Internal Audit and the ethical compass
A summary of the key issues raised at ACCA's 2017 annual Internal Audit Conference.
Internal auditors sometimes come under pressure from within an organisation to amend or bury findings that reflect unfavourably on it. At ACCA's 2017 annual internal audit conference, held in London in May, speakers considered challenges ranging from corporate culture to speaking-up/becoming a whistle-blower.
Corporate culture is the new frontier in governance. As boards respond to the need to regain public trust, they must learn to define and shape behaviour in their organisation and understand its social impact or risk losing the licence to operate. This was the message Peter Montagnon, associate director, Institute of Business Ethics, had for conference delegates.
‘The problem with the term “corporate culture” is that no one really knows what it means,’ he said. ‘So from now on I am going to avoid it and refer to “behaviours” instead. The headline story is this: boards need to adjust their governance approach to take greater account of the drivers of behaviour throughout the organisation.’
In the current climate, Peter suggested, boards need to pay much more attention than they have in the past to understanding their company and the impact it is having on the society from which they get their licence. Increasingly the public is distrustful and hostile to big business and the reasons include remuneration and taxation.
‘Remuneration is one area where governance has failed,’ Peter said. ‘It has not got to grips with a lot of problems around pay, which has got out of control and been very damaging to the reputations of companies.’
Recurring scandals, which have hit a large collection of companies, have also played a big role in feeding public mistrust. Using the recent scandal involving Volkswagen as an example, Peter said that one key problem was that VW has focused on what had happened and not why. Only if you ask ‘why?’ can you fix the difficulties. Instead, the VW leadership's instinct was to find out what happened, find someone to blame, put some sticking plaster on the problem and move on without changing anything fundamental. If you leave it at that, there is always the possibility of the same thing happening again.
Organisations need to move away from the inward-looking, process-driven approach which has characterised governance until now, towards a more outward looking, engaged approach.
‘It will be a huge error if we duck the challenge in addressing the substance around behaviour and its social impact,’ Peter concluded. ‘There is evidence that the companies who get this right produce better results in the long term. So, government codes and regulation are one thing, but there is no substitution for knuckling down and getting on with addressing damaging behaviours. Internal audit will have an important role to play in this.’
Developing ethical cultures
The relationship between the chair of the audit committee and the head of internal audit was central to a presentation by Anthony Harbinson, director of Safer Communities, Department of Justice for Northern Ireland.
‘The roles of both are clear,’ he said. ‘The former is responsible for the effective functioning of the audit committee and the latter occupies a critical position in helping the organisation achieve its objectives by giving assurance on its internal control arrangements and promoting good corporate governance. It is therefore essential that the relationship between the two is right. But all relationships are difficult and have to be worked on constantly, particularly if the aim is to build a strategic partnership.’
Making up a relationship ‘triangle’ is the CEO, and meetings between the three parties should be open and transparent.
In developing a culture of openness, there are many ‘do’s’ and they include:
- having a focus on purposes and outcomes
- striving for transparency and full accountability
- building a culture of honesty, integrity and ethics.
Numbering among the don’ts are:
- allowing a lack of clarity
- saying what you don’t mean or won’t deliver
- setting low levels of accountability
- undermining or undervaluing the reports you don’t like.
‘We need to do more than simply rely on the honesty, ethics and integrity of the individuals,’ Anthony said. ‘The chief executive and the head of internal audit need to develop a holistic approach to how they act individually and how they work together and build relationships. That will say much more to the organisation than the words they use or the documents they sign.
‘People judge us not by our words but by our actions. Body language is important. There should be real communication between all stakeholders. Ethical cultures don’t just exist and they don’t just grow. We must develop them and to show that they are valued. People need to know that they are real.
‘It’s a long road and we must travel it together,’ he concluded.
Support at hand
In a presentation on how ACCA supports its members, Raymond Jack, executive director, finance and operations, stressed that ethics is a key theme throughout the Association’s qualification. ‘ACCA ensures all students have an understanding of what it means to work and act professionally and ethically in the workplace,’ he said.
The development of a new ethics and professional skills module, due to be launched in October, reflects the crucial role ACCA views ethics playing in both protecting the public interest and delivering public value.
This on-going commitment is also demonstrated by ACCA’s engagement with the IESBA concerning the latter’s Code of Ethics for Professional Accountants, which is incorporated into the ACCA Code of Ethics and Conduct in its entirety. Consultations between the two bodies concerning the structure of the code and safeguards and non-compliance with laws and regulations (NOCLAR) are currently taking place.
European-wide, Jack pointed out, there is a move towards greater protection for whistle-blowers. An EU Commission whistle-blower protection consultation has recently been completed and ACCA will be responding and developing a position on this.
Jill Wyatt, business journalist