Professional Documents
Culture Documents
PG Auditing Culture
PG Auditing Culture
Auditing Culture
About the IPPF
The International Professional Practices Framework®
(IPPF®) is the conceptual framework that organizes
authoritative guidance promulgated by The IIA for
internal audit professionals worldwide.
Practice Guides
Practice Guides, a type of Supplemental Guidance, provide detailed approaches, step-by-step
processes, and examples intended to support all internal auditors. Select Practice Guides focus on:
Financial Services.
Public Sector.
Information Technology (GTAG®).
For an overview of authoritative guidance materials provided by The IIA, please visit
www.globaliia.org/standards-guidance.
Table of Contents
Executive Summary ......................................................................................................................... 2
Introduction ..................................................................................................................................... 3
Business Significance: Risks and Opportunities............................................................................... 4
Role of Internal Audit ...................................................................................................................... 6
Planning and Performing the Engagement ..................................................................................... 7
Gather Information ..................................................................................................................... 7
Considering Culture and Conduct Risks in the Audit Plan ........................................................ 10
Risk Assessment ........................................................................................................................ 10
Planning the Engagement ......................................................................................................... 12
Performing the Engagement ..................................................................................................... 15
Reporting................................................................................................................................... 21
Appendix A. Related IIA Standards and Guidance......................................................................... 22
Appendix B. Glossary ..................................................................................................................... 23
Appendix C. References and Additional Reading .......................................................................... 24
Appendix D. Sample Culture Monitoring and Reporting Formats ................................................ 25
Acknowledgements ....................................................................................................................... 28
Poor organizational culture has been identified as the root cause of many serious issues across
numerous industries around the world. In response, key business stakeholders, including boards
and regulators with responsibility for oversight of the control environment, have heightened their
focus on the role of organizational culture and the actions that arise out of that culture to constitute
conduct risk management.
1. The Institute of Internal Auditors. The IIA’s Position Paper: The Three Lines of Defense in Effective Risk Management
and Control (Altamonte Springs: The Institute of Internal Auditors, 2013).
Culture represents the invisible belief systems, values, norms, and preferences of
the individuals that form an organization. Conduct represents the tangible
manifestation of culture through the actions, behaviors, and decisions of these
individuals.2
This definition captures the complexity of defining and then assessing an intangible
organizationwide quality or aspect that comprises human belief systems, social norms, and other
psychological factors.
Internal audit teams operating in certain industries and/or jurisdictions are required to assess and
regularly report on the appropriateness of their organization’s culture and the effectiveness of
conduct risk management activities. However, even without regulatory guidance, internal auditors
can add value through the objective assessment and reporting of organizational culture and
conduct risk management.
2. Elizabeth St-Onge, Ege Gürdeniz, and Elena Belov, Measuring Conduct and Culture: A How-To Guide for Executives
(New York: Oliver Wyman, 2018), 2. https://www.oliverwyman.com/content/dam/oliver-
wyman/v2/publications/2018/april/Conduct_and_Culture_Measurement_Oliver_Wyman.pdf.
A common factor cited when discussing an organization’s culture is “tone at the top.” Many studies
have shown that most people who change jobs do so because of their immediate boss.3,4 Common
reasons to change jobs include boredom, struggling with work/life balance, and feeling unheard
and unappreciated. Interestingly, all of these factors are at least somewhat in the control of the
supervisor. Intentionally or not, supervisors set the cultural tone for their team and contribute by
operating within the culture of the broader organization. Many leaders are unaware of the
importance of their role in setting and modeling an appropriate culture. Thus employees may be
confused, unmotivated, or see opportunities to take advantage.
Studying the corporate failures of the last few decades indicates identifiable key risk factors arising
from cultural problems. Those risk factors, in no particular order, include but are not limited to:
3. Marcel Schwantes, “Why Do Employees Quit on Their Bosses? Because of 5 Common Reasons Still Not Addressed,
Says New Research,” Inc., December 21, 2018, https://www.inc.com/marcel-schwantes/why-do-people-quit-their-jobs-
exactly-new-research-points-finger-at-5-common-reasons.html.
