Human elements of agency risk – conduct and culture

James Jong IIANZ Board member and Chair of its Advocacy Committee

James Jong IIANZ Board member and Chair of its Advocacy Committee

James Jong

Member of Advocacy Committee

Institute of Internal Auditors New Zealand

The importance of speaking up

Two years ago, I wrote an article in this newsletter espousing the internal auditor as the conscience of organisations. Their functional independence, professional objectivity and direct access to governors and executives enable and empower them to speak truth to power. Yet, the history of scandals and failures suggests truths are either not spoken, unheard or not heeded. This article highlights some barriers and ideas for improving conduct, and strengthening integrity and accountability systems in organisations.

Unjust rewards

Purposeful organisations incentivise their people to achieve business goals, whether these are profit, innovation, market dominance or more altruistic ends. Their measurement and reporting systems track performance. Leaders, teams and staff who contribute significantly to goal achievement are rewarded. This simple dynamic can be fraught, as demonstrated in the Wells Fargo cross-selling scandal.

Even in mature organisations with safeguards and controls to ensure compliance with laws and regulations, highly motivated employees can push the boundaries to get bigger rewards. Those who are not meeting targets are pressured just to keep up, and may resort to unethical customer or internal practices. The Australian Royal Commission into Misconduct in Financial Services illustrates the perennial agency risk all organisations, particularly those that are commercially oriented, must pay attention to.

Ethical leadership

An important attribute for a truly transparent organisation is that it is difficult to hide wrongdoing. In New Zealand, the public expects government and the public service to be transparent and accountable. Disclosures through information requests, parliamentary questions and proactive releases are increasing across government. Yet, the risk of form over substance remains, and organisations – public or otherwise – must remain diligent to selective transparency. So what compels transparency in non-public sector organisations?

Mostly, it is regulation and the robustness of the regulatory systems run by government agencies, professional bodies and the likes. Effective self-regulation is a worthy goal, but is critically dependent on strong ethical leadership and integrity systems. All organisations have a civil responsibility to safeguard against unethical practice for the benefit of the society they serve and community in which they exist.

Customer driven culture

Organisations always say it’s all about their customers. More often than not, it’s about their owners. Listed companies use stock prices to determine how well they are doing. Public service organisations are measured by trust and confidence ministers and the public-at-large have in them. Private enterprises focus attention on their bottom lines and growth. Few organisations are explicit about customer service performance, which seems odd if it’s really all about the customers.

Perhaps it is just rhetoric. Who the real customer is, matters. This is because it drives behaviours and culture. Organisations fixated on brand, for example, are more likely to go into ‘damage control’ when something goes wrong, than do the right thing by owning and fixing the (customer) problem. It is critical that organisations are crystal clear about who their customers are, have the right channels to hear their voices, and systems and process that are tuned to respond to their needs. The organisational culture will invariably pivot around the customer, whomever that is.

Role of Internal Audit

The Internal Auditor, as the conscience of organisation, has the opportunity if not obligation to look beyond controls and compliance. They must take advantage of their independence and speak candidly about the health and fitness-for-purpose of their organisation. That is not an easy job. It starts with governors and executives who want to hear unvarnished truths, and who value integrity over short-term performance.

The Internal Auditor should be optimistic that great leaders always want to do the right thing. Should that optimism be misplaced, however, the Internal Auditor must have the courage to speak up and play their part to protect the organisation from wrongdoing. They are a cornerstone for the foundation of governance, integrity and accountability.


Organisations are vulnerable to human conditions. Even those with well-designed systems can go awry if there are conflicting tensions between business goals and personal objectives. Leaders, ensure your tone and behaviour reflect your organisation’s purpose. Encourage your staff to speak up if your actions do not match the rhetoric. Empower your internal auditor to hold a mirror to the organisation to safeguard its integrity.

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