Association of Local Government Auditors

This quarterly's focus on fraud provides an opportune platform to discuss how we, as government auditors, can heighten our awareness of workplace culture. While the fraud-fighting community has long recognized the impact of culture on the incidence of fraud, assessing or even observing an organization's culture is not something that has been incorporated into standard government audit procedures. We have yet to see an audit program step that says Assess Organizational Culture, and available auditing guidelines for assessing culture are minimal at best. The ones that do exist are narrowly focused on specific aspects of culture pertaining to compliance, internal controls, or governance.

We surmise that this is because assessing something intangible, like organizational culture, does not come readily to most auditors. Most of us do not have educational backgrounds in sociology, psychology, or cultural anthropology. We have been trained to base our assessments and conclusions on concrete facts. However, an organization's culture is not clearly spelled out for us in policies and procedures; identifying it often requires observing subtle cues from staff. But how does a "sense" or an "intuitive feeling" about an organization's culture fit into a profession that requires evidence? I'm sure more than one auditor completed an audit thinking "morale seems really bad at that department." But did we put that "sense" to work while conducting the audit, other than potentially from a fraud perspective? Probably not. After all, what is the criteria?

Shying away from an assessment of workplace culture is only to our detriment. Our audits will only benefit from an awareness of an organization's culture.  For example, we can use this information to more accurately identify operational risks or reasons for operational weaknesses.  We can help government managers understand how their organization's culture impacts operations and provide impactful recommendations that might have the compounding benefit of improving workplace morale, productivity, and ultimately, operations and customer service. 

The goal of this column is to illuminate the benefits of assessing workplace culture for the government auditing community and present tools to formalize the process. But, before we do, we present a general description of organizational culture and government auditors' familiarity with it in terms of assessing fraud potential.

What is Organizational Culture?

Let's start with a definition of culture: a collection of shared values, beliefs, norms, expectations, and assumptions that bind people and systems. Culture gives people a sense of identity, facilitates commitment, initiative, communication, and provides a basis for stability, control, and direction. People intuitively know that there is a difference between the culture of the Marine Corps and the culture of Disneyland, but they are less able to articulate the difference. For that, we look at the determinants of culture.

• On a basic level, the national, regional, and local cultures in which an organization operates influence internal culture. These are formed by the climate, geography and the histories of the inhabitants. Most of us perceive these cultural differences. For example, we would expect a local American company based in Alabama to have a different culture than one based in Boston, or that of a Japanese company based in Osaka.
• Organizational culture is also influenced by the personalities of its founding leaders. Founders are often uniquely talented individuals who imprint their personalities on an organization and whose influence lasts long after their departure. Microsoft's Bill Gates, and Apple's Steve Jobs are two such examples. Employees of organizations will attest to being inspired by these leaders, and often recount pondering "what would [insert leader's name] do in this situation?" as they try to tackle problems confronting them.
• The competitiveness of the industry or the absence of competition has a strong influence on organizational culture. Even government agencies behave differently when they face competition from other entities or the private sector (from threats of outsourcing, for example). The stability of the internal and external environments also shapes culture. For example, employees will interact with each other very differently in an organization with a high staff turnover compared to one with little turnover. External factors such as a perpetually changing regulatory environment or fluctuating revenues will force an organization to behave differently than one operating in a stable environment and having a steady income stream.
• Another aspect of culture is how strong or weak it is. High performance or elite groups, such as military special forces or aviation units, tend to have strong cultures, characterized by difficult barriers to entry, high levels of member commitment, strong group cohesion, and interesting and challenging work. Strong culture does have its downsides, however, and members in organizations with such cultures are more prone to groupthink than those in organizations with weak cultures.

Organization Culture and Fraud

For most auditors, experience assessing workplace culture has been limited to its implications for fraud. Most of us are familiar with the fraud triangle and the three dominant prerequisites it identifies for fraud: opportunity, pressure/incentive, and rationalization. Organizational culture can be a strong factor that effects whether or not employees are pressured or encouraged to cross ethical boundaries and commit a fraud, and it also shapes the way employees feel and think about their organization.