4. David Novak, “Here’s the No. 1 reason why employees quit their jobs,” June 21, 2019,
https://www.nbcnews.com/better/lifestyle/here-s-no-1-reason-why-employees-quit-their-jobs-ncna1020031.
For example, if employees are penalized for mistakes (that may or may not be the result of their
actions) in an environment of fear and blame, management regularly overrides key controls, and
challenge is discouraged, bad actors can operate freely until their behavior becomes the norm.
Other employees who behave honestly may leave the organization or become corrupt themselves,
resulting in further deterioration of the culture.
Management should be clear on what it will and will not tolerate in terms of its risk appetite. This
includes culture-related risks. An organization may choose to define actions, situations, or risk
impacts related to culture that constitute a breach of its risk appetite parameters and develop a
system to facilitate reporting on the remediation status of internal audit or risk management’s
findings regarding these breaches. (See Appendix D for an example.)
Conversely, a positive, affirmative, open culture supports the organization’s attainment of its goals
and objectives because it generally creates a more enjoyable place to work, enhances productivity,
and leads to overall improved performance in addition to reducing risk exposure.
Positive tone from the top – Executive management and the board work together to
define the organization’s values and proactively emphasize and model those values,
ensuring strategies are consistent with the values, and holding management accountable
to executing their duties within the organization’s risk appetite.
Clear communication – Management reinforces the values and culture through clear
communication of expectations across the organization. Methods include formal
communications, day-to-day interactions, and meetings with employees, customers, and
third parties.
Open dialogue – Management actively gathers and listens to feedback. All levels are open
to constructive criticism and problem solving through methods including information
obtained from second- and third-line functions via inputs such as well-received and
acknowledged employee suggestion/question program, ethics hotlines, open door
policies, employees’ events and meetings, and more.
Employee engagement – All employees (to the extent possible) are engaged in objective
setting and strategy discussions. In larger organizations this may be accomplished
through two primary methods: input into setting their own personal goals and objectives;
and understanding of how those individual goals and objectives align with the overall
The following sections will describe methodologies and options internal auditors may use to assess
an organization’s culture.
An organization’s management and board are responsible for culture and conduct risk
management. However, the internal audit activity may advise them in many ways, such as:
Identifying root causes not only for areas that have received observations and
recommendations from internal audit regarding culture but also for areas judged as
operating with best practices. Identifying and analyzing root causes from both
perspectives results in powerful tools to gauge frequency and assess how cultural
elements are drivers of results in improvement of affected areas.
Assessing the governance structure (roles and responsibilities) related to culture and
conduct.
Assessing the organization’s programs for communicating values, strategies, and
objectives.
Assessing the effectiveness of culture-related trainings including code of conduct, ethics,
sexual harassment, etc. (e.g., How seriously do employees take the training? Are the
delivery methods effective?)
Performing internal audit engagements that consider employee incentive and hiring
programs, disciplinary actions, and escalation protocols, treatment of “whistleblowers”
or employees that speak up and escalate issues and other key performance indicators
(KPIs) or key risk indicators (KRIs) that may be relevant to the organization’s culture.
Analyzing information related to culture gathered for other purposes in the organization
(e.g., analyzing and trending employee survey data).
In addition, certain attributes are needed for individuals assigned to culture-related risk audit
engagements. Internal auditors leading culture-focused engagements should be:
Familiar with the organization’s unwritten rules including hierarchical norms and how
employees from different levels communicate with each other.
Skilled at reading body language and “reading the room” to ensure nonverbal cues are
considered appropriately.
Experienced and/or respected enough in the organization to be able to ask hard
questions that may touch on uncomfortable subjects.
Focused on the objective facts of an engagement rather than their personal feelings
about the people or processes involved.
