CHAPTER 2

INTERNATIONAL PROFESSIONAL PRACTICES FRAMEWORK (IPPF) –

ETHICS AND THE INTERNAL AUDITOR

 LEARNING OBJECTIVES
To be able to: -
•Describe the importance of ethics in internal audit profession
– Discuss the principles and rules of conduct of IIA Code of Ethics
– Understand the importance of independence in ethics
– Define whistleblowers
– Illustrate the relationship between whistleblowing and internal
auditing
ETHICS
 WHAT IS ETHICS

• Oxford dictionary
- science of morals, study of principles of human duty, rules of conduct

• TB:
- A set of moral principles that distinguish between what is right and
what is wrong

- It is a set of values that guide the conduct and the behavior of the
individuals, enabling them to differentiate between rights and wrong,
good and bad and what should and should not be done
 IIA CODE OF ETHICS
• Adopted on 13 December 1968

• Purpose

- to promote an ethical culture in the profession of internal auditing.

- will enable the internal auditor not only to maintain their integrity,
but also to promote an ethical environment in the organization.
 IIA CODE OF ETHICS
• Applicability and Enforcements

- Applicable to all members of the IIA

- Applies to both individuals and entities that provide internal
auditing services

• Violation of the Codes

- Subject to forfeiture of the IIA’s membership or CIAs designation

 IIA CODE OF ETHICS
• Two Components (Refer TB)
 ETHICS AND INDEPENDENT
• Oxford dictionary - not depending on authority of another,
autonomous, free

• A good governance requires auditors to be independent of the

management and report to the AC

• A clear definition of independent is needed to ensure corporate

governance to perform effectively

• IA should be independent of the activities they audit, work should be

carried out freely, objectively, impartially an unbiased judgments
 ETHICS AND INDEPENDENT
• Leadership roles to achieve excellent corporate integrity, ethics and
independence
- Setting the tone at the top
o BOD establish corporate integrity & ethical culture

- Setting the Example

o BOD need to internalise a corporate value system

- Advocate and Compliance

o Role of Chief Audit Executive & Chief Ethics Officer

- Commitment
o Involvement of all levels in the organization
 FACTORS THAT LEAD TO
UNETHICAL CONDUCT
• The wish to fulfill some of goals

- IA will act outside their scope of duty, thus fail to comply with
Code of Ethics state by IIA just to fulfill their self interest.

• Fail to stay alert in the decision making process

- IA thinks that the small matter can’t lead to a big problem but
in reality a small matter that we neglect can cause into a big
consequences.
 FACTORS THAT LEAD TO
UNETHICAL CONDUCT
• Pressure to maintain numbers of goals and performance

- To secure a good name and image of company, they are force

to telling lie.

• Fear and silent

- The employee realizes the issue they faced whenever company

faced difficulties - try to raise red flag but had been restrained from
taking such action - because the threatened that set by the upper
management may cause them lost their job.
 FACTORS THAT LEAD TO
•
UNETHICAL
A culture of social responsibility
CONDUCT
- Most of company was closely involved in community affairs and
responsibility communities.
- By doing this, they can hide their unethical misconduct from the
eyes of public

• Lack of ethic program itself

- Most of the time, unethical misconduct happened because of

lack motivation and IA itself did not realize how important to
comply with IIA Code of Ethic in performing their job
 UNETHICAL CONDUCT
BY INTERNAL AUDITOR
• Breach of duties

• Bribery

- Bribe is promise, offer or give something (of value), especially

money, to a person to obtain services or gain influences.

• Fraud

- Fraud is intentional misrepresentation of financial

information by one or more individual among management,
employees or third parties.
 ROLES OF INTERNAL AUDITOR
• Have a good understanding about IIA Code of Ethics

- The first thing that must have in the knowledge of an IA.

• Act as an ethic supporter

- IA should show their good attitude and be a good role model in order to create an
ethical environment

• To detect and prevent possible unethical conduct

- Monitoring and tighten up the control in every activities of the senior management.
 ROLES OF INTERNAL AUDITOR
• Always refer to the IIA code of ethic while accomplishing the job

- Must retain their objectivity which to make a balance assessment in

every situations or circumstances and not improperly influence by their
own interest

• IA must ensure their own integrity is not compromise

- IA must discharge their duty with honesty, diligence and responsibility.

- Should avoid from being involve in any illegal activity
WHISTLEBLOWERS
 DEFINITION

• Whistleblowers
- One who reveals wrongdoing within an organization to the
public or those in positions of authority

• Whistleblowing
- Unauthorized dissemination by internal auditor, in good faith,
of serious information relating to questionable practices,
whose disclosure is perceived to be in the public interest.
 WHISTLEBLOWING
AND INTERNAL AUDITING
• Whistleblowing come into limelight since the collapse of giant companies as a result of
financial scandal

• U.S. introduce a Sarbanes Oxley Act in 2002 to impose requirement to establish

procedure for whistleblowing

• The Act requires AC to establish procedures for: -

- The receipt, retention, and treatment of complaints received by the issuer regarding
accounting, internal accounting controls, or auditing matters

- The confidential, anonymous submission by employees of the issuer of concerns

regarding questionable accounting or auditing matters.
 WHISTLEBLOWING
AND INTERNAL AUDITING
• Companies were urged to adopt whistleblowing policy or
confidential reporting program

• Whistleblowing policy is a signal to alert that a misconduct or

malpractices happen in workplace

• The policy encourage the employees to speak the truth

 FORM OF WHISTLEBLOWING

• Internal
- Current or former employee reports illegal or immoral activity
to members of upper management and supervisors within the
organization

• External
- Current or former employee reports the organization
wrongdoings to sources outside the organization to take
appropriate actions
 MOTIVES OF WHISTLEBLOWING

• Internally
- Have faith in mechanism for reporting misconduct

• Externally
- Fear of retribution from the employer
- Potential cover-up if company alerted to problem
- Failure of company to act upon previous complaints
- Motivated by personal and financial gain
 ROLE OF INTERNAL AUDITOR
IN THE WHISTLEBLOWING PROCESS
• Be open and ever ready to receive report from whistleblower

• Protect the confidentiality of the information reported

• Protect the identity of whistleblower

• Investigate the allegations discreetly within the company

• Update the whistleblower on the status of the case reported by the whistleblower

• Reviews policies on whistleblower to ensure the policy is updated in terms of whistleblower

protection
 IIA APPROACH TO
WHISTLEBLOWING
• IIA Code of Ethics provides mechanisms for reporting without
bringing it to outsiders

• Such mechanism include reporting to management, AC and BOD

• The Code is NOT to mitigate whistleblowing but to encourage staff

to report the misconduct internally

• If IA adheres to such mechanism, there will be no whistleblowing

• THANK YOU