t they catch him? The SEC has the authority to investigate entities such as BMIS as well as Bernard Madoff himself. According to the SEC’s website,

“The SEC oversees the key participants in the securities world, including securities exchanges, securities brokers and dealers, investment advisors, and mutual funds. Here the SEC is concerned primarily with promoting the disclosure of important market-related information, maintaining fair dealing, and protecting against fraud (SEC, 2010).”

However, Madoff was not a registered broker-dealer or a registered investment advisor. The Investment Advisers Act of 1940 and its amendment in 1996, under section 203 titled Registration of Investment Advisers, describes exceptions to those who do not have to register with the SEC. For example, subsection (3) states any investment adviser who during the course of the preceding twelve months has had fewer than fifteen clients and who neither holds himself out generally to the public as an investment adviser nor acts as an investment adviser to any investment company registered under title I of this Act (SEC, 2009).

The exceptions within the Investment Advisers Act and other similar exceptions help formulate a “gray area” that allows people like Madoff to fly under the radar. Staying under this “radar” would mean finding the loopholes in each regulatory agency’s rules and it seems Bernard Madoff was just the man for the job.

Madoff was a prominent member in the securities industry throughout his career. The National Association of Securities Dealers (NASD) knew Madoff as their vice chairman for a period of time, a member of NASD board of governors, and as chairman of its New York region. The NASDAQ Stock Market knew Madoff as a member of the board of governors and executive committee while serving as chairman of its trading committee (SEC, 2008).

Because of his affiliation with each agency that works with the securities industry Madoff was in the position to fully comprehend the ins-and-out of the system and if anyone could find a loophole, it was Madoff. Madoff would use his “Industry Stature” to intimidate examiners and investigators during the 16 years that the SEC complaints started coming in. For example, one examiner from the SEC’s Northeast Regional Office (NERO) characterized Madoff as “a wonderful storyteller” and “very captivating speaker” and noted that he had “an incredible background of knowledge in the industry (Kotz, 2009).” Another NERO examiner, from the same report, recalls that Madoff would become angry during examinations and then Madoff’s “veins were popping out of his neck” and he was repeatedly saying, “What are you looking for? . . . . Front running. Aren’t you looking for front running, “and “his voice level got increasingly loud.”

Madoff may have known the security industry better than the SEC’s teams that investigated him, but did this give the SEC a reason not to catch Madoff’s Ponzi-scheme? Even though Madoff hid his activities behind the gray areas of the security industry, evidence points to other reasons for the SEC’s failure to catch Madoff.

SEC’s failure to catch Madoff

After Bernard Madoff confessed to his multi-billion dollar Ponzi-scheme an investigation conducted by the Office of Inspector General (OIG); the OIG findings are detailed in a report titled, “Investigation of Failure of the SEC to Uncover Bernard Madoff’s Ponzi Scheme.” Lead by Inspector General H. David Kotz, the investigation details that the SEC received eight separate complaints between June 1992 and December 2008. Three of the complaints were from the same source and the first two versions were dismissed entirely (Kotz, 2009). The report also makes known that the SEC was fully aware of the two articles regarding Madoff’s questionable returns. If the SEC had received complaints and knew about the two articles then why didn’t the SEC catch Madoff?

During the sixteen year time span that the SEC received complaints concerning Madoff and BMIS, the SEC conducted three examinations and two investigations into his advisory business based on the complaints that Madoff was possibly misrepresenting his trading and could be operating a Ponzi-scheme. The OIG report states that the most critical step in examining or investigating a potential Ponzi-scheme is to verify the subject’s trading through an independent third party,” and “Yet, at no time did the SEC ever verify Madoff’s trading through an independent third-party, and in fact, never actually conducted a Ponzi scheme examination or investigation of Madoff (Kotz, 2009).”

The first opportunity that the SEC had to catch Madoff’s Ponzi-scheme was in 1992, sixteen years before Madoff confessed. A complaint lead the investigation team to door steps of Avellino & Bienes, an unregistered investment firm providing its customers with 100% safe investments. Although, the focus of this examination was to discover if Avellino & Bienes was operating as an unregistered investment firm, the SEC’s lead examiner states that, “Madoff’s reputation as a broker-dealer may have influenced the inexperienced team not to inquire into Madoff’s operations (Kotz, 2009).” Madoff would rinse and repeat this strategy within all investigations and examinations that were conducted.