These elements are critical and necessary for all internal auditors in all assignments, but particularly
so in the sensitive areas associated with an organization’s culture and the offshoots of culture that
may exist with departments and individual locations.
As stated by Standard 1100 – Independence and Objectivity, “The internal audit activity must be
independent, and internal auditors must be objective in performing their work.” Standard 1120 –
Individual Objectivity states internal auditors must have an impartial, unbiased attitude and avoid
any conflict of interest. For example, internal auditors who may have been involved with the
development and/or implementation of any relevant programs (e.g., employee engagement
groups, creating ethics training or codes of conduct) should not be assigned to these engagements.
However, small audit activities may have limited options in this regard. If this occurs,
Standard 1130 – Impairment to Independence or Objectivity requires that impairment in fact or
appearance be appropriately disclosed.
These issues must be carefully considered before assigning employees to embark on audits of
culture.
Gather Information
The chief audit executive (CAE), or internal auditors assigned by the CAE, should be involved as
observers in various meetings throughout the organization regarding values and strategic planning.
Internal auditors attending these meetings should be conscious of the information that pertains to
or may affect culture. This information will also help internal auditors identify where culture-
related risk information is retained in the organization.
“An internal auditor increases their chances of understanding whether the culture
is good or bad by being involved as observers in committees where management
discusses information key to the organization’s strategies. Internal auditors should
be on the Enterprise Risk Management (ERM) committee. Ideally, it is beneficial
for CAEs to attend executive committee meetings as observers. Internal auditors
must develop the ability to use their eyes, ears, and minds to watch people interact
and think. If internal auditors are not engaged or embedded in the organization’s
governance entities to see those behaviors on a regular basis, then KPIs and KRIs
related to culture may deteriorate unbeknownst to management.”
This CAE also suggested attending meetings in which executive management presents financial and
performance results. He states internal auditors should watch what people do and say when they
talk about risk occurrences.
Some of these elements are public knowledge and can be obtained easily. Others will be more
difficult and internal audit may have to work with available data to infer a conclusion.
Risk Assessment
To perform an audit of culture-related subjects, internal auditors may refer to the risk assessment
in their overall annual internal audit plan to identify risks to the organization’s culture generally
and then narrow the focus of a preliminary risk assessment to identify the specific risks they intend
to cover in the audit engagement. Culture-related risks can be identified anywhere in the
organization, so it is important that internal audit conduct a thorough risk assessment as a guide in
planning an engagement that will be of benefit to management and the board.
As internal auditors conduct their engagement-level risk assessments, they should review past
workpapers and consider any past engagements that may contain information relevant for an
organizational culture audit. Risks and controls may be gathered from the information available to
internal auditors during the information gathering phase.
Restrictions on work visas and immigration. Management (and, in some cases, the board)
Failure to identify skill sets required for key or refuses to acknowledge information contrary
specialized positions. to their opinions.
Reactive hiring strategy. Inflexible hierarchy impedes the flow of
Misalignment between the organization’s and information up, down and across the
the Human Resources department’s organization.
strategies, goals, and objectives. An attitude of hubris (e.g., “That will not
Competition between business lines for happen here.” or “That has never happened
personnel. to us before.”)
Any of these approaches would allow internal auditors to develop a list of relevant cultural risk
factors and map their audit results to those factors. They may spot trends or common themes that
could be presented to senior management and the board.
The CAE should consult with human resources, legal, and/or the relevant board member (i.e., audit
committee chair) to discuss the engagement plan before beginning the audit.
If work regarding culture is performed by another assurance provider, the CAE should also confirm
the work is objective and thorough. As noted in Standard 2050 – Coordination and Reliance, the
CAE should carefully consider the competency, objectivity, and due professional care of other
providers, as well as clearly understanding the scope, objectives, and results of their work.
Responsibility for ensuring adequate support exists for the conclusions and opinions reached by
the internal audit activity rests with the CAE.
The process of establishing the engagement objectives and scope may produce any or all of the
following workpapers:
Process maps.
