Associate Professor Colin SharpFIPPM Flinders University,

Adelaide, SA, Australia

(with assistance from David White, BCI Ltd)

HOW CAN AUDITORS ACCOUNT FOR

ORGANISATIONAL CULTURE,

ORGANIZATIONAL LEARNING AND CHANGE

MANAGEMENT ?

Flinders Institute of Public Policy and Management

“… a changing management philosophyand culture are changing the face

of internal auditing”(OAG-BVG, 1992, p.43)

The Office of the Auditor-General of Canada

How can we Audit a ‘learning organisation’if we can’t define & measure:- organisational culture- organisational learning?

Let’s look at some concepts and research on theseissues to see if we can make it clearer for auditing in the context of these changing management theories and practices?

Emic Approach to Culture"cultural behavior should always be studied and categorizedin terms of the inside view - the actors' definition - of human events. That is, the units of conceptualization in anthropological theories should be `discovered' by analyzingthe cognitive processes of the people studied, rather than `imposed' from cross-cultural (hence, ethnocentric)

classifications of behavior." (Pike, 1954 in Pelto, 1970, p. 54)

Etic Approach to Culture"An etic analytical standpoint ... might be called `external' or `alien' since for etic purposes the analyst stands `far enough away’from, or `outside' of a particular culture to see its separate events, primarily in relation to their similarities and their differences, as compared to events in other cultures, rather than in reference to sequences of classes of events within that ...particular culture."

Anthropologists have an insight into the Difficulty of Auditing

REVIEWING THE ROLE OF INTERNAL AUDIT

John Servage (June 1998, Internal Auditor, p. 104)(Chief Internal Auditor, Workers Compensation Board Alberta, Canada)

“... in our conviction that to be independent and effective, we need to remain detached from the organisation and its people. In many ways this position has been harmful....Control Self-assessment...CSA, with its remarkable capacity to enhance corporate communication and foster cross-culturalization, has shown us how to become true agents of our corporate cultures.”

How can Management Accountants &Internal Auditors

be involved in constructive culture change when the language of accountability is

conceptually restrictive?

A CULTURE OF COMPLIANCE ?Professor Allan Fels (March 1999) Chairman of the ACCC announcing the Australian Standard on “Compliance” advocated that:"Corporate Australia needs to recognise the concept of a'Culture of Compliance'. Management literature is full of discussions about corporate culture. These discussions focus on predominant values that drive decision-making and performance in the corporation. rate. A company with a culture of compliance is one in which a dominant value from top to bottom favours activities which support compliance with laws.Such a culture doesn't prevent a company from winningmarkets through innovation and high quality goods and services.”

Organisational Culturelike discrimination is Responsibility of the Governing Body

For example, the Sex Discrimination Commissioner, Moira Scollay in 1997 said:

“Sex discrimination is deeply ingrained in the way we work. It is part of the workplace and industry culture.”

But this makes it a risk or liability for the Board of Directors & Management, as the Australian Human Rights and Equal Opportunity Commissionfound in favour of Dunn-Dyer vs ANZ Banking Group Ltd.in the sex discrimination case of 1997 (HREOCA 52 29-97) against the “male dominated atmosphere and environment” of the “dealing room”. The Commissioner found that the respondent (represented by ANZ Bank’s Board and CEO) had a “vicarious liability” for the discriminatory actions,including language and attitudes of the male managers.

This responsibility was also reinforced by the Holden v Anther Pty Ltd case in the WA Equal Opportunity Tribunal decision of 1997. Where the Managing Director of the Company was held personally responsiblefor not instructing his staff about what were inappropriate attitudes and behaviour and so not to be tolerated in his workplace.

CASE STUDY: NASA's SpaceShuttle Challenger

WASHINGTON: Houston Chronicle Washington Bureau (10/08/86):

Congress and the administration share blame forsetting "unrealistic goals" that prompted the spaceagency to launch the space shuttle Challenger inunsafe conditions, the House Science andTechnology Committee said. … "NASA's drive toachieve a launch schedule of 24 flights per yearcreated pressure throughout the agency thatdirectly contributed to unsafe launch operations,"the report said. (Clayton, 1998)

DEFENSIVE ROUTINES ARE A RISKRegarding NASA's disaster Prof. Argyris (1990, p. 43) concluded:" Organizational defence routines make it highly likely thatindividuals, groups, intergroups, and organizations will not

detect and correct the errors that are embarrassing and threatening because the fundamental rules are to(1) bypass the errors & act as if that were not being done, (2) make the bypass undiscussable, and (3) makes its undiscussability undiscussable.”… These conditions, in turn, make it difficult to engage the organizational defense routines in order to interrupt them and reduce them. Indeed, the very attempt to engage themwill lead to the defensive routines being activated and strengthened. This, in turn, reinforces and proliferatesthe defensive routines".