The SEC’s blunders into all investigations concerning Madoff and his associates could be considered gross neglect. The interworking of the SEC seems to be missing something that would help them perform their duties better. Maybe that specific piece of the puzzle is ethical values.

Ethics within the SEC

The SEC made many mistakes during the Madoff investigations. Were these mistakes related to internal ethical decisions on the part of the SEC? One way to find out if the SEC’s mistakes were due to internal ethical decisions is to look into the decision history during the Madoff investigations.

Over the years the SEC has established a number of ethics changes in its rulemaking. One ethical change was the SEC’s Final Rule for implementing section 406 and 407 of the Sarbanes-Oxley Act of 2002 (Haynes and Boone, LLP, 2003). Also, a Final Rule, titled Investment Adviser Codes of Ethics, adds new amendments to the Investment Advisers Act of 1940, and requires registered advisers to adopt codes of ethics (SEC, 2004). As we can see the SEC is aware of the need for companies to implement a code of ethics.

The SEC faced many ethical situations during the Madoff investigations; the ethical situations that were prevalent within the SEC, during the time of the investigations, seemed to affect the core decisions that were being made within the SEC. As stated earlier the SEC’s main goal is maintaining fair dealing, and protecting against fraud, with this in mind unethical decisions would entail any decision that fails to align with that mission statement. The OIG report contains a number of decisions, made by the SEC, that failed to align with their mission statement, to name a few: (a) failure on behalf of the SEC to perform due diligence when conducting investigations; (b) the SEC failed to prevent conflict of interests; (c) the lack of internal controls and standardization for conducting investigations; (d) absence of “Tone-at-the-Top;” and (e) the SEC’s lack of formal training for investigators (Kotz, 2009).

The future of the SEC will rest in the ability to perform better investigation and examinations. David Kotz outlines several recommendations, for the SEC, that will improve investigations in the future. Among the recommendations are better training to investigators, better internal controls, and mandating better control over how to handle tips, and arranging more qualified investigation teams (Kotz, Testimony Before the U.S. Senate Committee on Banking,Housing and Urban Affairs, 2009).

Summary

Bernard Madoff may have been a great manipulator and master of the security industry, the fact still remains, the SEC should have caught on to the Ponzi-scheme years before he confessed. The SEC had more than enough complaints, from reputable sources that pointed out many red flags. A total of three examinations and two investigations failed to catch Madoff’s Ponzi-scheme. The SEC displayed unethical decisions throughout all inquiries conducted within Madoff’s businesses. Now that the SEC has the hindsight into what when wrong, it’s up to the SEC to fix their internal issue.

In the end, the lives of the people that invested with Madoff and his feeder funds were forever changed. Pointing the finger at this point in time may give some relief to those who seek justice but does nothing to change the outcome to what has already taken place. We, as society, must push to become a more proactive nation that seeks due diligence and higher ethical values for everyone. Forcing companies to setup ethics policies and perform due diligence will not stop people from unethical behavior or making poor decisions. I believe we must find away to instill not just the letter of the law into society but the spirit in which the law was created. My moving beyond compliance, I believe, society will suffer far less instances of fraud by eliminating gray areas that laws fail to address.

References

Arvedlund, E. (2001, May 7). Don't Ask, Don't Tell: Bernie Madoff is so secretive, he even asks his investors to keep mum'. Barron .

Haynes and Boone, LLP. (2003, January 24). SEC Adopts Code of Ethics Disclosure Rules. Retrieved April 18, 2010, from HG.org: http://www.hg.org/articles/article_182.html

Kotz, H. D. (2009). Investigation of Failure of the SEC to Uncover Bernard Madoff's Ponzi Scheme. Office of Inspector General (SEC).

Kotz, H. D. (2009, September 10). Testimony Before the U.S. Senate Committee on Banking,Housing and Urban Affairs. Retrieved April 20, 2010, from SEC.gov: http://www.sec.gov/news/testimony/2009/ts091009hdk.htm

Ocrant, M. (2001, May). Madoff tops charts; skeptics ask how. MAR/Hedge No. 89 , pp. 1-5.

