thought leadership on ethics & compliance scale final

RISK

MANAGEMENT

FRAUD

CONTROL

TM

Culpability Parameters for

Ethics Investigations

A guide to developing culpability matrix in ethics investigations

@ TRUSTUS Institute, 2014 Thought Leadership 2

A guide to developing culpability matrix in ethics investigation

1 Introduction

Organizations across the globe are striving towards encouraging ethical culture amongst their

employees, contractors, third party associates and business partners. These efforts are primarily driven

by the changing economic landscape of growing regulatory penalties, increasing demands for

transparency in business and extended visualization of community impact contributed by many

misconducts.

In todays world, organizations come across several patterns of misconduct ranging from misbehaviour to

misappropriation; dereliction of duties to disclosure of confidential information; corruption to conflict of

interest. These misconducts, if unattended can cause serious damage to the organization’s reputation

and overall health (financial/ ethical). An employee, a contractor, a supplier or a service provider or one

of their employees could be party to such misconduct.

Disciplinary action towards misconduct is considered a deterrent to such misconduct. While the extent of

deterrence impact created by disciplinary action on any misconduct is not easily quantifiable, the efforts

towards such actions cannot be undermined. Organizations adopt different approaches towards defining,

deliberating and deciding on disciplinary actions for misconduct, based on the available evidence to

substantiate a violation.

Evidences play a crucial role in deciding on disciplinary action. However, how the evidences needs to be

considered in the process depends on several factors including the impact due to violation, the level of

culpability and other circumstantial factors that intensify or de-intensify the level of disciplinary action.

Courts across the globe are moving towards structured sentencing guidelines for offences to ensure

consistency in decision making and enhance trust on legislative transparency.

This though leadership examines the need for Ethics & Compliance scale and key factors that shall be

considered in defining, deliberating and deciding on disciplinary actions.

2

3

4

Need for culpability parameters

Key factors for disciplinary action

Conclusion

Contents

3Thought Leadership @ TRUSTUS Institute, 2014


2 Need for developing

culpability matrix

Misconducts are not the same. Each type of misconduct

have varied root causes, dimensional impacts and differing level

of intent. While these aspects could not be definitively measured

in all circumstances, it is essential to consider them to the extent

feasible during the process. For instance, an accidental sharing of

financial information with a friend whose name is similar to that of

the board member or senior executive in the company, cannot be

treated the same way as a theft of intellectual property would be

treated.

Disciplinary actions on misconducts require varying treatments as

it has broader objective of prevention and cure besides the

obvious objective of punishment and deterrence. At its base, a

disciplinary action should reflect an attitude of zero tolerance

towards violation/ misconduct. The tolerance level, however may

depend on the type of misconduct.

Key types of misconduct that organizations face are fraud and

corruption, disclosure or misuse of confidential information,

misappropriation or damage to assets, behavioural misconduct

including misuse of powers, discrimination or harassment, conflict

of interest and others. There may be several sub types for each of

the above misconduct and accordingly the disciplinary approach

may vary.

Primary options available with organizations for disciplinary

proceedings include removal or dismissal, suspension, warning -

oral or written, withholding promotion or career progression,

withholding increments or bonus and counselling. In addition to

the primary options, organizations opt for reporting to law

enforcement for appropriate action.

In deciding on appropriate disciplinary action, organizations

essentially consider multiple factors. While some of the factors

considered mature over time, careful structuring of the essential

factors can enable organizations to prevent legal issues created

by rogue employee.

Each type of misconduct

have varied root causes,

dimensional impacts and differing level of intent



Fin

ancia

l R

isk

Legal R

isk

Key Disciplinary options

Key types of Misconduct

Broad level risks

Organizational

Ethics and

Compliance

A guide in nature of Ethics & Compliance scale is

essential for the organization due to the following

key reasons:

1. Disciplinary option for any misconduct may not

be same. For instance, Non declaration of

conflict of interest in a supplier by a

procurement manager may be different from a

conflict of interest in a supplier for a finance

person. This also represents the differences in

the impact and the level of culpability involved

in such violation.

2. Level of disciplinary option applied in many

instances are debatable. Organizations do

consider withholding promotion as an action

for certain misbehaviour. However, the

number of promotion cycles the employee has

to be withheld from is a debatable issue.

3. Ethics & Compliance Scale is such a guideline

for organizations in enabling consistent

disciplinary action across geographies and

time. It is not intended to be a rule book and

will leave the application of the guide to the

decision maker or the committee.