Management by ProcessThe culture of fads and quick fixesnnWhen problems arise find the When problems arise find the ‘‘right processright process’’, ,

apply it quickly and then move on to the next oneapply it quickly and then move on to the next onenn There is no situation that cannot be fixed by There is no situation that cannot be fixed by

process, so letprocess, so let’’s buy them, such as:s buy them, such as:– TQM, business planning, participative work teams,

benchmarking– Risk management, control self assessment, internal

audit

nn Promulgation of the Promulgation of the process as the answerprocess as the answernnDecline of management as a professionDecline of management as a profession

Quick Fix

Cycle

1. Drivers for Change• Competition / Contestability• Need for returns byInstitutional Investors

(C) CopyrightBCI 1998

2. Pressureto Perform

3. Short Term Focus for Performance Improvement

4. Imposed Change• Cost Cutting• Process Fixes

5. Employee Compliance• Fad Fatigue• Conformance Behaviour• Low Morale

6. Low ReturnsPerformance Failures& Write - downs

““WeWe’’ve tried everything ve tried everything -- TQM, best practice, TQM, best practice, ‘‘stick to your stick to your knittingknitting’’, cultural change, visioning, downsizing and none , cultural change, visioning, downsizing and none of it has worked. I therefore propose we revert to three of it has worked. I therefore propose we revert to three hour lunches, and golf on Tuesday and Thursday hour lunches, and golf on Tuesday and Thursday afternoonsafternoons””

A refreshingly honest Board/Management?

AICD Model of Directors Roles

External Focus

Internal Focus

Conformance(Past / Presentfocus =Rules)

Performance(Future

focus = Risks)

Accountability to Stakeholders

Communication with lenders, regulators,

stakeholders external audit

Setting StrategicDirection

Strategies, plans & performance targets

Monitoring ResultsMonitoring plans, policies

& procedures

Setting PolicyGovernance

FinanceOHS

Cause of Corporate FailuresConformance Culture

““Failures usually result from a few well intentioned Failures usually result from a few well intentioned but flawed management decisions that are not but flawed management decisions that are not sufficiently challenged in an effective manner......sufficiently challenged in an effective manner......The answer lies in creating a model of corporate The answer lies in creating a model of corporate governance in which the focus is not on governance in which the focus is not on monitoring managers but on improving decisionmonitoring managers but on improving decision--making, entering debate, bringing in better making, entering debate, bringing in better information, offering new perspectives, reducing information, offering new perspectives, reducing false consensus and insularityfalse consensus and insularity””

(John Pound (John Pound The Governed Corporation The Governed Corporation 1995)1995)))

Evaluative Culture?Remedy?

Accounting Information limits the ability ofInternal Auditors & Management Accountants

to deal with Organisational Change such as Organisational Learning

Kaplan (1986) used the term “Accounting Lag” to point out that Management Accounting has been generally unresponsive to organisational developments, such as organisational learning.

Emsley (1997 Macquarie University) surveyed Australian Managers and found this “lag” could be about2 years to introduce management data about “quality”

To Succeed Financiallyhow should we appear to OWNER/PURCHASER?

FINANCIALObjectives Measures Targets Initiatives

To Achieve Our VISION how should we SUSTAINOur LEARNING?

LEARNING & GROWTHObjectives Measures Targets Initiatives

To SATISFY Our STAKEHOLDERSwhat business processes?

INTERNAL BUSINESS PROCESSObjectives Measures Targets Initiatives

To Achieve Our VISIONhow should we appear toOur CUSTOMERS?

CUSTOMERObjectives Measures Targets Initiatives

A BALANCED SCORECARD? to Overcome the Limitations of Management Accounting?