SEC. (2004, July 4). Investment Adviser Codes of Ethics. Retrieved April 18, 2010, from SEC.gov: http://www.sec.gov/rules/final/ia-2256.htm

SEC. (2009, October 13). INVESTMENT ADVISERS ACT OF 1940 [AS AMENDED THROUGH P.L. 111-72].

SEC. (2008, December 11). SEC Charges Bernard L. Madoff for Multi-Billion Dollar Ponzi Scheme. Retrieved April 19, 2010, from SEC.gov: http://www.sec.gov/news/press/2008/2008-293.htm

SEC vs. Bernard L. Madoff, 08 CIV 10791 (U. S District Court Southern District of New York December 11, 2008).

SEC. (2010, January 20). What We Do. Retrieved April 19, 2010, from SEC.gov: http://www.sec.gov/about/whatwedo.shtml

By: Joseph Dustin

read more “Ethics Within the SEC During the Madoff Years”

The U.S. Financial Meltdowns: Then and Now

Bank Failures created in the 1930’s

Banks during the 1930s were vastly embarking into an unforeseen calamity; causation leading to the bank failures is still open to interpretation. At the turn of the 20th century, banks began to “boom.” The next two decades saw an increase in the numbers of banks that peaked in 1921 with roughly 31,000 banks in operation (Walter, 2005). So, what caused the catastrophic ripples, throughout the banking industry, that ended with the onset of the Great Depression?

Did the Bank of the United States (BUS) lead to the economic downswing during the early 1930s; thus becoming the catastrophic ripple? BUS, prior to its failure in December, 1930, was the twenty-eight largest commercial bank in the country (Trescott, 1992). To better understand the causation of bank failures during the 1930s, I will explore previous literature that attempt to scrutinize the Bank of the United States.

Milton Friedman and Anna J. Schwartz’s research, A Monetary History of the United States, has been said to be “the leading and most persuasive explanation of the worst economic disaster in American history,” by Ben S. Bernanke (Bernanke, 2002). Friedman and Schwartz’s research advocates that bank failures, during the “Great Contraction of 1929-33,” arise from monetary issues and view bank failures as a result of unwarranted “panic” and that failing banks were in large measure illiquid rather than insolvent (Calomiris, 2007). Others, including Paul B. Trescott, “argue that the bank’s closing was a response to actual and threatened insolvency, not illiquidity (Trescott, 1992).”

It is important to understand if banks at the time were failing due to becoming illiquid or insolvent. If banks, during the Great Contraction, were illiquid at the time then one could be lead to believe that contagion and/or bank runs might be at fault. On the contrary, if banks at the time were insolvent then we might need to look into other reasons as to why banks were failing.

One could easily come to the conclusion that banks, during the Great Contraction, were indeed illiquid. This conclusion could be explained through the creation of the Federal Deposit Insurance Corporation (FDIC). The creation of the FDIC in 1934 and the simultaneous halt of bank failures are both valid points that insinuate strong evidence that contagion may have played a factor. The FDIC insured deposits to prevent unfounded bank failures caused by contagion (Walter, 2005). The creation of the FDIC may have calmed the ripples moving throughout the banking industry, but could there be any other reason besides contagion that stopped the ripples?

There are a few explanations that might lead us to believe that the FDIC’s halt of bank failures was not caused by contagion. First, deposit insurance augmented the profits of risky banks, protecting them from failure. Second, the creation of deposit insurance undercut a market process that caused supervisors to close troubled banks quickly (Walter, 2005). So, if contagion was not a factor then maybe banks were not illiquid but rather insolvent.

Paul B. Trescott, professor of economics at Southern Illinois University, states that BUS was fairly liquid in the few months prior to its close in December, 1930. Trescott, also elaborates on the Bank of United State’s management strategy. These three elements are expansion through mergers and bank purchases, involvement with a series of securities affiliates and a syndicate for stock trading, and extensively investing in real estate development projects (Trescott, 1992). BUS was heavily into real estate lending, as were other banks in the New York area, but the loans lacked the usual safeguards relating to borrowers’ equity and collateral. Combine the risky lending with the heavy investing in BUS stocks and you have a recipe for disaster. The FDIC insurance allowed banks, which might have operated like the Bank of United States, to gain significant profits in subsidy by allowing them to take more risks. In this case the FDIC ended bank failures by providing insolvent banks a way to stay afloat. In either case, banks being illiquid or insolvent, the creation of the FDIC terminated bank failures during the Great Contraction.

