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Culture, ethics audits can prevent malfeasance: study

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Dive Brief:

  • Companies are failing to prioritize assessments of their work culture and missing an opportunity to ward off corporate wrongdoing that can occur when values are mismatched, a recent study by AuditBoard found.   
  • Executive behavior is seen as a critical indicator of company culture, with 68% of internal auditors surveyed in AuditBoard’s 2023 Organizational Culture and Ethics Report pointing to poor tone or executives not living up to company values as a key risk indicator.
  • Particularly concerning for study authors Richard Chambers and Cynthia Cooper is “how little is being done by organizations to really assess culture and obtain assurance regarding the health of the culture,’ Cooper said in an interview with CFO Dive alongside Chambers.

Dive Insight:

For Cooper and Chambers — who have both been studying organizational culture for several decades — that executive behavior plays a key role when it comes to cultural risk is less than surprising. It is “very difficult” to change company culture from the middle of an organization, Cooper said.

“It most often is set at the top and driven at the top, and any transformational change needs to come from the top,” she said of culture.

Chambers is the senior internal audit advisor at AuditBoard, as well as the former CEO and president of The Institute of Internal Auditors. Cooper, meanwhile, is the CEO of CooperGroup LLC, as well as the former chief audit executive for Worldcom. AuditBoard is a cloud-based audit, risk and compliance management platform.   

Besides poor tone or values on the part of executives, 51% of internal auditors pointed to a “profit at all cost” mentality as a key risk indicator. However, 37% of auditors said their companies undertake no formal assessment or audit of culture, which can exacerbate these risks as well as lead to poorer company performance.

There is a “clear, bright line between the health of the culture and certainly the long-term performance of a company,” Chambers said.

Recent research from Gallup shows that employees who feel “strongly aligned” with their company’s culture are less likely to leave their employers or experience burnout, and that such employees also perform at a higher level.

The business impact of healthy or toxic culture is something that should particularly intrigue CFOs, as the executives who are most often focused on the company’s bottom line and ensuring value growth over time. Assessing culture should therefore be a priority for finance leaders, as a healthy organizational culture can help to foster that growth, Chambers said.

In companies where internal audit reports to the finance chief, the CFO “is often in a position to be a champion and advocate for internal audit and to be the one who kind of empowers them to take on difficult areas, difficult risks,” he said. “So my first piece of advice to a CFO who has responsibility for internal audit, is to support them and to be a champion for the kind of assessment that needs to take place.”

Assessing culture can be challenging, however — some executives may just not be self-aware of the organizational culture they’ve allowed to grow, Chambers said.

“Even if it’s an effective and good CEO and somebody who wouldn’t tolerate bad culture, they just simply can’t come to grips with the fact that that may be happening on their watch,” he said. “So there’s often a reluctance to try and probe into it because maybe you fear what they might find.”

At the same time, companies that have poor or toxic cultures are not likely to be the types of companies who will call in a cultural assessment on themselves, Chambers said. Healthy cultures, on the other hand, tend to be open books, making it easier to assess what is working well and what isn’t.

There can also be a lack of understanding around what really drives culture, or what the principles that will guide a healthy culture are, at an executive or board level, Cooper agreed. Thirty-six percent of internal auditors said culture was not flagged as a high enough risk at their organizations, while 33% said their companies had insufficient resources available to assess or to audit culture.

However, that only makes it more critical for executive leadership to make culture a regular agenda item, Cooper said, and that they are asking for and receiving regular assessments on the businesses’ cultural health.

“That’s where I think the CFO and internal audit can really be a tremendous catalyst for change,” she said.

The study was created based on the responses of over 350 chief audit executives and internal audit directors, AuditBoard said.

Read the full article here

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