When culture is the culprit….
Another useful insight from Richard Chambers on governance failings, and in particular the lessons to be drawn from — Toshiba, Hertz and FIFA.
In the past few weeks, I have written about governance failings that came to light at three disparate organizations — Toshiba, Hertz and FIFA. These cases, in my view, have two notable things in common:
In each case, we have learned about failures in internal control that manifest themselves in prolonged and systemic accounting irregularities or alleged corruption. The details are critical from a forensic perspective, but it is important not to get immediately caught up in the details. The lesson these high-profile failings offer is that a strong yet inappropriate tone at the top can easily render even viable internal control processes and policies virtually irrelevant.
Plenty has been written about failures in the system by those in and supporting the C-suites in these organizations, including internal audit. Unfortunately, we may never know if internal audit or others at FIFA, Toshiba or Hertz tried – but were unsuccessful – to raise red flags about poor internal control, flawed financial reporting or inappropriate tone at the top.
The question then becomes: How can organizations best serve their shareholders/stakeholders, live up to expected values and correct internal control failings before they get out of hand?
A recently published Group of 30 report, Banking Conduct and Culture: A Call for Sustained and Comprehensive Reform, provides useful insight toward answering these questions. The report includes a comprehensive analysis of the cultural failures within modern banking that have contributed to a loss of public trust in the financial industry. It calls on the global banking system to identify and focus on desired values and conduct, then introduce steps to ingrain those values and conduct into all aspects of the industry.
It also calls on the industry to adopt the Three Lines of Defense model to clearly articulate responsibilities for delivering the desired values and conduct. This includes securing internal audit’s role as the third line of defense as an independent and objective assurance provider.
This is not a new concept: It was once labeled as “auditing soft controls,” then “auditing tone at the top” and now “auditing culture.” Yet, internal audit’s role has not moved to the forefront. Maybe it is high time it does.
Last year, I wrote about how auditing culture could be the new frontier for internal audit. That blog post discussed the need for internal audit to develop skills that combine subjective and objective measures to successfully examine corporate culture. These quantitative and qualitative skills are a must if we are to take auditing culture beyond a simple checklist of feel-good policies and protocols. Ultimately, the success of auditing culture lies in getting to the root cause of problems that begin with, or are fed by, weaknesses in corporate culture.
While internal audit can quickly develop the skills to monitor corporate culture, it must be understood that it is less a standard engagement than it is something that internal audit must do – continuously and at all levels.
What’s more, internal auditors must recognize that tone at the top is not restricted to the C-suite. Heads of subsidiaries or divisions within an organization often set their own tone that may or may not reflect the desired corporate culture. Internal audit is uniquely positioned then to monitor corporate culture at both the macro and micro levels.
We must begin the conversation in earnest about how the profession can move forward on this issue. The fundamental first step is defining what auditing culture means. I think it must include a deep understanding of both the stated and unstated elements of the organization’s culture, identifying situations in which behavior and/or actions may be inconsistent with the desired culture and reporting on those circumstances at the earliest indication of a possible disconnect. It starts with making sure everyone in a position of influence is not only talking the talk, but truly, and without exception, walking the walk.
This article was republished with the permission of The Institute of Internal Auditors. To read other blog posts from Richard Chambers, visit: https://iaonline.theiia.org/blogs/chambers.