Summary of interviews.
Preliminary risk assessment (e.g., risk and control matrix and heat map).
Rationale for decisions regarding which risks to include in the engagement.
Criteria that will be used to evaluate the area or process under review (required for
assurance engagements, according to Standard 2210.A3).
Given the sensitivity of some of the views expressed during an audit of culture-related risks,
safeguards may be necessary to ensure that working papers are only accessible to those in the
audit department with a “need to know” (e.g., anonymizing the interviewees and limiting access
to the “key” that identifies who is represented).
1. Integrated Approach
Returning to the example talent acquisition audit engagement, Figure 2 illustrates the integration
of cultural risk factors. As shown in these examples, consideration of cultural risk factors may result
in additional testing, expanded samples, or cross-referencing other audits.
The risk “Reactive Hiring Strategy” was selected from the Talent Acquisition Risks listed in Figure 1,
including hypothetical results of control testing, and observations and recommendations.
Once this audit program is complete, internal auditors may identify any risks, controls, and
observations and recommendations that relate to the cultural risk factors. This analysis may lead
to internal auditors completing additional procedures, root cause analysis, and, perhaps,
additional observations and recommendations as shown in Figure 3.
Other additional procedures to integrate cultural risk factors into regular audits for testing in this
manner may include:
Reviewing the results of employee surveys for the area or process under consideration.
Gathering documentation regarding ethics complaints, whistleblowing situations, or
other incidents involving management as individuals or as a group for the area or process
under consideration.
Gathering documentation illustrating management taking ownership of
recommendations issued by internal audit and ensuring the associated action plans are
completed timely and with quality.
Recording observations regarding management’s complete and timely participation in
audit engagement interviews and/or document requests, etc.
2. Targeted Approach
A targeted engagement may consist of choosing a key process related to culture and building an
engagement around the culture-related controls. Areas to cover under the targeted approach may
include:
Accountability
Examine performance review documents for assurance that disciplinary actions are
invoked as outlined in the organization’s code of conduct, employee manual, and/or
compensation policy.
Review complaint management processes and assess or determine:
o How complaint information is gathered, stored and reported including those
investigated, where action was taken and complaints that are pending accompanied
by their aging status.
o Whether proper segregation of duties and access controls are in place and
functioning.
o The quality and timeliness of complaint information reported to management.
o If complaint information results in organizational change.
Review exception reports for applicable processes and/or controls to determine:
o If management overrides of controls are recorded on exception reports.
o If management overrides are consistently reviewed and approved by an independent
party.
o If one unit has more management overrides than other similar units. If so, determine
the cause.
Review how many audit issues are open or past due or re-opened since the last audit. If
managers are closing audit issues or action plans to meet deadlines without fully
resolving issues that should be noted in terms of culture and conduct.
Assess the process(es) used to develop and/or update the organization’s ethics program
and code of conduct including:
o Subject matter coverage is reviewed and updated according to good practices.
o Appropriate parties are included in the review process.
o Input is obtained from the board and executive management.
o Input from related committees (ethics, risk, compensation, etc.) is considered.
o Audit committee review and approval is documented and validated.
Review documentation demonstrating ethics complaints, whistleblowing situations, or
other incidents involving management as individuals or as a group are investigated and
addressed promptly and in a manner consistent with the organization’s ethics policies,
escalation protocols, code of conduct, etc.
Whistleblowing/Complaint Audit
At the conclusion of an audit engagement, the internal audit activity is advised to praise positive
conduct. Standard 2410.A2 states “Internal auditors are encouraged to acknowledge satisfactory
performance in engagement communications.” For example, after a culture audit and obtaining
permission from the parties involved, one bank chose to publish case studies of complaints that
had positive outcomes. These were posted in elevators, break rooms, and other areas where
employees gather to foster an atmosphere of transparency.
