Auditors have a hard time assessing executive culture

Organizations are not making a priority of examining their corporate culture, although some internal auditors are doing that to deter corporate malfeasance, according to a new report.

Despite the risks that executive behavior can present, too few organizations are prioritizing culture assessments. Even when companies do try to assess their culture, they usually rely on vaguely qualitative approaches such as root-cause analyses in individual audits and behavioral observation as opposed to more formal, holistic and quantitative approaches to provide reliable assurance.

The AuditBoard report, released Tuesday, found that one out of five of the organizations surveyed did not assess culture at all, but internal audit teams at organizations that did that type of assessment favored methods such as root-cause analysis in individual audits (41%) and behavioral observation (40%). More complex methodologies such as standalone audits of culture (10%) and audits against ethics and compliance federal sentencing guidelines (8%) received the lowest scores. 

The report was co-authored by Richard Chambers, senior internal audit advisor at AuditBoard and former CEO and president of the Institute of Internal Auditors, and Cynthia Cooper, CEO of CooperGroup LLC, a former WorldCom chief audit executive and whistleblower, and a Time Magazine Person of the Year in 2009, who shared that billing with two other whistleblowers, FBI agent Coleen Rowley and Enron executive Sherron Watkins.

"No organization can afford to ignore the impact of culture on success," Chambers said in a statement. "A healthy, ethical and high-performing culture is a sustainable competitive advantage within an organization's control. "There is a great opportunity for internal audit to lead the way by helping organizations understand the urgent and far-reaching impacts of culture."

To produce the report, AuditBoard collected data from over 350 respondents to an online survey in April. They included chief audit executives and internal audit directors in organizations based primarily in North America, representing a diverse group of industries and internal audit department sizes.

Selecting up to three entities, the respondents identified culture as starting from the top, with 76% citing the most influential entity on culture as the CEO and/or founders, followed by line-management (65%), then non-CEO C-suite members (60%). Board member impact trailed in a distant fourth place (27%).

"Culture can be an organization's most powerful differentiator or its biggest risk," Cooper said in a news release. "Cultivating a healthy, high-performing, and ethical culture offers tremendous benefits, and is critical to achieving long-term sustainable success and avoiding the pitfalls of organizational failure. But culture can often seem nebulous and difficult to understand. We hope to take the mystery out of culture to help boards, executives, and gatekeepers gain a deeper understanding of what drives culture, the most important culture risk indicators and healthy culture guiding principles, and how to assess culture — identifying small changes that will drive big impacts in areas such as ethical behavior, employee engagement and well-being, and customer satisfaction and retention."

The report calls for internal auditors to play more of a role in assessing corporate culture. "To be sure, the mandate for internal audit to provide assurance on culture has been emerging for more than a decade," said the report. "However, involvement remains sporadic."

Only 17% of the survey respondents indicated their organizations had produced written standalone reports on overall culture, while 40% of respondents identified briefings or discussions with management and/or the board to be their typical product of culture assessment.

In response to the survey's main findings, Cooper and Chambers have developed a Culture Assessment Toolkit to help organizations develop their own culture assessment program.