(based on Kaplan & Norton, 1996, p. 76 & MAB, 1997, p. 50 -54)

How can we Audit?

Domain B:Corporate Memory?

Domain A:Organisational Culture?

"only cultures can learn"

“creating, acquiring, & transferring knowledge".

KEYS TO ORGANIZATIONAL LEARNING

Hampden-Turner (1992) Garvin (1993)

"A learning organization is an organization skilled at creating, acquiring, and transferring knowledge, and at modifying its behavior to reflect new knowledge and insights". (Garvin, 1993, p. 80)

LEARNING ORGANIZATIONThe Organisational Learning literature sees“The learning organization” as a theoretical ideal type

of organisational culture.

"There is something paradoxical here. Organizations are not merely collections of individuals, yet there are no organizations without such collections. Similarly, organizational learning is not merely individual learning, yet organizations learn only through the experience and actions of individuals.

What, then, are we to make of organizational learning? What is an organization that it may learn?" (Argyris & Schon, 1978, p. 9)

ORGANISATIONAL LEARNING?Surfacing the Dilemmas of an "International Learning Race"

"Organizational learning is a competence that all organizations should develop ... the better organizations are at learning the more likely it is they will be able to detect and correct errors, and to see when they are unable to detect and correct errors. Also, the more effective organizations are at learning the more likely they will be at being innovative or knowing the limits of their innovation.

An error is any mismatch between plan or intention and what actually happened when either is implemented." (Argyris, 1992, p. 1, italics added)

ORGANISATIONAL COMPETENCE

KEY DIAGNOSTIC FEATURES OF ORGANIZATIONAL LEARNING AND THE LEARNING ORGANISATION

In order to be useful ODx tools for internal audit and program evaluation, concepts of organizational learning and the learning organisation, should meet the following criteria (cf Harrison, 1994; Manzini, 1988):1. Clearly and consistently define the key concepts2. Share a consistent theoretical framework which enables

prediction of system behaviour and identifications of solutions to system malfunction

3. Identify relevant operational tools which can be used in ODx and performance evaluation

4. Be applicable to all types of organisations (ie. public sector, third sector as well as private sector)

5. Identify the organisational lines of accountability, roles and sources of responsibility.

PROBLEMS WITH ORGANISATIONAL LEARNING THEORY & PRACTICE

But there are difficulties on the following points:· the diversity of definitions and concepts, which leads to confusion and a fail on criterion 1

· The concepts are difficult to operationalise, e.g., a key method of ODx is through the concept of mental modelswhich are defined by Senge (1990b, p. 174) as:

“internal images of how the world works, images that limit us to familiar ways of thinking and acting. That is why the business of managing mental models -surfacing, testing, and improving our internal pictures

of how the world works- promises to be a major breakthrough for building

learning organizations.”· There is little convincing evidence from comparative evaluation or longitudinal research, & too much anecdotal case study

"An integrated model of organizational learning organizes all of theelements ... into a cohesive framework ... I call it the OADI-SMM model:observe, assess, design, implement - shared mental models. It addressesthe issue of the transfer of learning through the exchange of individualand shared mental models." (Kim, 1993, p. 42)

HOW TO INTEGRATE INDIVIDUAL & GROUP LEARNING

WITH ORGANISATIONAL LEARNING

• Observe• Assess• Design• Implement Shared

Mental Models?

Nancy Dixon’s 1994Organizational Learning CycleMcGraw-Hill.

ExperientialLearning Cycle

Generate

Integrate

Interpret

Act

ConcreteExperience

Abstract Conceptualisation

ReflectiveObservationActive

Experimention

Relationship between Individual and Organisational Learning

"The culture of an organization defines appropriate behavior, bonds and motivates individuals, and asserts solutions where there is ambiguity. Culture governs the way a company processes information, its internal relations, and its values. It functions at all levels from subconscious to visible." (Hampden-Turner, 1992, p. 1)

ORGANISATIONAL LEARNING AS ORGANISATIONAL CULTURE

Results

Principles

Operating

Oversight

StakeHolders

LeadershipManagement

AssuranceAssertions

IIA AustraliaControl Criteria

IIA AustraliaIIA Australia’’s s Australian Australian Control CriteriaControl Criteria

