Risky business: Why auditors ignore company safety culture at their peril

Accountants and auditors should recognise that a company's culture and 'tone at the top' can have a profound impact on operational safety, risk-taking, and ultimately, financial position, according to Professor Russell Craig, Head of Victoria University's School of Accounting and Finance, and his co-researchers.

In a paper published in the New York State Society of CPAs in the CPA Journal, Professor Craig, Professor Joel Amernic (University of Toronto), and Professor Dennis Tourish (Royal Holloway, University of London), argue that a company's corporate culture – and its impact on safety operations – must be assessed and given due acknowledgement if audited financial statements are to be fair and accurate.

Using BP's 2010 Deepwater Horizon oil spill as a case in point, the researchers say that auditors should broaden the notion of what an audit is, so that operational risks generated from a company's culture and management tone are factored into potential liabilities.

The researchers present evidence to suggest that BP's 'tone at the top' and corporate culture (and consequently its management and operational systems) were dysfunctional. Not only did the company have a poor safety record, but another disaster appeared almost inevitable.

"A close examination of BP's tone at the top and consequent culture reveals a h­igh likelihood that a major man-made safety-related disaster would befall BP every few years...[Yet] no acknowledgement of the company's susceptibility to disaster was included in the company's financial reports or was identified by conventional auditing procedures," the paper notes.

"In such circumstances, in the interests of fairness of presentation, we submit that a provision for disaster should have in fact been made in the accounts."

The absence of a "provision for disaster" in BP's financial statements – one that would take into account the array of environmental and legal costs that would follow a future major disaster – meant that BP's audited financial statements did not comply with the  "fairness of "presentation" objective outlined in International Financial Reporting Standards (IFRS), the researchers argue.

Professor Craig said that while it would have been impossible for BP to predict which of its operations would be the site of a future disaster, "there was a strong case that a liability existed and was growing by the year".

If financial statements are to be the fair presentations that they claim to be, he said, auditors needed to take a more holistic approach and scrutinise more than just the numbers.

"These things have an impact -- a corporate culture that over-values cost-cutting to the detriment of safety will more than likely have financial consequences down the line -- so they should be taken into account by auditors if the provision of fair and accurate financial statements is the goal," Professor Craig said.

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