Speech by Sir Winfried Bischoff, Chairman, FRC at the Audit Quality Forum event: Whose culture is it anyway?
News types: Speeches
Published: 12 November 2015
On 12 November, FRC Chairman Sir Win Bischoff, addressed the audience at the Audit Quality Forum event: Whose culture is it anyway?
The plain text version of Sir Win's speech can be found below. Read or download the formatted version (PDF).
Sir Winfried Bischoff Chairman, Financial Reporting Council
Audit Quality Forum: Whose culture is it anyway?
12 November 2015
Glaziers Hall, 9 Montague, Close, London SE1 9DD
Good afternoon, I am delighted to be here today at this Audit Quality Forum and to expand on the very pertinent and thoughtful remarks of the Minister.
We all know culture is not an easy concept. At its minimum, it is the sum of knowledge, beliefs, values and experiences acquired by a group of people over a period of time through living or working together. But since the financial crisis society has changed its expectations of companies.
Society wants company behaviour to improve, and culture to change. It expects a company’s culture to instil confidence among its investors and other stakeholders, and to deliver the company’s objectives in a way that enhances long term value.
Culture is very high on the FRC’s agenda and it is very important to me. I have seen what a good company culture can do and I have also seen what a poor culture can lead to. For example, I know Volkswagen well. Like many I admire its technical excellence, its long term approach and its global and iconic nature. For those reasons, I am astonished at what appears to have happened. Its Board and senior management will need to examine how things could have gone so badly wrong and what role culture played in that.
Addressing cultural issues and embarking on cultural change in a company is not an easy task.
The UK Corporate Governance Code and the Stewardship Code are respected internationally. Good corporate governance is an essential part of a healthy corporate culture; but strict adherence to the Code is not necessarily an indication that a company’s culture is completely healthy.
The Code recommends that boards be a place of constructive challenge and that “tone from the top” be observable through the values, attitudes and behaviours displayed right through the company.
To do so, the board must define the company’s purpose, the outcomes it wants to secure, and the behaviours it wishes to promote. This involves asking questions and making choices about the correct balance between
constructive innovation and disproportionate risk-taking; deciding whether different parts of the business should operate differently; maintaining culture under pressure and through change; balancing the delivery of short term and longer term needs, and encouraging constructive discussion on culture among shareholders.
We still see poor governance and cultural weaknesses identified as root causes in a number of recent corporate failings. Issues such as excessive executive remuneration, market manipulation and supplier arrangements have drawn comment and criticism.
The FRC is undertaking work now “to assess how effective boards are at establishing company culture and practices, and embedding good corporate behaviour, and to consider whether there is a need for promoting best practice”. We are leading a culture coalition and have received positive responses from many people and organisations. This collaborative project will deliver practical, market-led observations to help boards and companies establish and embed their desired culture. We look forward to hearing from you with questions and feedback from this event, and views more generally, to help inform our work in this area.
In focusing on culture, the AQF has chosen a highly appropriate theme. A company can improve its prospects and staff morale by developing a positive culture. Culture can also be enhanced by learning the lessons from audit. As part of every audit engagement, auditors need to have assurance and evidence to prove that management operates with integrity and transparency. The auditor also needs to be satisfied that risk management and internal controls operate effectively, protecting the corporate reputation in addition to investors’ interests.
The impact of a poor culture on risk management and control can now be part of the extended auditor’s report. Where auditors cannot get confidence over culture and internal control, they need to do more work to support their opinion. The fact that the auditor has taken this action is transparently reported to all stakeholders through the annual report.
Auditors can also support the development of a positive culture through information other than the financial statements. They consider the information and statements made by the directors in the company’s annual report, to determine whether they are consistent with the auditor’s understanding of that company. The audit committee also publicly reports, setting out how it has discharged its duties, as a way of providing further confidence. It is worth noting that audit committees are now giving consideration to cultural issues as well as financial ones.
To conclude, at the Mansion House event in March the AQF questioned if business could ever get it right? From experience, I suggest, that if a business get its culture right then many good things follow, financially as well as reputationally.
Thank you for listening.