Toolsnot

RulesCulture

CompetencyCompetency

Proc

ess

ControlProc

ess

CultureCompetency

Australian Control Framework (Australian Control Criteria, 1998, p. 3)

Values:Trust, Effectiveness,Appropriateness,Flexibility, EquityParticipation &Self-control

"A main problem in the study of organizational change is that the environmental contexts in which organizations exist are themselves changing, at an increasing rate, and towards increasing complexity." (Emery & Trist, 1965, p.21)

HOW DO WE DEFINE OC?(The Iceberg of Organisational Culture )

= a group’s shared values and behaviour patterns

Organisational Structure

Strategic Statements INFORMAL:(intangible,below)

FORMAL:(above the surface)

Public Postures

Paradigms & Attitudes

Organisational Memory

Corporate KnowledgeValues & Assumptions

An “Evaluative Culture” ?

"One of the most exciting developments in recent years has been the growing emergence of an evaluative culture."

Sedgewick (1994, p. 22) Secretary of the Commonwealth Department of Finance

Evaluative Culture in the NewsThe last issue of the Evaluation Journal of Australasia had 2 papers:

“Creating an evaluative management culture… an organisational culture wherein policy and programmanagers in the development and implementation stagesconstantly check whether their efforts are having a positive… effect for clients and society… and if not what needs to be done instead” (Ryan, 2003, p. 9)

“An evaluation culture can be regarded as a commitment to roles for evaluation in decision-making within an organisation …This is systematic enquiry which is initiated and controlled by members of the organisation, and is carried out with the explicitpurpose of contributing to the stock of its working knowledge. Enquiry of this nature is not undertaken routinely, but in response to the need for empirically based knowledge ...regarded as strategic”(Owen, 2003, p. 43)

"The evaluation strategy has been operationalised into a set of procedures that agencies have grown accustomed to, and they are undertaking a great deal of programme evaluation activity. An irony here is that, once again, there may have been a tendency to focus on the procedures, not the results. Everyone is doing evaluation, following the procedures laid down. The success of the process is being measured in process terms... not in terms of program outcomes. ...In sum, the reforms are only half-complete. ... many of the changes already put in place are still taking effect and, even with no further direct initiatives, will lead to further improvements in agency performance in due course."

The Task Force on Management Improvement of the Management Advisory Board and the Management Improvement Advisory Committee of the Commonwealth (MAB-MIAC, 1993, pp. 472 - 473)

CASE STUDY: Commonwealth Evaluation Strategy?

Evaluation Research can test for an Evaluative Culture

C O M P E T I N G V A L U E S F R A M E W O R K( Q u i n n & C a m e r o n , 1 9 8 3 ; Q u i n n & R h o r b a u g h , 1 9 8 3 )

i s a r r a n g e d a r o u n d t w o d i m e n s i o n s :

⇒ f l ex ib i l i t y ⇔ r ig id i tyo f c o n t r o l ,

⇒ i n t e r n a l ⇔ e x t e r n a l f o c u s o f v a l u e s .

Dr John Stanwick started as Internal Auditor in Commonwealth- DAS (1990) “culture audit” used CVF questionnaire - PhD (2000) developed new OC questionnaire for Public sector

External

Flexibility of Controll

Rigidity of Control

Internal

HUMAN RELATIONS MODEL

INTERNAL PROCESS MODEL RATIONAL GOAL MODEL

OPEN SYSTEMS MODEL

1 52 3 4

1. Dominant Characteristics (use the scale to rate out of 5 points.)

Not at all 2 Moderate Extent 4 Very Great Extent1|__________|__________3__________|__________| 5

__ a. This program (business unit) is a very personal place.It is like an extended family.

People seem to share a lot of themselves.__ b. This program is a very dynamic and entrepreneurial place.

People are willing to stick their necks out and take risks.__ c. This program is a very formalised and structured place.

Bureaucratic procedures generally govern what people do.__ d. This program is very competitive in orientation.

A major concern is with getting the job done. People are very production and achievement oriented.

THE COMPETITING VALUES TEST OF ORGANISATIONAL CULTURE

Each of the questions contains four different descriptions of the subprogram (business unit) you work for. Please give each a rating of up to 5 points depending on how similar the description is to your Organisation, Unit or Program. None of the descriptions is any better than the others; they are just different.

