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Assessing Your Financial Institution's Culture

Financial institutions are constantly searching for ways to increase the success of their business, whether by trying to increase profits and return on capital or simply pushing into uncharted territory. To accomplish this and ensure that there are no surprises, traditional audits usually focus on areas such as asset-liability management (ALM), Bank Secrecy Act (BSA) compliance and information technology general controls (ITGC). However, a bank or credit union’s corporate culture is a factor that is often overlooked and, if evaluated, could prove to be a useful tool in the journey to success.

Is your culture as good as you think it is?

Made up largely of repetitive habits and emotional responses, a corporate culture is the culmination of shared beliefs, values and standards held by members of an organization that determine the institution’s nature. The root of an institution’s culture lies in its goals, administration, codes of conduct, strategies, relationships with clients and its overall community. A good culture will energize employees, encourage ethical decisions and instill confidence and pride in the workforce. Adversely, a bad culture could damage productivity and employee commitment, undermining the chances for long-term success.

How to Build and Maintain a Good Culture

The creation of an institution’s culture starts at the top. The board has complete oversight of the culture and should establish and monitor an ethical framework. Senior management then implements and maintains the desired behaviors, and hopefully leads by example. The human resources department is then tasked with shaping and reinforcing changes within the culture.

In order to create a solid culture within a financial institution, there should be an established code of conduct. Furthermore, employees must be fully trained on this code, and the rules set out should be enforced at all times. Institutions with good culture have clear and consistent communication between employees and management, and the desired behaviors of the culture are directly exemplified by executives.

Once these elements are in place, the internal audit team (IA) should assess whether the lived culture is aligned with the desired culture. To do so, it is crucial to analyze the effectiveness of those elements and suggest possible solutions to any problems that arise. Are prior audit report ratings strong, weak or a mixed bag? What are the SOX and compliance testing results revealing? Are they sending up red flags? Are there things that are poorly controlled or designed? Or are you getting a lot of positive feedback that says operations are well-controlled?

From there, IA needs to begin searching for patterns and connecting the dots between all of these assessments in order to implement the next steps to assess the corporate culture. Why is a particular finding problematic? Are people stretched too thin to do what is required of them, so they cut corners? Is management taking care of it by making the fixes that need to be made and making sure those fixes work?

It is critical to determine the root cause of the problem, and not just treat the symptoms. Data analytics and continuous controls monitoring, internal audit risk assessments and even whistleblower hotline reports are all exceptional ways to keep track of an institution’s cultural well-being.

The Effects of a Bad Culture

Bad culture holds the potential to have a tangible, negative impact on a financial institution. Take Goldman Sachs, for example. The firm was recently accused of taking part in one of the largest scandals to ever hit the banking industry. In short, Goldman helped raise $6.5 billion for a Malaysian development fund, more than $2.7 billion of which was allegedly embezzled and used to bribe government officials and purchase luxury items, according to prosecutors.

A similar situation occurred at Wells Fargo in 2016. The company pressured employees to increase the number of accounts that the bank opened, and heavily incentivized them to do so. Because of the pressure from above, employees then began opening fake accounts for clients, leading to the company establishing millions of unauthorized accounts.

These companies were negatively affected in everything from profits to reputation to client retention due to poor choices that could have possibly been avoided had there been a better culture in place. Financial institutions could gain a competitive advantage if they broaden their auditing universes to include ongoing assessment of their culture.

How should they go about evaluating culture? Start by asking these three questions. Does the institution’s culture:

  • Set the tone at the top?
  • Establish standards of conduct/ethical framework?
  • Address deviations in a consistent, timely manner?

From there, the institution can conduct anonymous surveys, review whistleblower hotline activity and analyze commission plans to align them with cultural expectations. By focusing on communicating effectively, treating employees fairly and highlighting customer service, institutions can strengthen the building blocks of an effective culture.

When analyzing areas of the institution that could possibly be reformed in order to maximize success, it would be beneficial to review the current culture to examine its strengths and weaknesses. Although focusing on factors such as ALM, BSA and ITGC is critically important, evaluating culture may be the next step that an institution can and should take to further improve business.

Disclaimer: The views and opinions expressed in this article are those of the author(s) and do not necessarily reflect the official policy or position of the Financial Managers Society.

About the Author
With more than 25 years of experience providing internal audit and risk management to various organizations, Scott Baranowski oversees a team of professionals in developing solutions and addressing client internal audit, risk management and SOX compliance needs as a Principal and Director of the Internal Audit Services group at Wolf & Company. Scott also currently serves a Director-at-Large on the FMS Board of Directors.