Source: TRUSTUS Research

4. An action in an organizational context comes

under a lot of scrutiny. It is hence necessary to

for the organisation to demonstrate a

transparent approach and avoid potential

opportunities for influence based decisions

with the aid of such a guide.

While a guide is essential, it may evolve to its

comprehensive best over a period of time.

Organizations shall always attempt to embed the

learnings from the implementation of guides as a

part of its evolvement process.

Actions taken by organizations for any given

misconduct may not be the same. The actions

taken will vary between organizations based on

their industry and their culture. For instance, a

culture of involving law enforcement or removal for

remote negligence in oversight are not common

across organizations.

Organizations should recognize the need for such

Ethics & Compliance scale and evaluate elements

/ reasons reflected above in structuring a definitive

base of disciplinary action for tackling issues of

misconduct.



3Key factors for

disciplinary actions

Organizational environment exhibits multiple

factors in the process of determining appropriate

disciplinary action for misconduct. Key factors are:

1. Act of violation or misconduct – This factor

examines the nature of misconduct and its

overall impact.

2. Role in the violation or misconduct – This

factor examines the subject’s role in misconduct

including whether he was influenced to act.

Act of violation or

misconduct

Subject’s role in

violation or misconduct

Motivational elements

associated with misconduct

Behavioural clues associated

with investigation

Overall Organizational

perspective


x

3. Motivational elements – This factor examines

the aspects that may have motivated the subject

or whether the vulnerabilities are exploited.

4. Behavioural aspects – This factor examines

the subject’s level of cooperation, response to

warnings and trends of past violations amongst

others.

5. Organizational perspective - This factor

examines the impact due to violation or

misconduct.



x Act of violation or misconduct

Similar is the case in issues pertaining to

sexual harassment wherein, wherein, oral

evidence may be still be held reliable even

though the issue in question could still not be

corroborated from other sources.

3. Value or number of instances – Impact of

investigation also depend on the number of

instances of such fraudulent behaviour or value

of such frauds. For instance, a misbehaviour at

customer’s premises may lead to loss of

business, but consistent misbehaviour at the

customer may result in loss of market. Hence,

action against ethics violation shall also consider

the frequency of such acts.

4. Complexity and planning – A misconduct may

have differing levels of complexity or

sophistication. Treasury or hedging fraud may

have been perpetrated with considerable

planning. Similarly, an attempt to hack into a

server to remove confidential customer

information may be perpetrated with

technological sophistication. These attempts will

require detailed planning and deeper intent to

cause harm. Intent to harm is one of the crucial

factors that guides decision making process.

5. Period of misconduct - Misconduct may have

occurred over a period of time. For instance, a

financial statement fraud may have occurred

over a long period of time. Similarly, corrupt

practices in businesses are seldom isolated

instances, these may have happened across

periods. Sustained occurrence of the

misconduct represents the possible intent and

deeper inflection of the wrongdoer in benefiting

out of such misconduct.

An assessment of these elements provides a clear

perspective of the impact due to act of violation.

1. Nature and seriousness of the misconduct –

Nature of misconduct and its seriousness is a

vital element in assessing the act of violation.

For example, discrimination based on religion

and conflict of interest will be handled differently.

The seriousness may vary significantly between

multiple nature of misconducts. For instance,

misuse of position by a senior management

personnel may have greater sensitivity.

Similarly, unauthorized download of certain

proprietary documents of a product exposes the

risk of sharing it with competitors thereby may

have higher level of sensitivity.

2. Adequacy of evidence – Evidence forms the

core part of organizational disciplinary action

process. Oral, documentary and digital are key

types of evidences. More than the existence of

evidence, whether the evidence is substantiating

the issue in question or whether it is only

circumstantial, determines the course of action.

Many a times, in instances of bribery and

corruption investigation, the evidences are more

circumstantial than direct.

Herein we examine the act of violation and its impact. These elements primarily

pertain to nature and seriousness of the misconduct, adequacy of evidence,

complexity related to perpetration, period of misconduct and frequency of

instances.

Nature &

seriousness

Adequacy of

evidence to

substantiate

Complexity

and level of

planning

Period of

misconduct

Value or

frequency of

instances




4. Organizations do come across instances of

misconduct wherein subordinates are involved

in certain acts based on the instructions from

their superiors. In these instances, the

subordinates may not understand the complete

impact of the misconduct. Further, hiring wife or

a relative in the team by abusing position is also

not uncommon.