Bank Failures during the Financial Crisis of 2007

During the 1980s the United States was going through a Savings & Loans (S&L) Crisis. The S&L crisis, brought on by years of deregulation and moral hazard (Degen, 2009), was bringing down the public’s confidence in the thrifts markets. Runs began to hit the S&L industry as values started to drop. Much like the FDIC, Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), in an effort to restore confidence, this time in the thrift industry.

The purpose of FIRREA, as set forth in Section 101 of the bill, was to promote a safe and stable system of affordable housing finance; improve supervision; establish a general oversight by the Treasury Department over the director of the Office of Thrift Supervision; establish an independent insurance agency to provide deposit insurance for savers; place the Federal Deposit Insurance System on sound financial footing; create the Resolution Trust Corporation; provide the necessary private and public financing to resolve failed institutions in an expeditious manner; and improve supervision, enhance enforcement powers, and increase criminal and civil penalties for crimes of fraud against financial institutions and their depositors (Law Brain, 2010).

FIRREA gives the FDIC the duty of insuring the deposits of savings associations as well as banks. In addition, FIRREA created a separate fund under the management of the FDIC called the FSLIC Resolution Fund. The FSLIC Resolution Fund generally assumed all of the "assets and liabilities" of FSLIC as of the day before its abolition (Moss, Randolph D., 1998).

Did the creation of FIRREA settle the S&L industry by providing these institutes with relief from contagion or did it allow for more risky behavior? The next two decades are again cast with troubles. First, with the “dot com” bust in the 1990s, then the housing bubble bursting in 2006, and followed by the “shadow banking” industry in 2008. This rapid growth followed by rapid burst is starting to become the norm within our economy. A norm, if left unchecked, could devastate the United States.

Summery

The FDIC and FIRREA were two pieces of legislation that were created out crisis. We may not all agree as to the exact causes of the crisis but we can agree that something needed to be done. Determining if the banking industry was illiquid or insolvent during these crises may be hard to discover and I believe that both played their part. As legislators rush to fix one part of our broken financial system the industry will leap to invest in another profiteering idea until it bursts. This herd mentality, which the financial industry’s management must refrain from, is the only way to slow down the crises. As long as the banking industry is allowed to take risks, speculate values, and use loopholes, we should all prepare ourselves for another bailout.

References

Bernanke, B. S. (2002, November 8). On Milton Friedman's Ninetieth Birthday. Retrieved April 5, 2010, from Federal Reserve: http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm

Calomiris, C. W. (2007). Bank Failures in Theory and History: The Great Depression and Other "Contagious" Events.

Cecchetti, S. G. (2008). Monetary Policy and the Financial Crisis of 2007-2008.

Degen, R. J. (2009). Moral hazard and the financial crisis of 2007-9: An Explanation for why the subprime mortgage defaults and the housing market collapse produced a financial crisis that was more severe then any previous crashes (with exception of the Great Depression of 1929). Glob Advantage.

Law Brain. (2010, March 16). Savings and Loan Association. Retrieved April 6, 2010, from Law Brain: http://lawbrain.com/wiki/Savings_And_Loan_Association

Moss, Randolph D. (1998, July 22). APPROPRIATE SOURCE FOR PAYMENT OF JUDGMENTS AND SETTLEMENTS IN UNITED STATES v. WINSTAR CORP. AND RELATED CASES. Retrieved April 6, 2010, from Justice.gov: http://www.justice.gov/olc/winstarfinal.htm

Trescott, P. B. (1992). The Failure of the Bank of United States, 1930. Journal of Money, Credit, and Banking, Vol. 24, No. 3 (August 1992) , 384-399.

Walter, J. R. (2005). Depression-Era Bank Failures: The Great Contagion or the Great Shakeout? Federal Reserve Bank of Richmond Economic Quarterly Volume 91/1 Winter 2005 , pp. 39-54.

