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How the tone from the top impacts your internal audit

Oct 22, 2021

Tone from the top. You've heard it, but what does it mean?

For some, it’s how the individuals above you in the reporting chain can influence how you act and the decisions you make.

From an auditor’s standpoint, it’s used when evaluating an organization’s internal control environment, regulatory compliance management and ethics.

In other words, what's perceived as important to the C-suite or the board of directors is important to you. For example, if the leader of your organization shows they value strong procedures and controls, you'll likely put an effort into ensuring processes are in place to ensure controls are up to snuff. Why? Because it's important to your leader. It's the tone from the top.

On the other hand, if procedures and controls are not a priority to the boss, it’s probably not as important to you. Why? Because the leader probably won’t support a big investment in time and effort in something they consider a lower priority item. It's the tone from the top.

How tone from the top impacts day-to-day operations

As an auditor, you get a good sense of tone based on processes and procedures. Sometimes you see strict adherence to the controls in place. Every T is crossed, every I dotted. The procedures have been well thought out and include consideration of the various risks.

Other times, you can see that the assessment of the risks, as well as the controls in place (or lack of controls in place), indicates the tone from the top for strict control is of a lesser priority.

Those who set a tone of importance to internal controls will have well-thought-out processes and documented procedures, and they’ll take a more proactive and wholistic approach when introducing a new product, process, or service.

The tone from the top can also impact day-to-day operations in a negative way. If leadership puts emphasis on running lean and efficient at all costs, this will trickle down to how your area functions. Employees may ignore or not consider regulatory compliance, leaving your organization exposed to fraud, misstatements, reputational issues, compliance violations and more. This typically results in a more reactionary environment.

Here’s a good example: How does senior management feel about auditors and examiners? Some welcome the scrutiny, looking for every opportunity to improve the organization. Other leaders, not so much.

In some organizations, leaders don’t necessarily welcome external insights. When this is the case, it does indeed trickle down and throughout the organization, resulting in a more defensive environment.

Can this cause conflicts? Absolutely. An employee needs to be able to reconcile their personal priorities with the tone from the top.

Communicating tone from the top

How is your tone is projected?

Picture yourself as a manager in an organization that’s merging with another. Everyone is in agreement that the merger is best for the organization and its various stakeholders. During merger meetings, everyone is upbeat, and the tone from the top in the meetings reflects that. But at the end of the day, after hours of merger meetings, when you talk with your employees, do you highlight the positive parts or the negative parts? If you only communicate the negative parts, the true tone from the top doesn’t make it out to everyone in the organization, and some employees’ morale may falter because the tone that came across was negative.

Another situation you may come across is verbal versus nonverbal tone from the top. While verbally everyone may agree with a leader, the non-verbal clues can say otherwise. Employees may not actually agree with the leader and may even directly contradict their wishes. This has the potential to cause internal conflict, loss of morale and even the loss of employees.

Can you always control the tone from the top? Maybe not all of it. But you can control, or at least mirror, your tone with the organization’s tone. When your tone is reconcilable with the tone from the top, it results in a productive and satisfying experience for all involved.

Strengthen your internal audit

You may have a positive tone from the top when it comes to your internal audit, but you may not have the resources you need. Wipfli can help. Whether it’s outsourcing your internal audit, co-sourcing your audit or training your internal auditors, we have deep experience and can assist you as needed. Click here to learn more.

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Author(s)

Michael P. Moreau, CIA, CFE, CFSA
Manager
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