CVF TEST: (CONTINUED)

5. Criteria of Success (use the scale to rate out of 5 points.)

Not at all 2 Moderate Extent 4 Very Great Extent1|__________|__________3__________|__________| 5

__ a. This program defines success on the basis of its development of human resources, teamwork, and concern for people.

__ b. This program defines success on the basis of its having unique or the newest products. It is a product leader and innovator.

__ c. This program defines success on the basis of efficiency. Dependable delivery, smooth scheduling, and low cost production are critical.

__ d. This program defines success on the basis of market penetration and market share.Being number one relative to the competition is a key objective.

6. Management Style (use the scale to rate out of 5 points.)

Not at all 2 Moderate Extent 4 Very Great Extent1|__________|__________3__________|__________| 5

__ a. The management style in this program ischaracterised by teamwork, concensus, and participation.

__ b. The management style in this program ischaracterised by individual initiative, innovation, freedom, and uniqueness.

__ c. The management style in this program ischaracterised by individual security of employment,longevity of position, and predictability.

__ d. The management style in this program ischaracterised by hard-driving competitiveness, production, and achievement.

CVF TEST: (CONTINUED)

The intersection of these two dimensions are presumed to result in four culturestypes. These are:

⇒ Human Relations Model (Flexibility & Internal Focus).cohesion, morale, teamwork, &concern with the development of staff.

⇒ Open Systems Model: (Flexibility & External Focus).insight, innovation, & adaptability in order to meet changing needs.

⇒ Rational Goal Model (Rigidity & External Focus).task orientation and planning, customer-focused?.

⇒ Internal Process Model ( Rigidity & Internal Focus).internal control, rules and procedures dominate & concerned with thestability of the organisation.

According to the espoused "evaluative culture" of the Commonwaelth government it could be said tobe a form of "Rational Goal model" of organisational culture.

4 ORGANISATIONAL CULTURE TYPES

Direction,

Decisiveness

Expansion, Transformation

Maximization of Output

Values:

Values:

Values:Competitive Position

of the Overall System

Traditional Bureaucracy/Hierachical Control

Team Work focus

Development of Human ResourcesValues:

Cosolidation, EquilibriumValues:

MaintenanceValues:

External

CONTROL Flexibility

CONTROL Rigidityl

Internal

HUMAN RELATIONS MODEL

INTERNAL PROCESS MODEL

RATIONAL GOAL MODEL

OPEN SYSTEMSMODEL

SELF-CONTROL CULTURESPOTENTIAL for

External Support, Growth, Resource Acquisition

RISK MANAGEMENT CULTURE

COMPLIANCE CULTURE Productivity, Accomplishment, Profit/Impact

External

Flexibility of Control

Rigidity of Control

Internal

HUMAN RELATIONS MODEL

INTERNAL PROCESS MODEL

RATIONAL GOAL MODEL

OPEN SYSTEMS MODEL

Productivity,Accomplishment,Profit/Impact

Direction,

Goal Clarity

Decisiveness

Expansion, Transformation

Maximization of Output

Values:

Values:

Values:

Competitive Position

of the Overall System

External Support, Growth,

Resource Acquisition

InsightAdaptation

Traditional Bureaucracy/Hierachical Control

StabilityProcedural control

Measurement orientedFocus on documentation

COMPLIANCE CULTURE

RISK MANAGEMENT CULTURE

ConcernCommitment

Morale

Participation

Innovation

SELF-CONTROL CULTURES

Team Work focus

Development of Human Resources

Values:

Cosolidation, Equilibrium

Values:

Maintenance

Values:

POTENTIAL for

EvaluativeCulture

CONFLICTING DIRECTIONS IN ESPOUSED VALUES & CULTURES

Jewell (1992) developed Lotus Agenda’s infosift capability to create PLANSPEC: "... organizational documents, especially strategic (or corporate) plans can be considered as models of an organization and should be tested against a brief (or specification) before they are put into effect. PLANSPEC provides a framework for developingsuch a specification. This framework can then be used as the basis for the plan to be developed. The plan (or organizational model) can then be tested, using PLANSPEC, against the planningspecification/brief and against itself, for consistency."

AN ORGANISATIONAL CULTURE CONSISTENCY METER?

