• Service: Enterprise, Family business
  • Type: Business and industry issue
  • Date: 4/9/2013

Ethical assurances to avoid reputational damage: The ethical audit 

The ethical audit
All businesses impact on the people and the environment around them. Previously, we discussed how the traditional bottom line, which emphasised the pursuit of profit, often at the cost of all else, has expanded into the triple bottom line, which unites profit with people and the planet on which we live.

We talked about how auditing frameworks have also expanded to include different types of audits, like ethical audits, as well. Just like a financial audit, which examines and verifies your business’s financial statements, documents and records, an ethical audit systematically assesses your business’s social and environmental performance and the extent to which you’re observing practices which seek to minimise environmental and social harm.

Why conduct an ethical audit?

Although not required by law in many jurisdictions, conducting an ethical audit on your business is a smart move…

  • It demonstrates that you are a responsible corporate citizen
  • It demonstrates that you’re leading the way in social and environmental issues
  • It provides assurances which alleviate or prevent reputational damage
  • It highlights your commitment to ethics and strong environmental and social values
  • It points out problem areas and assists in formulating strategies and plans to overcome them.
  • It speaks to an increasingly vocal and passionate group of consumers who choose to buy products and services based on a business’s track record on environmental and social issues (known as ethical consumption or ethical consumerism).

Traditionally, audits are concerned with issues or areas which are easily quantifiable, like financial records. By way of contrast, ethical issues can be subjective or qualitative in nature, making them more difficult to measure or audit. In addition, not all ethically questionable actions are actually illegal, which blurs the picture further.

Carry out a review of social and environmental policies

Reviewing a company’s formal policies on social and environmental issues is the first step in an ethics audit. Check whether:

  • There are firm policies on paper – like a Code of Ethics and Company Social and Environmental Policy – and that these are published in the company’s employee handbook
  • Employees are aware of and fully educated about environmental and social responsibilities, policies and procedures

Conduct a review of any legal challenges facing the company

Check whether there are any pending or existing legal challenges over the company’s social and/or environmental performances. Thoroughly examine the facts to ascertain whether any such cases have merit and what actions are being taken to ensure that issues are properly addressed to prevent further occurrences.

Conduct a review of press coverage

Review all press coverage relating to the company’s ethical performance. Do you notice a trend – is press coverage overwhelmingly positive or negative, for example? Marking stories on a timeline will help note the frequency or magnitude of incidents.

Note whether the company has tried to cover up the issues or is willing to face up to them to overcome them. Ascertain what has been done to address negative issues and to prevent them from occurring again down the line.

Carry out a review of how the company is perceived

Perceptions aren’t limited to the public arena – how do employees, suppliers and clients feel about the company? Have an honest discussion with them about their perceptions – note whether they’re positive or negative. Do they feel that the company’s Code of Ethics and social and environmental policies are entrenched in the culture of the company or merely lip service?

Ambivalence, reluctance to discuss issues or to deflect attention from them could point to cover-ups or intimidation from certain quarters. Look for patterns in responses or certain issues which keep cropping up.

Look out for whistleblowers

Whistleblowers are those who bring undesirable actions or deeds to the attention of those in authority, either within the company (senior management) or outside it (legal authorities or professional boards).

Determine whether there have been any instances of whistleblowing and examine how whistleblowers were treated, for example whether their claims were taken seriously and properly investigated or disregarded and swept under the carpet.

Christophe Bernard

Christophe Bernard
I am a KPMG partner based in the French firm’s Paris office, responsible for encouraging the growth of our firms’ middle markets practice across Europe, Middle East and Africa, a majority of that market comprises of family businesses.

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