3. Top-down approach
Performing a top-down approach to auditing culture may be a difficult task in most organizations
due to the sensitivity of the topic and the difficulty of obtaining reliable information. However,
there are internal audit activities developing culture audit programs and covering the key aspects
of their organizational culture as shown in this case study:
One global bank chose to blend all three approaches to obtain a comprehensive top-down
audit of its culture. The first step was to distribute questionnaires to assess the level of
cooperation, openness, and ethical standards as perceived by employees at all levels of the
organization. A quarterly snapshot of the state of the organization’s culture was gleaned
from the questionnaire results, which were then presented to management.
Subsequently, internal audit integrated information gathered from the questionnaires into
audits that were not culture focused by including a statement regarding the same factors
(cooperation, openness, and ethics) in every audit. For planning purposes, they gathered all
the questionnaires and snapshots completed within the last audit cycle and aggregated the
responses. Responses were included in the top-down culture audit report.
At the senior management level, a Conduct and Values Committee assessed situations such
as internal fraud risks, harassment claims, and more. This committee also examined risk
management, compliance, compensation, and sales practices, and used metrics they
evaluated on a monthly basis.
To compile their top-down culture audit report, the CAE took the committee’s information
and integrated it with the questionnaire results and other culture-related audit activities as
explained.
In the end, the organization had a comprehensive view of its cultural risks and how the
organization managed those risks. Data trends from these activities are now analyzed on an
ongoing basis, enabling the organization to determine its success rate or failure to improve
according to its own cultural metrics.
Additional Considerations
In testing culture risk management activities, CAEs should ask, “What is the objective of this
control? Is it to investigate the incidents and find a solution, or is it to institute better controls to
prevent the behavior?” The objective should be to institute better controls to prevent bad
behavior.
Information and testing protocols regarding these culture risk management activities may not be
obvious. The CAE should ensure the auditors’ workpapers include sufficient information to support
the audit. The IPPF states, in part, “Sufficient information is factual, adequate, and convincing so
that a prudent, informed person would reach the same conclusions as the auditor,” and “Relevant
information supports engagement observations and recommendations and is consistent with the
objectives for the engagement.”
An organization’s culture can be an intangible, fluid thing, and the CAE must be free to
communicate issues that may not rise to the level of a formal control deficiency/recommendation,
in addition to any formal, written recommendations identified in the report.
Code of Ethics
Principle 1: Integrity
Principle 2: Objectivity
Principle 3: Confidentiality
Principle 4: Competency
Standards
Standard 1100 – Independence and Objectivity
IIA Position Paper: The Three Lines of Defense in Effective Risk Management and Control, 2013.
board – The highest level governing body (e.g., a board of directors, a supervisory board, or a board
of governors or trustees) charged with the responsibility to direct and/or oversee the
organization’s activities and hold senior management accountable. Although governance
arrangements vary among jurisdictions and sectors, typically the board includes members
who are not part of management. If a board does not exist, the word “board” in the Standards
refers to a group or person charged with governance of the organization. Furthermore,
“board” in the Standards may refer to a committee or another body to which the governing
body has delegated certain functions (e.g., an audit committee).
chief audit executive – Describes the role of a person in a senior position responsible for effectively
managing the internal audit activity in accordance with the internal audit charter and the
mandatory elements of the International Professional Practices Framework. The chief audit
executive or others reporting to the chief audit executive will have appropriate professional
certifications and qualifications. The specific job title and/or responsibilities of the chief audit
executive may vary across organizations.
conflict of interest – Any relationship that is, or appears to be, not in the best interest of the
organization. A conflict of interest would prejudice an individual’s ability to perform his or her
duties and responsibilities objectively.
governance – The combination of processes and structures implemented by the board to inform,
direct, manage, and monitor the activities of the organization toward the achievement of its
objectives.
impairment – Impairment to organizational independence and individual objectivity may include
personal conflict of interest, scope of limitations, restrictions on access to records, personnel,
and properties, and resource limitations (funding).
independence – The freedom from conditions that threaten the ability of the internal audit activity
to carry out internal audit responsibilities in an unbiased manner.
objectivity – An unbiased mental attitude that allows internal auditors to perform engagements in
such a manner that they believe in their work product and that no quality compromises are
made. Objectivity requires that internal auditors do not subordinate their judgment on audit
matters to others.
risk appetite – The level of risk that an organization is willing to accept.
