What Specific Steps Might the Audit Committee Undertake in Assessing the Tone at the Top and Ensuring Ethical Behavior within an Organization?

We will continue to stress the importance of understanding an organization’s tone at the top because it provides the basis for ethical behavior within an organization. Under Section 406 of the Sarbanes-Oxley Act, an organization is required to disclose whether or not it has adopted a code of ethics for senior financial officers. While nonprofit organizations are not subject to this provision, this is a best practice that should be considered. A “code of ethics” encompasses such standards as are reasonably necessary to promote:

  1. Honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships
  2. Full, fair, accurate, timely and understandable disclosure in the financial reports and tax returns prepared by the organization
  3. Compliance with applicable governmental rules and regulations

Most audit committees believe that they can assess the tone at the top from their periodic meetings with management. However, best practices continue to develop which, in addition to these periodic meetings, may include more formal assessments, such as conducting confidential employee surveys, focus groups, one-on-one discussions with second and third levels of management, as well as holding separate discussions with internal and external auditors.

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