by Glenn Cheney

Altamonte Springs, Fla. — The Institute of Internal Auditors has long been an advocate of a more ethical and effective “tone at the top” — the clear intent of upper management that fraud and financial misrepresentation will not be tolerated. Now IIA president David A. Richards is calling on internal auditors to help raise the tone at the top to “a new dimension,” one which the world has just begun to explore, that of sustainable development.

Richards, who was director of internal auditing at FirstEnergy Corp. until he assumed the IIA presidency this year, says that internal auditors are in a unique position to help management understand the importance of long-term corporate and community development — known together as sustainable development — as opposed to short-term profit that has no real foundation for continued success.

“We’ve got the broader topic of corporate governance, the business of how a company is managed and operated, and sustainable development is a subcategory under that,” he says. “What we’re trying to do is identify the various components of governance and look at how we address them at the IIA.”

The IIA is in a good position to grapple with the nascent concept of sustainable development. With 93,000 members in 120 countries, the institute can deal with concepts at a global level, sharing experiences in diverse countries and devising multinational solutions that would make it easier for companies to remain competitive while adopting policies that allow sustainable development. This broad perspective is essential to considering the many different aspects of sustainable development.

This is an emerging issue for the IIA. The institute is planning seminars, conference sessions, forums and position papers that will explore the concept of sustainable development and the role of the internal auditor in promoting it. The institute is looking at the ways that other countries have been dealing with the issue.

One big question that internal and external auditors face is how to assess information that is not financial in nature yet is crucial to a company’s long-term business. Standards, benchmarks and guidelines are gradually being developed by such organizations as the United Nations’ Global Reporting Initiative and the International Institute for Sustainable Development, but efforts are still scattered, inconsistent, far from comprehensive and generally not required by legislation.

The IISD defines sustainable development in business as “[the adoption of] business strategies and activities that meet the needs of the enterprise and its stakeholders today, while protecting, sustaining and enhancing the human and natural resources that will be needed in the future.”

Looking for definition
The internal auditor’s role in this new, improved tone at the top is still largely undefined. Richards says that it will take some thinking outside the box for auditors to ask how accountable their companies are and what areas of accountability the internal auditor should be assessing. Until there are standards and guidelines, assessment will require subjective judgment by professionals who understand the intent of sustainable development.

Judgment, however, is a scary concept in the world according to Sarbanes-Oxley. Just as auditors are trying to understand the new rules and use them to protect themselves, they are also being forced to go beyond the rules and decide, with professional judgment, what is right and wrong.

Richards is not advocating a totally selfless corporation that sacrifices profit for the greater good. Rather, he says that concern for the greater good ultimately leads to greater and more sustainable profitability.

“I think the record shows that companies that are more aware of their environmental responsibility — the environment where they live and work — are much more successful than those that just try to meet the letter of the law,” Richards says.

Long-term payoff
As an example, Richards cites the widely perceived need for companies to use unethical means to secure business in certain countries where bribery and environmental contamination are standard and, for competitiveness, necessary business practices. Bribery and pollution may contribute to short-term profitability, but they are not conducive to sustainable business. Ultimately, in the broad and long-term perspective, such practices hurt business and limit growth.

Internal auditors, who are partially responsible for monitoring, advocating and reporting on ethical behavior in corporations, are well situated to work with management on issues of ethics.

“The internal auditor should be adopting a philosophy to look beyond financial subjects,” Richards says. “A lot of internal audit shops are operationally oriented, so they can be more proactive and not just meeting the bare minimum that regulations require. ... One of the things that internal auditors do is test whether an organization is living up to its credos and value system, and if not, where they are failing. ... It’s the difference between what’s in print versus what people really do — that’s where the internal auditor comes in.”

As an example of companies forgoing short-term profit in deference to sustainable development, Richards cites cases of companies supporting training programs at local community colleges. In this way they generate more qualified professionals in the local area who may later become employees. Such a program helps both the company and its community sustain development.

“How accountable are the corporations of the world to efforts to assist the areas where they operate, and to help them continue to develop as the local economies support those businesses with people resources, community resources and natural resources?” Richards asks. “This isn’t just in underdeveloped countries. It’s anywhere.”

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