Auditors warn against ‘organisational culture crisis’ in UK businesses

The Chartered Institute of Internal Auditors (CIIA) is urging boards to ‘get a grip’ on unhealthy corporate cultures in response to a string of culture-related scandals.

Unveiling its report entitled ‘Cultivating a healthy culture: Why internal audit and boards must take corporate culture seriously in a post-Covid world', its call to action is based on a survey of over one hundred senior internal audit executives from the private, public and third sectors operating in the UK and Ireland.

The increasing prominence of organisational culture as a business-critical risk has continued to grow over recent years and the CIIA argues that urgent action is now required to encourage a healthy corporate culture to protect value, reputation, and long-term sustainability.

As the ICCA alludes to in the report, an unhealthy or rotten culture can have a significant adverse impact on an organisation’s future. For example, the Work and Pensions and the Business, Energy and Industrial Strategy (BEIS) Committees’ joint inquiry final report into Carillion was critical of the firm’s culture and cited it as a key reason for its collapse. Other examples include Enron, BHS, Patisserie Valerie, WorldCom and Wells Fargo.

As such, with the report’s publication, Sir Jon Thompson, chief executive of the accounting regulator, the Financial Reporting Council, said ‘the right tone from the top’ can help organisations avoid Carillion-style failures.

As the research highlights, there is ‘the risk of a post-Covid organisational culture crisis, exacerbated by a lack of leadership from the top, that now needs to be urgently addressed by boards. With large swathes of the workplace being forced to work remotely for much of the last two years, and the move towards ‘hybrid’ working in the longer term, many organisations are grappling with how to promote, embed and sustain their culture going forwards.’

One of the fears is that hybrid working may have created a “culture crisis” for companies by eroding staff loyalty and by making it harder to retain talented employees and easier for individuals to conceal fraud. The other is that more than half of internal auditors employed by companies to assess their risk management and governance, said they had never been asked by their board or audit committee to report on corporate culture or equality initiatives.

The survey records a number of risks impacting corporate culture including ethics, corporate governance and lists the top three as:

1. Human resources, talent management and recruitment and retention risk – 64.5%
2. Inclusion, equality and diversity risk – 34.1%
3. Health, safety and staff wellbeing – 31.6%

With organisations facing difficulties in attracting and retaining talent, it has never been more imperative for boards to focus on tackling conditions which can contribute towards the creation of a sub-optimal culture. That means articulating, establishing and embedding the corporate culture is of fundamental importance to the success of an organisation and it is the board and CEO’s responsibility to lead on this as well as share clear expectations.

John Wood, CEO with the CIIA said: “Recent culture-related scandals have unfortunately shone a spotlight on the impacts associated with an unhealthy organisational culture – including catastrophic damage to reputation, public trust and value. Yet as our research demonstrates those at the top do not appear to be taking the risks associated with corporate culture seriously. Urgent action is now required by leaders across all sectors to cultivate a healthy corporate culture to protect reputations and long-term sustainability. With organisations adopting new models in a post-Covid world, now is the time for boards to get a grip on corporate culture, including seeking assurance from their internal audit functions.”

Gina Lodge, CEO at the AoEC welcomed the report and commented: “The debate around organisational culture has been a hot topic for the financial services sector and regulatory bodies for some time. The push here for better policy making and governance give us good, solid learning. Building a healthy corporate culture that is aligned with purpose, values and overall strategy should be one of the biggest priorities all organisations. Not only does a strong, ethical workplace or coaching culture promote an organisation as an employer of choice, but it has huge appeal to investors. These companies are more likely to thrive, perform better and be more resilient. Culture is a fundamental risk to all businesses, and it should be treated with the same due care as other threats are.”