5. A security guard who allows transit of materials

without adequate documentation, as instructed

by the store keeper, is influenced by the trust in

the role and responsibility of the store keeper. He

is culpable, however, the level of culpability

6. Similarly, abuse of fiduciary duties and abuse of

position of trust in diverting business leads to a

future employer by a sales manager or to

another related entity of a promoter post

receiving private equity funds have relative

higher degree of culpability.

1. Misconduct may be committed by more than

one individual. The involvement could be active

or passive. For instance, an employee may have

ignored harassment of another employee by a

manager, despite requests from victim for help.

In this given circumstance, had the employee

observing such a situation, had offered to help;

he would be accorded a different treatment as

compared to had he gone ahead and reported

such an incident

2. Involvement could also be based on peer

pressure, wherein the employee adopts corrupt

practices to gain business benefits. Further,

some of the misconduct activities may result due

to adoption of predecessors practices.

3. Many a times in sexual harassment case

wherein a secretary is raising concern on her

long standing manager, a question that arises is

why is the secretary raising the concern now? In

many instances it is due to exploitation.

Role in violation or misconduct

The role of the subject in the violation or misconduct is another crucial aspect in

the process of determining an appropriate disciplinary action. The elements

under this factor includes the level of involvement by the subject including

whether it is influenced by others and the extent of abuse of authority by the

subject.

Significant or peripheral

role in misconduct

Involvement due to

coercion, intimidation

or exploitation

Involvement due to

influence of pressure

Abuse of power, trust

or responsibility


Role in violation or misconduct



Deliberate efforts

to exploit

vulnerability

Opportunistic

motivation (one of

violation)

Motivated by

financial/ other

gain

Limited awareness

on the impact of

misconduct

Threats or inappropriate

actions (black mail)

Discrimination based

motivation

Motivational

elements


Motivational/ Influencing factors

All acts of misconduct can be associated with certain motivation, while in many

cases the motivation may not be apparent or convincing. The motivational factor

includes financial gain , approach to exploit vulnerability, discrimination based

motivation or psychology based inappropriate actions.

1. Financial gain as a motivator is prominently

experienced in many misconduct cases

relating to fraud. In addition to the financial

gain, there may be other contributing or

coexisting motivational factors.

2. Motivation to exploit vulnerability is

increasingly becoming prominent in

information security related misconduct. Such

aspects may be more serious as it has a

focussed effort to exploit weakness.

3. There may also be circumstances wherein an

employee had submitted excess travel claim,

but failed to withdraw the same on realizing it.

During investigation if the employee regrets

his decision and agrees to withdraw his claim,

then it may only be an opportunistic

motivation.

4. Caste, nationality, colour or sexual orientation

based discrimination related misconduct may

have more serious impact on working

environment of the organization. Organizational

decision on disciplinary action shall take

cognisance of such elements also.

5. Similarly misconduct involving physical threats

or inappropriate actions may be equally serious.

6. Further, there may be circumstances wherein,

the perpetrator may not have understood the

impact of such misconduct. Harassment is

referable to the harm caused to the person

harassed rather than the actual intent of the

other. With people from different culture and

backgrounds it is essential to sensitise

individuals on appropriate conduct.



4. Some of the behaviours of the subject learnt

during the investigation may include his

addiction to drugs or pornographic content or

histrionic behaviour. During the course of

review, if the subject demonstrates steps to

recover from his addiction, the organization may

consider such behavioural improvement in

taking disciplinary action.

5. Further, the behaviour may also indicate the

subject’s efforts to facilitate other fraudulent or

undesirable behaviour.

6. Previous behaviours of the subject include the

nature of previous violations and its relevance to

the current act/ violation; or violations since last

warning or similar action. A failure to respond to

warnings may indicate non-inclination of the

subject to change his path.

1. Cooperation with investigation is one of the key

elements to consider. Acts of misconduct

involving bribery or financial statement fraud

may be perpetrated by more than 1 individual.

One of the individuals involved may agree to

become a cooperating witness and aid in

unearthing the extent of the misconduct. In such

a circumstance, while the act of violation by the

cooperating individual is serious, his behaviour

to support may be considered as supportive

information in disciplinary proceedings.

2. Voluntary reporting or early admission can also

be supportive behavioural cue in this regard.

