Can compliance restart integrity? Toward a harmonized approach. The example of the audit committee

• Date: 01 April 2018
• Author: Reyes Calderón,Ricardo Piñero,Dulce M. Redín
• Published date: 01 April 2018
• DOI: http://doi.org/10.1111/beer.12182

ORIGINAL ARTICLE

Can compliance restart integrity? Toward a harmonized

approach. The example of the audit committee

Reyes Calder

on

1

|

Ricardo Pi~

nero

2

|

Dulce M. Redín

1

1

School of Economics and Business

Administration, Universidad de Navarra,

Pamplona, Spain

2

School of Humanities and Social Sciences,

Universidad de Navarra, Pamplona, Spain

Correspondence

Dulce M. Redín, School of Economics and

Business Administration, Universidad de

Navarra, Edificio Amigos, Campus

Universitario s/n, 31009 Pamplona, Spain.

Email: dredin@unav.es

The compliance-based approach and the integrity approach have beenthe mainstream responses to

corporate scandals. This paper proposes that, despite each approach comprising necessary ele-

ments, neither offersa comprehensive solution. Compliance and integrity, far from being mutually

exclusive, reinforce each other. Working together, in a correct relationship, they build a harmon-

ized system thatyields positive synergies andwhich also advocates prudence(phr

onesis). It enables

the generationof a culture of compliance that tends to minimize the technicaland ethical errors in

decision making.In order to explore an applied harmonized approach, we analyze theaudit commit-

tee, a specific and broadly accepted regulatory instrument. Formed by non-executive members,

regulation requires these members to be dedicated, qualified, and independent as a guarantee of

efficiency. We showhow the compound of those elements producespositive effects in a context

of solid governance. We conclude that it is the strong relationship between efficiency and pru-

dence, in the creationof a culture of compliance, which enablesthe minimization of errors.

1

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INTRODUCTION

Corporate scandals have become one of the greatest ethical concerns

of this century (Coffee, 2005). Enron, Parmalat, WorldCom, or Madoff

Securities arepart of a long and nefarious list of reputable corporations

that allowed or broughtabout irregular, unethical, and/or illegalbehav-

iors. These debacles leadto serious economic costs and they have had

devastating effects on the trust of investors and society. Krugman

(2002) even asserts that in the years ahead Enron, not September 11,

will come to be seenas the greater turning point in US society.

Regulators, academics, and society itself continue to debate about

the causes of and remedies for these debacles (Bies, 2014). Do scan-

dals arise because of the existence of bad apples—that is, isolated

greedy managers—or bad barrels—that is, defective governance and

control structures? (Ghafran & O’Sullivan, 2013; Trevi~

no & Young-

blood, 1990). To what extent could these debacles be attributed to

ethical irregularities (bounded willpower) or the bounded rationality of

managers and inexpert non-executive directors in a very complex

world? How many can be ascribed to the lack of ethics on the part of

the organizational culture or the executive members? The answers to

these debates are dominated by two primary positions that coexist

today and that,following Paine (1994), we designateas the compliance-

based approachand the integrity approach.

The compliance-based approach attributes the high-profile failures

to inappropriate corporate governance combined with lax control

systems. Weak governance structures broke the roots of companies’

self-regulation and generated perverse incentives that enabled dishon-

est or undiligent managers to take advantage of the circumstances

causing severaltechnical—failures in the perceptionof the complexities

of financial or operational problems—and/or ethical irregularities, which

led to debacles (Csaszar, 2013). As Paine (1994, p. 106) explains,

“Managers who fail to institute systems that facilitate ethical conduct

share responsibility with those who conceive, execute, and knowingly

benefit from corporate misdeeds”. Because, when bad apples can dam-

age the barrel through institutionalization and moral disengagement

(Shu & Gino, 2012; Shu, Gino, & Bazerman, 2011), the barrel itself

must be repaired.

To ensure that the company operates with honesty, this approach

recommends stronger self-regulatory mechanisms of governance,

supervised by regulators, and a more incisive spirit of “command-and-

control”based on internal auditors, evaluation of risks, andcompliance

(Thibodeau & Freier,2014). In response to the recurrent implication of

executive directors in the scandals,and with the belief that they play a

crucial role in mitigating agency costs and conflictsbetween controllers

and minorities, the presence of independent non-executive members

(NEMs) on boards is emphasized in the repair of the barrel (Rashid,

2015).

Since Enron, the level of adhesion to the compliance-based

approach has increased dramatically. Regulatory proposals such as the

Sarbanes–Oxley Act (SOX) (2002)—one of the major regulatory

BusinessEthics: A Eur Rev. 2018;27:195–206. wileyonlinelibrary.com/journal/beer V

C2018 JohnWiley & Sons Ltd

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Received:21 October 2016

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Revised: 18 November2017

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Accepted:3 December2017

DOI: 10.1111/beer.12182