While there is no mandate for financial statement auditors to report externally on company culture, their observations could prove invaluable as an independent source of insight for leadership to consider. With culture being a common cause of non-compliance and reputational harm, monitoring whether an organisation’s conduct is in line with its stated policies and behavioural standards could prevent damage down the track.
If there is a word that ensures board members, company leaders and stakeholders turn their heads, it is culture. With poor culture being a key contributor to many noted compliance and reputational failings, the need to instill the desired culture through every level of an organisation is growing.
David Kells, Partner, Audit and Assurance, KPMG, says as the pace of business speeds up, technology increases connectivity, and regulatory and public scrutiny is amplified. Auditors have a role to play in this regard.
“Auditors go to every corner of the business. We talk to the Chair of the board through to the accounts clerk, and see the full spectrum. So when you are looking at culture, one of the key things is seeing consistency across the whole business," he says.
He says the ultimate example of cultural failing, the global financial crisis, showed that businesses considering risks without looking at culture can lead to downfall.
“Things happen so quickly that the consequences emerge before you have an opportunity to fix it. This means it is even more important now to have an appropriate culture throughout the organisation, as it can increase the likelihood that things are done appropriately the first time,” he says.
Jennifer Travers, Director, Audit and Assurance, KPMG, says from an investor's perspective, if a company focuses on culture and is open about its activities, it is likely to be viewed more favourably than those that don’t.
"Reputational or brand damage that may result from poor company culture ultimately impacts an institutional investor’s view of a company’s value, and therefore their willingness to invest," she says.
She adds that a positive culture can also help organisations make better choices when facing challenges that will be publicly scrutinised. A company may be complying with the strict letter of the law; however, they also need to consider how a particular response or position may be viewed by key stakeholders and whether it aligns with stated values.
Andrew Gray, Senior Manager, Investments Governance at AustralianSuper states that investors use a building block approach to piece together the information and data that is available to them to form their view on a company’s culture but it’s a challenging exercise due to the fact there is no formalized reporting requirement. Culture is however one of the indicators they look at for every company in the ASX 200 which demonstrates the importance of the issue and its relevance across industries.
Culture also impacts how customers view an organisation. This is evident when, in a bid to outpace competition, businesses push new products and services onto the market – without a thorough consideration of customer needs.
“This links to staff remuneration structures and incentives. If the front line is incentivised to sell inappropriately, then it may not result in a good outcome for customers,” Kells says.
Regulators like ASIC have publicly stated culture matters to them because poor culture can be a driver of poor conduct and they regulate conduct. They’d like the businesses they regulate to strive for a culture of ‘doing the right thing’ by investors and consumers.
ASIC are also incorporating culture into their risk–based surveillance and looking at cultural indicators that suggest they should take a deeper dive around issues concerning poor conduct, which could result in more intensive or a broader scope of surveillance. Boards should therefore take note of how they are monitoring and measuring culture within their organisation.
As organisations join forces, whether through partnerships, acquisitions, or alliances, the potential for a company to be impacted by the culture of another increases.
"An example of this risk is dealing with intermediaries. In financial services, a challenge that businesses face is that products can be mis-sold by third parties, such as brokers or advisors," Kells says.
Travers says that kind of reputational damage can take years to rebuild. “It shows the need to have a sound culture that extends beyond the boundaries of the organisation, and to recognise if it aligns with the values of the associated businesses.”
Organisations that care about their customers, stakeholders and reputation will likely have defined cultural values for all to see. This presents an opportunity to observe or measure what the company says it is going to do, against what it actually does. An auditor is well placed to provide these types of observations internally.
An example could be assessing customer outcomes against the original product promise.
We could look at how the organisation interacts with the customer subsequent to the sale through ongoing delivery of the service or product and compare to the original design; for example, comparing the product specifications outlined in a wealth management product disclosure statement.
We may observe abrupt customer communications and a legalistic approach to service delivery perhaps stemming from an incentives structure that rewards fast processing.
"You can apply this process and logic to any part of a business. For financial services issuing credit cards, to marketing, to call centres or in the case of a service provider, how accounts receivables follow up outstanding debts," he says.
While an auditor’s observations can bring internal benefits and insights, one day culture may become a more formal part of an organisation’s external reporting, Kells suggests.
"If an organisation wanted to report externally or the board wanted to gain independent insight into aspects of their company’s culture, then we would focus on objective, measurable frameworks. You would ask, is there a framework in place, and do the processes, controls and staff incentives align with cultural objectives and corporate values?" he says.
The policies that an organisation has in place reflect the conduct that is expected from its employees which in turn is a reflection of an organisation’s desired culture. Policies can be observed as to how they are put into practice and are therefore capable of independent evaluation. Topics that could be included include reward and incentive structures, recruitment and training, whistleblower policy and the nature and level of complaints, all of which can be assessed.
Kells says such a report could help investors “distinguish those businesses that are making a tangible investment in aligning the underlying business activities with stated values and customer promises”.
“As company frameworks mature, it will be possible to provide more formal external assurance dealing with certain aspects of culture. That would be a helpful contributor to addressing the concerns around the shortfalls or failings of corporate culture," he says.
In order to achieve a future state where we can provide assurance, practitioners will need to work together with their clients as they develop their culture and conduct frameworks.
We need to continue the dialogue with stakeholders such as regulators and investors to forge the future path and develop a reporting framework to achieve greater transparency. Andrew Gray suggests that this could start with looking at the information that various stakeholders are currently using to perform their own evaluations of a company’s culture and then consider what additional information is needed.
Assurance practitioners can work with clients and stakeholders to determine specifically what is measurable and what level of assurance is required. This in turn will move us towards a higher level of transparency in reporting. Companies who have embraced the message and embedded a positive culture within their organisation may be incentivised to use this as a competitive advantage for themselves. In the end, any movement towards improved culture and conduct within organisations is a win for society as a whole.
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