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An internal audit to assess the ‘tone at the top’

An internal audit to assess the ‘tone at the top’

KPMG Soft Controls

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Introduction

Leadership makes or breaks the quality of risk management, which is recognised by Internal Audit Functions (IAFs). Supervisory directors and members of audit committees are also clear about this: the Internal Auditor should report more about the ‘tone at the top’.1

Especially in this COVID-19 period much is demanded from leaders. Their job is to guide the organisation through the crisis, seeking a good balance between directive leadership and trust in employees. True leaders are willing to take painful decisions, but also able to motivate employees in times of crisis. They share their dilemmas, express their doubts and pains. This requires specific skills and competences. It is the task of the internal auditor to include these leadership aspects in audits, but they may struggle with the questions: How? Where do you look? What is the framework of standards? And how do you investigate?

At KPMG, we have been conducting research into leadership in the context of audits for more than ten years. And it is becoming increasingly clear to us: an audit to assess the ‘tone at the top’ is complex. It requires multiple disciplines in terms of audit backgrounds and especially the ability to empathise with the world of the leader without saying what he wants to hear. Depending on their ambition, we help customers determine an approach that fits and persists.

What is the basis for the audit?

When conducting an internal audit to assess the ‘tone at the top’, we include four different aspects that play a crucial role in leadership in a changing environment. An environment in which COVID-19 suddenly became the talk of the day, an environment in which the external environment is continuously changing and requires agility due to changing laws and regulations and demanding regulators. In short, there is a need for 'change leaders'. The four main change leader characteristics that form the basis for an audit to assess the ‘tone at the top’ are:

Empathy: A leader should be genuinely interested in others and understand their ambitions, fears and anxieties. A leader is also able to stand back from own personal concerns to see the world through a different lens.

Curiosity: A transition or new project with unknown challenges requires a leader who asks explorative questions to investigate issues and identify possibilities

Resilience: A leader should be resilient and persistent with compassion and flexibility, without being put off by confrontation or opposition. Helping to develop resilience in others is also a task of the leader, including self-care and self-reflection.

Humility: A leader must be able to see the bigger picture and realise that the long term connects. In addition, a leader should be open to learning and discovering more about himself, and encourages open and honest feedback to identify opportunities for de‑‑velopment and improvement.

It is important to gain insight into perceptions with regard to the above characteristics. This because perceptions influence behaviour and play a major role in the quality of risk management.

What is the approach?

The soft control ‘tone at the top’ is all about perception – how is (top) management perceived by stakeholders? Stakeholders are employees, customers and the Supervisory Board (SB). The approach to clarify these perceptions is as follows:

  • Identify formal and informal leaders through interviews and/or questionnaires.
  • Based on best practices, the different leadership characteristics (empathy, curiosity, resilience and humility) and in dialogue with the leader, we determine the standard and desired framework of the organisation (SOLL).
  • Determine the current situation (IST) by measuring employee perceptions. This is done by:

Self-assessment: By having leaders complete a self-assessment of their own leadership style, it becomes clear what the perception of the leaders is.

Questionnaire: Rolling out a questionnaire to the client, the Supervisory Board and various employees – including employees who report directly to the leader – enables the leader (and internal audit) to understand how his or her approach to leadership is perceived.

Interviews: Having in-depth interviews makes it possible to validate questionnaire results and to better understand personal perceptions and possible underlying root causes of perceptions related to leadership.

Focus group: Organising a focus group helps to validate the results of the self-assessment, the questionnaire and interviews and to discuss them with several stakeholders at the same time. This is to collectively gain a better insight and understanding of the perceptions.

Reporting: Finally, based on the input obtained by the aforementioned research methods it is important to report on the current situation (IST) and on any recommendations that are necessary to achieve the desired situation (SOLL).

The result

  • Awareness among leaders about their attitude and behaviour
  • Better relationship between (top) management and employees due to openness about perceptions and possible actions as result of the internal audit
  • Demonstrable transparency
  • More in control through reflection and the learning capacity of (top) management
  • Insight into the extent whether the ‘tone at the top’ is in line with organisational objectives and core values

More information

For any further queries please contact Karlijn Smit.

© 2021 KPMG N.V., a Dutch limited liability company and a member firm of the KPMG global organization of independent member firms affiliated with KPMG International Limited, a private English company limited by guarantee. All rights reserved.


For more detail about the structure of the KPMG global organization please visit https://home.kpmg/governance.

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