Many audit professionals likely can relate to the following situation: Sree, chief audit executive with a large manufacturing company, understands the importance of tone at the top. He also realizes that some of his colleagues in other departments have only a vague understanding of the concept and its role in fostering an ethical, successful organization. As a result, they question the need to devote management time and attention to developing a strong "tone at the top."
Sree has attempted to address their concerns, but the skepticism he continues to see tells him he hasn’t truly communicated the value of a strong tone at the top. And that’s made it challenging to obtain broad management support for initiatives designed to develop a strong tone at the top within his company.
What Does Tone at the Top Mean and Why is it Important?
Tone at the top, according to the Association of Certified Fraud Examiners, refers to “the ethical atmosphere that is created in the workplace by the organization’s leadership.” For instance, does management frown on gamesmanship when reporting financial results? Are all employees expected to adhere to the stated policies for travel expenses? Both can demonstrate executive leadership’s commitment to principles and integrity.
These examples also show that the real test of management’s commitment to tone at the top is in how it permeates the organization, says Peter Brady, principal and national business risk services leader, with RMS US LLP.
“To be effective, tone-at-the-top has to manifest itself in a strong, ethical tone among middle managers and front-line employees,” Brady says.
Employees at all levels need a reason to believe the policies that flow from the tone set by senior management are applied fairly to all employees within the organization. “Senior leadership has to live it,” Brady says.
To be sure, many internal audit and risk management professionals already understand the value of a strong tone at the top. Nearly 90 percent of respondents to a study from consulting firm PwC said tone at the top is critical in mitigating the risk of fraud, corruption, and behavior. The respondents were responsible for managing fraud, corruption, and integrity risk to their organizations.
By mitigating these risks, a strong tone at the top can improve a company’s performance. “Not only does tone at the top promote accurate financial reporting and an ethical culture, but it can make the company more successful by reducing litigation, turnover, and employee dissatisfaction,” says Jami Shine, corporate and IT audit manager with QuikTrip Corporation.
The benefits of a strong tone at the top should be of interest to leaders in all departments within every organization. However, as Sree has discovered, that’s not always the case.
This article will help risk management professionals foster a strong tone at the top within their organizations by examining the following:
- Obstacles to developing a strong tone at the top.
- How to evaluate tone at the top.
- How internal audit can help improve tone at the top.
Obstacles to Developing a Strong Tone at the Top
Attempts to foster a strong tone at the top can hit obstacles. Some managers may believe that promoting an ethical culture takes time and energy away from their operations, or even works against their efforts to build business. That can be the rationale for allowing a high performer to take shortcuts or act in ways that would get other employees in trouble. This sends a message that tone at the top is ignored in some circumstances, says Tony Redlinger, internal audit director with IHS Markit.
Another obstacle occurs when auditors become “a little too hung up on compliance,” Redlinger says. While complying with policies is important, it’s critical to also ask if the policies address the most significant risks and encourage an ethical culture, he adds. While internal audit shouldn’t craft policies, it can point out when they don’t make sense.
Evaluating Tone at The Top
Given the importance of tone at the top, internal audit should evaluate it just as they do other risks. To be sure, this isn’t as straightforward as, for instance, examining the adequacy of the controls around disbursements. Yet internal audit has several ways it can evaluate tone at the top. They include:
- Reviewing how exceptions to the code of conduct are handled. Tough, but fair and consistent consequences tend to indicate a stronger tone at the top.
- Monitoring hotlines for issues that consistently arise, Redlinger says. For instance, ongoing reports of harassment may indicate executive leadership is only paying lip service to the idea that all employees should be treated with respect.
- Evaluating the training budget. “Does it allow for all employees to receive training on the ethical culture the organization claims it’s trying to cultivate?” Redlinger asks.
- Looking for small exceptions to the rules that can indicate a “do as I say, not as a I do” mentality. For instance, an organization may require all employees to change their computer passwords every three months but look the other way when senior leaders flout the rule. “Even if management says everyone is held accountable, this shows the rules really are for those lower in organization,” he says.
Improving Tone at the Top
Once internal audit has evaluated tone at the top, it can assist in improving it. The following steps are a starting point.
- Make the risks of poor tone a part of regular conversations with management.
- Use data analytics to identify trending issues that can shed light on the tone at the top. Brady provides an example: most human resources departments conduct exit interviews. Employees leaving a company tend to be “abnormally candid,” he notes. The interviews, combined with other non-structured data can provide insight into how the real tone is on the ground and may indicate problems can be traced to a poor tone at the top.
- Implement programs that help employees throughout the organization promote an ethical culture. Jackson National Life Insurance, for instance, has implemented a leadership excellence development program, according to Constance Snelling, interim IT audit director with the company. Over the course of a year, up-and-coming leaders within the organization learn about issues that impact the culture and tone, such as how to truly listen to others and recognize bias. Each student is charged with creating a development plan for him- or herself that impacts the company in a positive way. “Top management is really empowering employees to make the company better,” she says.
- Suggest informal ways, like employee appreciation events, to recognize ethical behavior. “Singling out people for good examples of ethical behavior sends the message to employees that the company values and will reward this behavior,” says Mason Wilder, research specialist with the Association of Certified Fraud Examiners.
Talking About Tone at the Top
At some organizations, initiating conversations about the tone at the top can mean taking a career risk. After all, the individuals most responsible for promulgating a strong tone at the top hold a great deal of power within the organization.
To mitigate this risk, internal audit needs to support its conclusions with “fact-based observations,” Shine says. If necessary, internal audit also can reach out to the board or audit committee with its concerns.
Rather than point fingers, the conversations should focus on the risks of a weak tone or culture. “Auditing culture actually benefits management by helping to identify pervasive issues and risks before something catastrophic happens,” Shine says, adding that QuikTrip has “a fantastic CEO who sets a strong tone at the top.”