The importance of culture in relationship to fraud is often encapsulated in the phrase "tone at the top," which recognizes the power that upper management has in determining how organizations behave. In practice, it is difficult to control the actions of an organization's leaders, whether the organization is a small private firm, a large international company or a municipal government. Unless they clearly violate some law, leaders normally have a lot of leeway to make poor decisions, and they can cause much damage before they can be forced to leave. Corporate boards can force CEOs out, but is even more difficult for voters to recall a politician.

"Tone at the top" doesn't just mean unethical management. Lackadaisical or absentee management can create a permissive culture that allows for the emergence of fraud. It is also well-established in fraud literature that employee discontent and resentment is a red flag, as unhappy employees may be motivated to harm their employers and may find it easier to rationalize fraud. Think of the unhappy IT worker who crashes a company's systems after getting into an argument with his boss, or the underappreciated bookkeeper who decides to start his own employee bonus program. 

Consideration of Workplace Culture Beyond Fraud

Assessing organizational culture for reasons other than evaluating fraud risk can be beneficial to government auditors for a number of reasons. First, sensitivity to the idiosyncrasies of a particular culture can help auditors better navigate their way through the audit. For example, some local police and fire organizations function through a strict chain of command and expect upmost respect for higher-ranking officers.  Recognizing and showing respect for this culture can go a long way in building relationships during the audit and facilitate the auditor's ability to obtain information.

In addition, understanding an organization's culture can provide critical insight into the behavior and actions of department management and staff that negatively impact operations. If an organizational culture is weak and morale is poor, staff may not have a strong loyalty to the organization nor a strong desire to see it succeed. This apathy can lead to mistakes, low productivity, and poor customer service. Identifying a weak culture during the planning phase can help auditors identify potential operational risks and areas warranting further review. An audit shop might even want to develop a brief checklist for its auditors to help them assess the culture at the department being audited and help detect any major dysfunction.

Presenting information on workplace culture to managers and government leaders through audit reports can provide valuable information on the current condition and direction of the organization and whether major changes are needed. Presenting an assessment of workplace culture in an audit report that also identifies operational inefficiencies and/or deficiencies makes this "touchy, feely" information much more concrete and powerful. Changing organizational culture is a difficult and slow process that often meets stiff resistance, but we are in a unique position to present a holistic picture of operations that can make it more difficult for government managers to simply ignore "culture problems." 

We can also use the information to help department managers better understand specific concerns or problems within their department. For example, on one audit, a department was managed in a command and control fashion and was experiencing difficulty in soliciting feedback from its blue collar employees. We helped the department understand that that it could not realistically expect a workforce conditioned to follow orders would suddenly start brainstorming with management, and recommended that it commit more resources to engage its employees.

Formalizing an Assessment of Workplace Culture

As government auditors who follow yellow book standards, we need to provide documented evidence to support our "sense about the culture." We can accomplish this through interviews, but this requires many of us to step out of comfort zone to talk "feelings" with auditees. A more structured approach might be to take advantage of online survey tools. Surveys could inquire about employee satisfaction levels and the ethical climate of the organization. Conducting surveys of employees' perception of their organization's culture and morale might also be an interesting tool to incorporate into an audit shop's annual risk assessment process.

Measuring Up

Lastly, is there such thing as an ideal culture? One that auditors can use as a criterion against which to judge organizational cultures? Both Jim Collins in Good to Great and Tom Peters in the earlier In Search of Excellence make attempts at uncovering the mysteries of great companies and provide a description of these companies' cultures. To summarize, great companies have a bias for action, a focus on the customer, allow autonomy and entrepreneurship, aim for productivity through people, have involved management, are narrowly focused, and have simple organizational structures and lean staff. While public organizations might find it difficult to acquire these attributes, we should nonetheless strive to promote them through our work.