Similarly, attempts to prevent victim from

obtaining assistance could be another

behavioural cue in disciplinary proceeding. This

may be by misguiding a victim on the process of

seeking assistance.

3. Subject’s attempts to share or conceal additional

information regarding the misconduct or

diverting the investigation may implicate the

subject further in a disciplinary action.

Behavioural factors

Behavioural factors relating to misconduct and the course of investigation have

a strong bearing on the disciplinary action. The elements under this factor

includes cooperation during investigation, history of violations, attempts to

conceal/ dispose of evidence and behaviour in responding to warnings.

Cooperation and early/ late

admission

Attempts to share or conceal

additional info

Demonstration of steps to

improve

Efforts against victim on reporting

Response to warnings

History of violations or misconduct

Supported other

misconducts


Behavioural

factors



Organizational factors

Any act of misconduct requires an assessment of the impact from the

organizational perspective. Organizational perspectives include losses and the

impact on reputation if not acted seriously.

1. Organizational impact due to misconduct may

be of several types. They are

• Financial impact: The financial impact due

to acts of misconduct includes financial

losses and/ or loss of business. It may also

include the investors’ departure from their

investment, which may result in cash

outflow.

• Reputational impact: Reputational impact

may include instances where organizations’

brand value, market standing, credit

worthiness, ethical representation and

business presence is put at stake.

• People impact: Certain type of misconduct

may have a significant impact on people.

These may not be quantifiable and may

include departure of key executives also. In

many large investigation scenarios, the

employees’ morale gets affected the most

and they move into a shell of protecting

themselves rather than being open about

innovative approaches for the organization’s

benefit. These impacts are sizeable and

detrimental for organizational prospects.

• Legal impact: Some of the misconduct may

involve legal consequences for the

organization including regulatory

proceedings and their associated impacts.

The financial, reputational, legal and people

impact determine the course of disciplinary

action. However, in many circumstances the

impact of the misconduct may not be apparent

and measurable at the time of disciplinary

proceedings. Organizations shall take

consideration of these possible impacts before

deciding on the disciplinary action.

2. Similarly, there may be certain misconducts

which may have serious implication on the

organization, if not acted upon appropriately.

This could be an issue of mass misconduct

involving multiple employees of same division or

sensitive misconducts. Sensitive misconducts

may be in nature of discrimination or sexual

harassment or senior management fraud. These

misconducts if not acted upon appropriately and

timely, may result in more serious impact on

organization than estimated.

It is essential for an organization to consider the

possible organizational impact due to the

misconduct and appropriately consider the options

for disciplinary proceedings.


Impact on

organization due

to misconduct

Misconduct that

may have

detrimental impact

if not acted upon

Organizational

perspective



4 Conclusion

With varying organizational processes across geographies and emerging types of misconduct,

organizations face several challenging circumstances in deciding upon appropriate disciplinary

actions. These disciplinary actions, if taken on a solitary case basis may sometimes become

inconsistent. These inconsistencies get noticed by whistle blowers, management and the subject of the

misconduct more closely. Considering the increasing usage of social media, impacts of mis-conceived

disciplinary action may have serious complications. Developing a structured developing culpability

matrix that guides the organizational approach towards disciplinary proceeding will contribute to

organizational transparency.



RISK

MANAGEMENT

FRAUD

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About this publication

This thought leadership is based on the learnings primarily from

United States Corporate Sentencing Guidelines and United

Kingdom Crown Prosecution Guidelines. These guidelines provide

reasonable inputs for the Judges and Jury to determine the

appropriate disciplinary action to be taken on the identified

individual or the offender. This document is an attempt to represent

the relevant factors for corporate disciplinary proceedings.

This publication is from TRUSTUS Institute, a center for research

and thought leadership on ethics and compliance. TRUSTUS

Institute is a unit of TRUSTUS Solutions, a professional services

firm providing valued and lasting services to clients with risk

management and fraud control services.

This publication is prepared by TRUSTUS Solutions to provide the

reader a generic overview of the market scenarios and current

updates regarding forensic audit services. All information contained

herein are sourced from various public domains and other legal

avenues, and TRUSTUS Solutions makes no warranties or

representations regarding the accuracy, correctness or reliability of

the information contained herein. The information, events and

analysis contained herein are of generic nature only and are not

intended to be construed as advice of any manner against any

event or circumstances.

TRUSTUS Solutions neither assumes nor accepts any

responsibility for any loss arising to any person or entity acting or

refraining from acting as a result of any material contained in this

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