Got Culture? How the Audit Committee Can Help

By Debra Cope

Audit committees have an important role to play in making sure corporate culture is aligned with a company’s mission, vision and values, says Cindy Fornelli, executive director of the Center for Audit Quality.

Maintaining an appropriate culture is a shared responsibility of management and directors, and thus culture is very much a “team sport,” Fornelli says in an interview. But the audit committee is uniquely positioned to bring internal teams together by connecting the dots between internal audit, legal, human resources and compliance, she says.

Corporate culture is closely tied to strategy, risk management and other issues that come before the audit committee—issues that typically have the ability to impact reputation and financial performance, Fornelli notes. In addition, internal audit, which plays an important part in assessing and monitoring corporate culture, often works closely with the audit committee. One of the main duties of internal audit is to root out poor decision-making and make sure that integrity and ethical behavior guide the organization.

The cost of failing to establish and maintain a healthy corporate culture has been in the headlines over the past year. Ethical missteps by large corporations have been a powerful reminder that the tone from the top sometimes gets lost in the middle. Signs that the culture is unhealthy include high turnover, squabbling and tension between departments, a focus on blame and lack of debate.

Audit committees and boards are well advised to think about what culture actually means, Fornelli says. “It can be an elusive term, and it’s actually broader than the company’s core values or mission statement,” she explains. “It is the culmination of shared values, beliefs and assumptions that shape the behavior of an organization. Culture is the unwritten rules that guide decisions that the company makes every day.”

“You can have a disruptive culture; you can have a conservative culture,” she continues. “There is no correct answer. But the important thing is to be thoughtful about it.”
She offered several questions audit committee members should be asking about corporate culture:

• Is the CEO sending the right messages to the organization? Audit committees should evaluate the organization to ensure that management’s words are matched by actions. Culture can be a unifying force and an organizational asset, but only if the proper tone is set from the top.
• What are the bank’s zero tolerances? Fraud, sexual harassment and discrimination are usually at the top of the list. “If credible allegations are made in those areas, a company is not going to tolerate that,” Fornelli says. The audit committee should evaluate whether the right controls are in place to catch any wrongdoing.
• How is the bank coordinating among stakeholders? As Fornelli notes, the audit committee can serve as the hub for communications when negative cultural issues arise. A number of disciplines—internal audit, ethics, compliance, the general counsel and human resources—could be the first to see an issue arise. The audit committee can coordinate to ensure that the others see the warning flags, she says.
• Is culture being lived uniformly across the company? Audit committees should be alert to the existence of lower standards for high performers and for differences in the way senior people versus rank-and-file staff members are allowed to behave.
• Is good news celebrated? Audit committees shouldn’t focus only on what’s wrong. One board starts every meeting by asking for an example of a staff member who is living the company’s values and culture. “Looking for signs of good culture is just as important as looking for problems,” Fornelli says.