By: Joseph Dustin

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A Baseline for Ethical Reporting Models

Organizations looking to implement a way to report unethical conduct can choose from a wide range of Ethical Reporting Models. Reasons for the variety of models can be argued that organizations, in general, do not share the same functional business models. Some of the organizational issues that can affect the Ethical Reporting Model an organization will choose are (a) the differences in operating funds, (b) the number of employees/stakeholders, (c) different laws the organization is governed by, and (d) the initiative to want change. Ultimately, organizations are left to choose a model that works well for them. So, what does an organization look for when choosing a model? To answer this question, I will analyze several different ethical reporting models to find commonalities that establish the necessary baseline of any model an organization may choose.

Ethical Reporting Models Analyzed

The first ERM analyzed is being used by the Global Fund to Fight AIDS, Tuberculosis and Malaria. The Global Fund appointed Willem A. Landman as the Independent Ethics Advisor to help give advice to the Ethics Committee on a wide range of ethical issues. The Global Fund’s Ethics Committee requested Landman to lend his expertise on implementing a whistling-blowing program to help complement the ethics and conflict of interest policies (The Global Fund, 2005).The Global Fund’s ERM is based off the guidebook, First to know: Robust internal reporting programs, published in 2004 by Trace International Inc, in collaboration with ISIS Asset Management and the Prince of Wales International business Leaders Forum. In 2005, Landman, as CEO of Ethics Institute of South Africa, obtained copyrights to produce its own edition of the guidebook, with due recognition (Landman, 2005). The Global Fund’s ERM is described as a, “legal and ethical misconduct prevention and detection strategy,” by Landman and addresses the five components of the U.S. Federal Sentencing guidelines for Organizations’ best practices, the UK’s Public Interest Disclosure Act, the U.S. Sarbanes-Oxley Act, and South Africa’s Protected Disclosures Act (Landman, 2005). This robust Ethical Reporting Model contains eleven key best practices.

The next ERM is published by Grant Thornton LLP, one of the six global audit, tax and advisory organizations, as part of their Corporate Governor Series. Grant Thornton developed a process called the Model Accounting Complaint-Handling Process (MACH Process). The MACH Process was created to be meaningful and flexible for any organization to use (Grant Thornton LLP, 2009). The MACH Process expresses the need to understand all stakeholders and their needs within the organization. The MACH Process is a customizable six step process that breaks down the processes for creating complaint handling procedures. This model also expresses a need for the MACH Process to be monitored using metrics to measure performance.

The third ERM analyzed was published by Foley & Lardner, LLP (F&L), a national law firm that provides a full range of corporate legal services. The guidebook published by F&L is titled, Implementing an Effective Corporate Compliance and Whistle-Blower Program. The F&L program starts with the organization’s Code of Ethics as the base of for the ERM. Then the program highlights four key elements for effective implementation. These key elements are education, fostering communications, evaluating compliance, and enforcement. The F&L program also ensures confidentiality and details the role of the company boards (Brown, Wilson, & Svendson, 2004).

The last ERM analyzed was introduced by Dr. Muel Kaptein, a senior Consultant at KPMG Ethics & Integrity Consulting, in the Journal of Business Ethics titled, Guidelines for the Development of an Ethics Safety Net. There are three Ethical Reporting Models described by Dr. Kaptein, of them, the Ethical Helpdesk Model was analyzed. The Kaptein Model revolves around the use of a centralized Ethical Helpdesk that is responsible for receiving all types of violations, adding violations into the organization’s reporting system, referring violations to the appropriate officers, and then following-up on violations to ensure all procedures are carried out properly. The Kaptein Model also uses steps for determining an Ethical Code of Conduct using a set of key principles and critical factors (Kaptein, 2002).

Commonalities of the Ethical Reporting Models

Upon reviewing each Ethical Reporting Model, a recurring theme started to appear. This recurring theme has eight distinct commonalities that can be broken down into two separate functionality groups (see Table I for details). The first functionality group consists of “Tone at the Top,” Code of Conduct, Reporter Protection, and Routing & Screening. This group determines the scope of the ERM by allowing an organization the ability to be as aggressive and flexible as they need. To understand this first functionality group better I will provide some examples.

