COSO 2013 Principle 1 & VW: Basic Ethics and Business

Cathy Connally Blog, Corporate Governance, Financial Compliance 0 Comments

COSO The Internal Control – Integrated Framework (2013) Principle 1 states “The organization demonstrates a commitment to integrity and ethical values.” As part of this principle, there is a discussion of oversight to better understand  that “Performance goals that create incentives or pressures to compromise ethical behavior”.

Ethics and business

 

Most people find what VW did to be really unbelievable, mainly because they had such a great reputation for high quality and integrity. The even more crazy thing is that eventually they would get caught. It probably went on so long that eventually it became “impossible” to reverse or change without being found out.

My experience with fraudulent behavior is that it usually is found out, one way or another. So if not for the right reason, do the right thing? Then really for the wrong reason – do not do it because you will get caught. And the punishment will far outweigh the benefits of the crime.

So why did this happen? Were the pressures on these engineers so massive to find a way to meet standards in an unconventional or maybe less expensive way? But still you ask why?

Does it come down to culture (written or unwritten) of the company that this would even be entertained at all? Maybe. Win at any cost. The engineers in question were supposedly some of the brightest. So they could not solve the problem, then maybe with today’s technology, it is not possible or not in the time allowed. But failure was not an option. Apparently, sales of diesel cars were essential to growth plans dictated from the top. So the pressure must have been enormous.

Does it appear that it was ok at VW to commit fraud as long as you did not get caught? At what level did this become ok?  Was there a case of willful blindness at the top?

Most employees are motivated by rewards from management whether they be money, promotions, acknowledgement etc. Further, most employees become very savvy very quickly if there is a difference between what is said and what is done. Therefore, actions of employees are a direct reflection of what top management and maybe the board really wants.

Ethics aside, throw everything away for the goal of economic growth. This seems to be true at VW, especially since after the problem was discovered by Researchers at West Virginia University, VW compounded the deception by blaming the problem on technical issues.

Disaster management experts advise that if you have a crisis, get to the bottom of it as fast as possible. Then decide what your response is. Be transparent. Then maybe you have a chance to survive and thrive. People can often forgive errors that happen but rarely what they judge to be deceit and deception.

This is a lesson for all companies to take note. Make sure you know what messages you are sending to your organization – directly and indirectly. Are your ethics and integrity standards adhered to in the organization?

There may be actions taken by employees that are surprising – or not – to upper management and the board. But for board members who are part timers, these actions may completely blindside them. Best to be actively involved in the corporate culture of an organization and not assume that the paperwork people sign once a year for code of conduct covers your assets.

This is the first in a series on how COSO principles are demonstrated (or not) on a day to day basis in business. Perspectives on how to avoid big problems in business with implementation of basic ethics and control principles.

See Issues Central Events and Workshops for more information on how to help your company and board review and manage corporate governance and financial compliance at your company.

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