In this statement, SEC Chief Accountant Paul Munter discusses the importance of setting the tone at the top. According to Munter, “academic research has ‘long stressed the crucial role that tone at the top, set by leadership, plays in influencing firm culture and how it is ultimately reflected in the actions and behaviors of [auditors].’ The tone at the top of an audit firm determines whether the culture is focused on delivering high-quality audits or is a profit-center chasing the short-term bottom line, and whether ‘top management extols the important role audits play in the capital markets’ or acts as if audits are little more than compliance ‘commodities.’” Although he talks in terms of auditors, some of Munter’s recommendations may prove useful for companies in establishing their own ethics environments and tone at the top.
In particular, Munter points out that “setting a proper tone at the top is critical in supporting auditors’ ability to exercise professional skepticism—having an attitude that includes a questioning mind and a critical assessment of audit evidence at all times.” Professional skepticism can involve additional time and costs, so “for a less-experienced accountant on an engagement team to be empowered to exercise such skepticism, they need the unwavering support of engagement team and firm leadership, who should shield members of the engagement team from client pressure and resist the desire to wrap up an engagement quickly so that they can move on to the next book of business.”
Munter identifies quality control as another context where tone at the top is critical:
“[l[eaders who understand and are dedicated to their role in protecting the interests of investors through adherence to professional ethics, values, and attitudes—and instilling those priorities in their employees—are the foundation of a strong quality control system. So when firm leadership fails to set a strong tone at the top—for example, by sweeping mistakes and bad behavior under the rug, treating violations of law as isolated incidents or the ‘cost of doing business,’ not holding wrongdoers throughout the firm and across service lines accountable, or changing their firm structures in ways that could pose future independence challenges for the firm with respect to its audit engagements—they risk eroding the firm’s culture, professional skepticism, quality control systems, and public responsibility as gatekeepers of our capital markets.”
What does Munter advocate to instill a healthy tone at the top? While codes of ethics are useful, and extolling them is even better, Munter says that it’s action that really matters. According to Munter,
“all those words and policies can easily be diluted or undermined by leadership’s ‘tone,’ which is exhibited by actions. For instance, does firm leadership support their staff when tough calls need to be made in compliance with ethical and professional obligations? When mistakes are made or bad behavior is uncovered, does leadership candidly admit those mistakes, take corrective action, and share lessons learned with staff? When a top-earning partner that wins engagements has been suspended in an enforcement action for unethical behavior, does firm leadership hold that partner and themselves accountable in a transparent manner to mentor and cultivate ethics and integrity in the next generation of partners? Do the firm’s expectations about ethics and integrity apply to all professionals in the firm, and not just to those who provide audit and attest services?”
Because more junior staff watch what their managers do, if “they see their managers bend the rules or make exceptions for profitable partners who engage in inappropriate conduct, less-experienced staff may assume that this behavior is the path to rise through the ranks. This is why firm leadership must make ethics and character a fundamental part of the firm’s hiring, retention, and promotion criteria for all professionals, regardless of service line within the firm—even at the expense of a more profitable bottom line in the short-term.” He suggests that “professional integrity and ethics should be an integral part of the promotion and compensation process.” In addition, he recommends that employees “be able to share their views confidentially on the company’s culture and climate. Survey results should be shared throughout the organization in a way that maintains the anonymity of respondents. Staff also should be empowered—or perhaps even required—to report misconduct when they’re aware of it. And of course, retaliating against or threatening a whistleblower should never be tolerated.” He also rails against alternative practice structures that “may pose serious challenges for the audit firm’s future ability to comply with independence rules, [which] risk sending a message to staff that complying with professional standards, providing high-quality audits, and fulfilling its public watchdog role are not the firm’s highest priority.”
In the end, he concludes that it is critical for leaders to “lead by example and foster a healthy tone at the top by prioritizing integrity and professionalism over profit and growth.”
