The U.S. Securities and Exchange Commission (SEC) released its final rule to implement a code of ethics under SOX Title 404. The stock exchanges have proposed that each company listed on the exchanges publish its code of ethics.
- Discuss how disclosures of a code of ethics by senior management could have a positive effect on public confidence and influence investors’ behavior. Discuss the consequences of not establishing a code of ethics. Support your position.
- Evaluate the importance of senior management in setting the tone for the application of the company’s code of ethics and promoting positive employee behavior, improved decision making, or the willingness to report unethical behavior of coworkers.
- Recommend at least two policies that might encourage employees to report unethical behavior.
I pointed out in the most recent writing assignment that the 2022 ACFE Report to the Nations on occupational fraud shows that 42% of all frauds are detected through company hotlines (ACFE, 1). The next most common method of detection is internal audit, which uncovered 16% of reported fraud, making the hotline the most effective method of detection by a huge margin (ACFE, 1). The 2022 report also shoes that companies with tip hotlines in place had half the median losses of companies without hotlines, most likely due to that organizations with hotlines available detected frauds much earlier than organizations without hotlines (ACFE, 1).
Reporting Hotlines and other anonymous reporting options have been the most effective fraud detection tools consistently over time. In addition to options for anonymous reporting methods such as hotlines, other policies that are effective include periodic training on the reporting options and surrounding policies, which increases the likelihood that employees will report on unethical behavior.
Another effective policy is to emphasize protection for whistleblowers. Employees will be much less likely to reporting unethical or fraudulent behavior if they fear retaliation from management or colleagues. The policies concerning whistleblowers should be included in training. The Sarbanes Oxley Act, Section 806 “Protection for Employees of Publicly Traded Companies Who Provide Evidence of Fraud” contains legal protections for whistleblowers, however, company level policies that protect employees for situations not covered by this can help encourage tips earlier and on a larger range of problematic behavior.