FOLLOWING scandals, including Tesco profits overstatement or VW’s emissions rigging, the importance of corporate culture is now in the spotlight of both financial and political debate.
However the issue has always been important to investors. Investors want to understand how the business operates, how transparent it is and to put it simply; whether it is trustworthy. As significant as financial statements are, it is not the only factor that influences investment decisions. Transparency gives people confidence in the company and is one of the reasons why annual reports are becoming increasingly detailed. They give additional information from performance to prospects, corporate social responsibility and other factors that might reflect on an organisations culture. Though much of this information is unaudited, its disclosure helps investors and others understand the business, its risk profile, and reliability.
Regulators are also turning their attention to corporate culture. The UK Corporate Governance Code sets out principles on board leadership and effectiveness, accountability, remuneration and relations with shareholders. Listed companies in particular have to comply with the code or explain if they did not. The FRC is assessing how effective boards are at establishing company culture and practices, and embedding good corporate behaviour. They will also consider whether there is a need for promoting best practice
Can auditors shape a positive corporate culture?
Auditors already play an important role here. In accepting an audit engagement they should assess the integrity of management and in planning the audit they should evaluate the risks and control environment of the organisation. This is not an ‘audit of culture’, and serves other purposes as well, but helps the audit to compensate for the ‘people risk’ which any organisation has.
Practically, this involves speaking to staff and management to get an understanding of the business. Any issues should be communicated to those charged with governance, for example the audit committee. This process should help promote t a positive business culture.
Is it possible to measure and audit culture?
It is yet to be generally accepted how culture can be reported. Can intangible concepts like beliefs and values be measured? Is it possible to establish a set of criteria against which each company should be judged? And finally can anyone define what ‘good corporate culture’ actually means?
The criteria would have to be neutral, robust and consistently applied by all organisations. However, the nature of each business differs, as well as its size, structure, operations or the client base. It might not be feasible to judge each of them against the same criteria. Also; organisations might interpret the criteria in different ways which would affect the reliability of the reports. For example the results of employee surveys measuring levels of satisfaction could be unconnected with their work running the business: front-line employees might rarely interact with senior managers so their understanding of the business culture may not be the same. Interpreting beliefs is one of the key challenges when it comes to auditing culture.
Another issue is that applying the criteria might become a box-ticking exercise. This is already one of the concerns when it comes to disclosing compliance generally in annual reports. Companies want to observe the legislation and some produce lengthy annual reports, which are difficult to understand.
It seems, to establish a positive corporate culture, all stakeholders have to play a proactive role: investors, managers, employees, regulators, and auditors to name but five and finally, and perhaps most importantly, consumers. We all have a part in getting the businesses we deserve in a society based on freedom and democracy within the rule of law. Auditing and reporting have a part to play but is not a panacea.
Auditing and reporting is a powerful tool. Everyone involved should be sensitive to unintended consequences. Acknowledging this is probably wise for companies as they implement changes to the management and reporting of culture with open eyes if they wish to enhance trust in their businesses.
Henry Irving is head of audit and assurance faculty at ICAEW
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