Additional Reading
Fountain, Lynn. Raise the Red Flag: An Internal Auditor’s Guide to Detect and Prevent Fraud.
Altamonte Springs, FL: Institute of Internal Auditors Research Foundation, 2015.
https://bookstore.theiia.org/raise-the-red-flag-an-internal-auditors-guide-to-detect-and-
prevent-fraud.
Jex, Susan, and Eddie J. Best. A Journey Into Auditing Culture: A Story and a Practical Guide. Lake
Mary, FL: Internal Audit Foundation and Grant Thornton – United Kingdom, 2019.
https://bookstore.theiia.org/a-journey-into-auditing-culture.
A European provider of professional services developed a plan, which is revised and documented
annually, to communicate business plan objectives to its employees. All employees have access to
this plan on the company’s intranet.
The plan lists each business objective and notes the corresponding communication objectives as
shown in this excerpt:
Communication Objectives
1.1 Ensure partners, clients, and employees (and directors and members) know and understand what standards of
service are expected, as well as the actual standards they are providing/receiving.
1.2 Ensure partners, clients, and employees (and directors and members) have a means to tell the company what
their expectations are for standards of service delivery.
1. 3 Ensure partners, clients, and employees (and directors and members) have a means to give and/or receive
feedback on whether their expectations were met in the delivery of service.
This plan also identifies the different audiences for this communication including but not limited to
employees, board of directors, partners, and clients. It further identifies which communication
methods are most effective for each of those audiences individually. Some of the methods are
noted in the following excerpt:
Further, this communication plan extends to a manual for employees instructing them on how they
are expected to communicate with each other and with the other audiences. For example,
employees are coached to “respect each other’s opinions” and to “rely on each other to act as
critical friends.”
Internal audit can use policies and procedures such as this in an audit program designed to assess
the effectiveness of management’s plans regarding communication of the company’s core values.
A fintech company focused on digital platforms to facilitate multi-asset market access for traders
and other investors has a rigorous culture assessment embedded into its operational risk
management processes. This company measures any breaches of its risk appetite parameters and
has a system to facilitate reporting on the remediation status of internal audit or risk
management’s findings regarding these breaches.
A quarterly report on risk appetite breach indicators regarding culture is generated, and an excerpt
is featured below.
These reports are used by a variety of control functions within the company including internal audit
on a quarterly basis to monitor key risk indicators related to culture. These reports are also
produced as part of the escalation protocol should a breach occur that exceeds certain parameters.
This department has no appetite for violation of the company’s code of conduct, policies and procedures.
This department has a low appetite for high priority audit recommendations that are overdue.
Risk Appetite: Number of large events caused by failure to follow the code Operational Risk
of conduct.
Audit: Number of high priority audit recommendations more than 30 days Internal Audit
overdue.
The IIA would like to thank the following oversight bodies for their support: Financial Services
Guidance Committee, Guidance Development Committee, Information Technology Guidance
Committee, Public Sector Guidance Committee, Professional Guidance Advisory Council,
International Internal Audit Standards Board, Professional Responsibility and Ethics Committee, and
International Professional Practices Framework Oversight Council.
DISCLAIMER
The IIA publishes this document for informational and educational purposes and, as such, is only intended to be used as a guide. This
guidance material is not intended to provide definitive answers to specific individual circumstances. The IIA recommends seeking
independent expert advice relating directly to any specific situation. The IIA accepts no responsibility for anyone placing sole reliance
on this guidance.
COPYRIGHT
Copyright© 2019 The Institute of Internal Auditors, Inc. All rights reserved. For permission to reproduce, please contact
[email protected].
November 2019
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