Table I
Group	Commonalities	Global Fund	MACH	F&L	Helpdesk
	Tone at the Top	X	X	X	X
	Code of Conduct	X	X	X	X
	Reporter Protection	X	X	X	X
	Routing & Screening	X	X	X	X
	Investigation	X	X	X	X
	Resolve	X	X	X	X
	Monitor & Report	X	X	X	X
	Training	X	X	X	X

The involvement of top level management is the first commonality explored in the first group and all four ERMs expressed the need for high level commitment. Willem A. Landman’s Global Fund Model states, “Programs will fail if management does not provide support, both through frequent and high level public statements and through the commitment of staff and resources(Landman, 2005).” The F&L model extends this notion by indicating that the “tone at the top” exhibited by corporate management drives the program and for organizations to be effective they must have an ethics/conduct code (Brown, Wilson, & Svendson, 2004). The organization’s code of conduct allows for flexibility by tailoring the code of conduct to include applicable laws or by going beyond compliance and instilling a higher level of responsibility. Although, reporter protection is another key commonality, not all Ethical Reporting Models agreed in how to provide this protection. The Ethics Helpdesk Model is flexible and allows for the organization to use either anonymous reporting or identification (Kaptein, 2002). The MACH Process, on the other hand, states the need for confidentiality and anonymous submissions that are required by the Sarbanes – Oxley Act (Grant Thornton LLP, 2009). The last commonality within this functionality group is routing and screening. This step can consist of written internal controls and procedures designed to handle violations of the code of conduct. The core of each ERM features processes that identify different ways organizations can address handling violations of the code of conduct. The first functionality group can be considered the roadmap for the second functionality group.

The second functionality group consists of Investigating, Resolving, Monitoring & Reporting, and Training. This group allows the organization to reduce and improve their unethical behavior. The first commonality of the second group is the investigation process. Although, not all ERMs specifically stated the investigation process in detail, those that didn’t, implied that investigation is necessary by applying remedial action to violations of the code of conduct. The MACH Process states, “The investigation should consist of all necessary procedures and actions to provide for the discovery, location and procurement of sufficient facts to reach accurate conclusions (Grant Thornton LLP, 2009).” The next commonality is resolve. If organizations don’t take remedial action of reported violations, it will threaten to stop the flow of information (Landman, 2005). Information gathered throughout the ERM process will need to be logged, thus allowing the ability to monitor and report against it. The Foley Model expresses that monitoring and reporting has taken on greater urgency under SOX 404 and this urgency requires management to attest to the effectiveness of the internal controls (Brown, Wilson, & Svendson, 2004). The last commonality in this functionality group is training. Training can be seen as training employees how to report and what to look for, training management how to handle violations, and training on how to improve the overall ERM system.

Summary

Organization looking to implement a way to report unethical conduct or implementing a whistle-blowing program to deter fraud can choose from a wide range of Ethical Reporting Models. I would encourage any organization in this situation to choose a model that, at a minimum, incorporates the two functionality groups. The two functionality groups work with each other to form a flexible ERM that can be used as a baseline when choosing an Ethics Reporting Model.

References

Brown, S. A., Wilson, D. O., & Svendson, D. M. (2004, May 19). Implementing an Effective Corporate Compliance and Whistle-Blower Program. Retrieved May 17, 2010, from Foley.com:http://www.foley.com/files/tbl_s31Publications/FileUpload137/2240/Whistleblower.pdf

Grant Thornton LLP. (2009). Establishing an effective whistleblower complaint-handling process. Retrieved May 17, 2010, from GT.com:http://www.gt.com/staticfiles//GTCom/files/services/Forensic%20accounting%20and%20investigative%20services/Establishing%20an%20effective%20whistleblower%20complaint-handing%20process.pdf

Kaptein, M. (2002). Guidelines for the Development of an Ethics Safety Net . Journal of Business Ethics , 217-234.

Landman, W. A. (2005, October 23). Whistle-blowing program best practice - some policy considerations for the Global Fund. Retrieved May 17, 2010, from TheGlobalFund.org:http://www.theglobalfund.org/documents/board/12/GFB-12-13-EC_Report_Whistleblowing.pdf

The Global Fund. (2005, September 28-30). Eleventh ANNUAL REPORT OF THE ETHICS COMMITTEE. Retrieved May 17, 2010, from TheGlobalFund.org:http://www.theglobalfund.org/documents/board/11/gfb1111.pdf

By: Joseph Dustin

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