Cultural Audits for Ethical Reporting

It has been argued that managing by objectives and results can create unintended consequences that can lead to accounting fraud (CPA Journal, "Using Cultural Audits to Assess Tone at the Top," 2005). The authors argue that conducting periodic cultural audits can alleviate this risk.

A cultural audit assesses attitude toward internal controls and ethical decision-making. The audit helps management shape ethical culture within the organization and assists directors and auditors in determining how effective their internal controls are.

The audit should discover whether there is pressure to meet earning targets by mid-level management, and if their earning and incentive plans force them to make these numbers at any cost.

Some executives agree with these recommendations, but not solely for internal control. The culture of the company can drive sustainable growth. There is a strong relationship between a company's culture and retention - both key to long-term growth of a company.

Others believe this would be a good way to help auditors understand the appropriateness and decision-making process of management. By auditing its accounting policies, the way a company handles "bad news" or the way it compares itself to other companies, stakeholders can likely better satisfy their investors, assure customers, and retain good employees.

Whether or not a company decides to engage in a cultural audit, the results are clear: Cultural audits give a view into company practices that is key in determining areas for improvement. It keeps companies honest.