The board needs a trusted, objective view of culture. Who better than internal audit for the job?
Research has long shown there’s a direct correlation between positive corporate culture – that engages and motivates employees – and strong ethical and financial performance. So it's no wonder boards want more formal processes around culture review to make sure it is delivering. But ‘culture’ remains hard to pin down.
As management guru Pete Drucker says: "culture eats strategy for breakfast". Without an appropriate culture, no business will achieve its strategy. As a tangible asset, culture has to be driven from the top, but how can a board be sure the standards it sets for integrity are being met on the ground?
The board needs a trusted, objective view. Who better than internal audit (IA) for the job? It is not as crazy a notion as you may initially suspect that the IA team could be the arbiter of a soft measure like culture. While the board sets the tone, and management drives day-to-day behaviour, IA can bring a much-needed independent assessment of what’s happening on the ground, identifying issues that need attention.
The problem for both boards and IA teams is that ‘culture’ is hard to evaluate. Is it happy employees? Delighted customers? A strong pipeline of innovative ideas?
In fact, a good starting point is controls. Our experience shows that having employees who follow policies and procedures is a good proxy for positive culture and integrity in the business. It is also a clear and understandable KPI to report to the board.
Take, for example, a situation where the policy to pay suppliers in 30 days is regularly ignored. Superficially, that could mean it simply isn’t possible within the system’s framework. Do you need more accounts payable staff? Maybe better sign-off procedures? It’s certainly possible that IA would simply reported this as a control failing.
But look behind the result, and it might be possible to understand deeper, cultural, reasons for a breakdown in business integrity. In this case, perhaps there is pressure to delay payments to flatter working capital. Or relationships between sales and credit control have broken down.
In many cases, assessing controls and outcomes is only half the story – leaving the board (and IA) needing to know what people really think if they’re to get to the root of the problem.
Surveys are a useful tool here. We help businesses with anonymous surveys, featuring questions with a cultural or ethical slant. These include:
IA can also learn a lot from whistleblowing reports. These give a clear picture of culture risks. Where there have been allegations of bullying or a culture of results at any cost, we often find there have also been incidents of accounting manipulation too. IA should always treat whistleblowing reports about employees coming under undue pressure as a red flag for integrity.
This is why an organisation needs to understand the balance between culture and performance; between a relaxed atmosphere and one of fear. The latter drives the wrong behaviours – whatever the tone from the top might be.
Control failures, survey results and whistleblowing reports aren’t the only tools IA has at its disposal. Skilled IA operatives ought to be able to take a read on individuals they encounter, as well as teams, departments and divisions. What trends are they seeing? What’s the mood? Where do issues cluster, and what kind of culture is obvious there?
This is where an IA team’s strengths – a focus on detail, while being able to step back and take a broader view – come into their own. These integrity and culture issues also need to find their way into board and audit committee reports in a way that facilitates action to address them.
Boards know they are removed from sentiment and behaviour on the ground. They need an independent view of how the culture really works in the business and about whether the standards they set for integrity are being met. IA offers an objective and dispassionate link between the board and employees to do just that.
© 2020 KPMG LLP a UK limited liability partnership and a member firm of the KPMG global organisation 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 organisation please visit https://home.kpmg/governance.