Results for the Comparison of Staff CVF Survey and CATA of thestrategic plan of a large federal Government welfare agencysummed across the document for the four CVF Culture Types(from Table 17 in Sharp, Stanwick and Baulderstone, 1996, p. 21)

CATA ofDocument 2

Staff CVF Survey

Culture Type Relative %(Rank)

Relative % (Rank)

Human Relations 24% (3) 23% (3)Open Systems 26% (2) 20% (4)Internal Process 28% (1) 31% (1)Rational Goal 22% (4) 26% (2)

EVALUATING ORGANISATIONAL CULTURE

Factor Factor LabelNumber

1 Rewarding, Empowering 2 External Achievement 3 Best Customer Service

(Service Ethic)4 Status Quo5 Collegial/Democratic6 Top Down, Conformist

TABLE 3: Stanwick’sFactor Solution for the Actual Culture Responses

TABLE 4: Stanwick’sFactor Solution for the Desired Culture Responses

FactorNumber Factor Label:

1 Empowering, Internal Achievement2 Top-Down, Conformist3 Success thru' Customer Service4 Dynamic5 External Achievement6 Democratic

The implications forManagement Accountants and

Internal Auditors

• Have to be able to define and measure changes inOrganisational Culture

• Only basic research tools available

• Has to be significant injection of resources:* research funds,* time and* development of competence in the non-financialevaluation of change and organisational diagnosis(ODx ).

CAN ORGANISATIONS LEARN WHILE SUFFERING CORPORATE MEMORY LOSS ?

"... the turn-over of relationships with formal

organizational structures brings with it an

increased turn-over of informal organization and a

faster through-put of people as well.

Each change brings with it a need for new learning.

He must learn the rules of the game.

But the rules keep changing."

(Tofler, 1970, p. 143)

Surfacing the Dilemmas of an "International Learning Race"

Since 1989, two million Australians retrenched (of labour force of about 8 million) from 315,300 in 1982 to 450,000 in 1994 (A. B. S., 1994).

Australian companies have reduced labour two and one half times faster than the top 500 American companies which took ten years to impose the same cuts

(Cornford, 1994).

Pre-conditions* definition of corporate memory (see Sharp & Lewis, 1993)

* developing tools for modeling corporate memory data or knowledge (Latta &Swigger, 1992)

* raising awareness of the content, and storage of corporate memory (see Apsey, 1994)

* estimation of extent and awareness of corporate memory loss (see Apsey, 1994; Lewis, Sharp & Apsey, 1995)

Parallels* personal construct theory and the development of methods of investigation

of personal constructs, e.g. REP grid (Kelly, 1955; Latta & Swigger, 1992; Shaw, 1980)

* inter-personal communication assessment tools for the supervisor -supervisee relationship (Barrett, 1995)

* development of group learning (Dixon, 1994; Galagan, 1993; Kim, 1993).

ODx of Consequences of Delayering

Total Corporate Memory was defined as:

CM = f (Ch, Cs, Ph, Ps), where:CM = corporate memory, which is thought to be a function of:

Ch = Corporate hard system data, Cs = Corporate soft system data Ph = personal hard copy dataPs = personal soft data

(Sharp & Lewis, 1993)

Known toStaff Member

NOT Knownto StaffMember

Knownto

Organisation

1]Corporate

Knowledge:Soft & hard

data

2]Priviledgedknowledgesoft & hard

data

NOT Knownto

Organisation

3]Private

knowledgeSoft & hard

data

4]UNKNOWN

or lostsoft data("tacit

knowledge"?)

Sharp & Lewis (1993) identified that there were at least four potential system design limitations which take on significance in the down-sizing and restructuring of organizations, and which should be audited to monitor the potential strategic impact of such risk, viz.:* neglect of the attrition of `personnel memory'

(Ph and Ps data) resulting from the dislocation of staff;* neglect of the effects of this loss on

total corporate memory and on the evaluation and change processes;

* focus on managers' needs in organizational diagnosis & MIS design at the expense of the needs of the workers at the client or market interface;

* a lag between when the system designers commence change and when Auditors or Evaluators conduct their ODx to when the errors become noticeable`

TYPICAL CORPORATE MEMORYSYSTEM DESIGN LIMITATIONS

DISCUSSION QUESTIONs:

So where does all this leave the Auditor?

Can we audit the learning organisation?