Nearly one in three (31%) of boards across the public and private sectors have not established or articulated what sort of corporate culture they want and only around a third (36%) assess the extent to which values are manifested in the behaviour of all staff within the organisation, according to new research by the Chartered Institute of Internal Auditors (The Institute).
However, the issue of culture is now starting to appear on some organisations’ radars. Nearly 20% of respondents to the Institute’s survey plan to include cultural aspects in their audit work in the coming year. But more than a quarter indicated that they had no plans to audit culture in the next 12 months.
These findings, which are the results of a survey of 220 Heads of Internal Audit (HIA), two thirds of whom are from private sector organisations, are outlined in the Institute’s report for the Financial Reporting Council’s (FRC’s) “Culture Coalition” initiative. The Institute has been working in partnership with the FRC and other organisations to gather insights into corporate culture, the role of boards and how internal auditors support them.
The report explains that the role of internal audit is to provide independent and objective assurance that an organisation’s risk management, governance and internal control processes are operating effectively. Internal auditors assess whether organisations are adequately managing all major risks facing them, ranging from financial mismanagement through to fraud and environmental risks. Assessing an organisation’s culture is a key aspect of this.
The report points out that the financial services sector is outperforming other sectors in this area, with nine out of ten HIAs at banks and other financial services firms surveyed reporting that they currently analyse organisational culture in their audit plans. The progress made in the financial services sector reflects their response to the financial crisis.
However, the report says that, whilst the business community increasingly agrees on the importance of auditing organisational culture, there are challenges involved.
Dr Ian Peters, Chief Executive of the Chartered Institute for Internal Auditors, said:
“Managing culture is a vital issue for Boards, to ensure not only that they are setting the right tone at the top, but that all employees are acting in accordance with the organisation’s ethics and values.
“Auditing culture is not an exact science. Many organisations struggle to define their culture, let alone incorporate it effectively into their risk evaluation and assurance processes. But it is essential that they do so.”
Peters says that whilst the financial services industry is ahead of the game in this respect, all other sectors need to follow suit:
“As we have seen recently in the automotive and retail sectors, scandals can hit any industry, and whatever other factors come into play, culture always plays a significant role in the issue.”
The Institute’s report makes a number of recommendations, including that all boards should:
The Institute’s research shows that the most popular methods for auditing culture are conducting interviews and behavioural observation and that common proxies used to audit culture include: staff surveys; whistleblowing activity; customer complaints handling; and the use of values statements. Heads of Internal Audit also reported that reliance on their professional judgement and experience were key when auditing culture (85% and 71% of respondents to the Institute’s survey respectively).
Harnessing “Big Data” could provide a solution
The research suggests that harnessing the power of “Big Data” could also be a solution, to provide more objective and robust insights about culture through leveraging the information organisations hold about themselves. The report describes how this technique is already being used in the aviation sector and the NHS to improve safety and quality standards.
The Institute’s research highlights that in the aviation sector, a fundamental element of safety culture is a “just” culture, where human weaknesses and fallibilities are recognised. A “just” culture allows for simple mistakes and errors and risky behaviour to be addressed through systems improvement and staff training and education. But reckless behaviour, where systems and controls have been deliberately overridden, results in the punishment of the individuals concerned. In the Institute’s view, other sectors could benefit from such an approach.
It also cites the potential benefits of creating a “technoculture”(1) in which the organisational culture is “hard-wired” into management and reporting systems, thereby closely linking culture (people) and technology (data)- so-called “soft” and “hard” controls.
But Peters warns: “Hard-wiring culture is far from straightforward, as risk reporting is riddled with ambiguity and contradiction. However, it’s a concept that needs to be investigated further if the debate over how best to audit culture effectively is to move forward.”
The FRC is expected to publish its report of observations on corporate culture in July 2016.