Worldwide financial markets have been rocked in the past few years by corporate scandals and the very first question is: ‘Where was the auditor?’ However, the question should rather be: ‘Where were the guardians of governance?’
In performing an audit, the auditor is heavily reliant on the internal controls and governance implemented by the organisation. The auditor needs to report on the fair and true presentation of the financial position and performance and has to rely on information from various third parties in the audit process.
Furthermore, the task of performing an audit (even before COVID-19 and related challenges) is a daunting task on its own. Certain challenges that auditors face include, but are not limited to, the timing of reporting deadlines, demographics of international companies, reporting framework, complexities in group audits, highly skilled staff employed by the company that is audited, performance incentives afforded to officers of the company, etc.
It must be noted that the auditor is only one part of the greater financial reporting ecosystem and cannot by himself take responsibility for these failures. I don’t for one moment discount the importance and the role of the auditor. It is conceded that the auditor is part of the problem but is not the problem alone.
For financial reporting to be accurate and of high quality, every guardian of good governance must take full responsibility for and ownership of their role in the ecosystem and fulfil it to the best of their ability − underpinned by a culture that promotes good corporate governance.
The guardians of governance are the board of directors, executive team, internal audit, audit committee and the auditors.
Every guardian of governance must fulfil their function, without any pressure or agenda. When this happens, the inherent quality of reporting will improve and support a more stable financial market in our country, and also worldwide. This is such a high priority for certain institutes that they have created academies and programmes to foster these skills.
The guardians must consider, to name a few, fraud, governance, risk management and ethical values.
A just as important task of these guardians is to foster the governance culture. Tackling corporate culture is challenging. When boards approach culture proactively rather than reactively, it helps to protect a corporation’s future. This is how it also protects employees, shareholders and other stakeholders.
Defining a healthy culture is challenging, but not impossible. This culture has two components. One of them requires having leadership that is in strong agreement about what they value. The other is leadership that has a high level of intensity with regard to those values.
The board of directors can start by embedding these components into a strong ethics and compliance programme.
It is well known that corporations with weak cultures are more susceptible to having leaders who have bad conduct. Conversely, studies have shown that a healthy corporate culture increases productivity and generates positive long-term shareholder value.
To create the right culture and empower the guardians of this governance is not a one-size-fits-all exercise and also not a once-off task. It’s a continuous process and must be at the front of the mind of the board.
I believe that ethical cultures are sustained from the bottom up as well as from the cascading effect of the tone at the top. It is also a prerequisite that open and robust communication must be afforded to enhance the engagement on the design of this governance culture.
Once the culture of ethical behaviour is well established and the leaders of the governance are empowered, they will become the guardians of governance. This will enhance the quality of reporting, improve the internal controls, and in the end lead to fewer corporate failures.