Big Four firms to rethink governance  

Big Four firms are reportedly set to reexamine their governance and focus on holding management to account in the coming year, following a series of scandals and audit failures, The Financial Times has reported. 

The paper cited steps Big Four firms have already taken to change their governance structure. For example, EY’s US partners recently voted to introduce a new governance system that includes a board to oversee management and approve strategy, sources told the FT.

The move was reportedly proposed after EY abandoned a plan to split up its audit and consulting businesses after months of internal disagreements from US executives.

Elsewhere, global chair of PwC, Bob Moritz, told the Financial Times that governance reforms in Australia could act as a blueprint for other countries, after the firm outlined plans to install an independent chair in the country for the first time.

In the US meanwhile, the Public Company Accounting Oversight Board has launched a culture review of the Big Four to examine whether there is something wrong with “the tone at the top” and root out the cause of a rise in the number of public company audits that fail to meet regulatory standards. 

Laura Empson, a professor specialising in the management of professional service firms at the University of London’s Bayes Business School, told the FT this debate and reexamination was long “overdue”. 

She said: “The current governance of the Big Four encompasses the worst aspects of partnership governance and the worst aspects of corporate governance. 

“The partnership model eliminates the principal-agent problem, in that owners, managers and major producers are one and the same. At a small scale that can work very effectively. The problem is, when it becomes scaled-up, the leadership becomes more and more divorced from the partners.” 

She added: “The firms haven’t yet come to terms with how much involvement the non-execs need to have in order to perform the role that the regulators are expecting of them. In underestimating the time and commitment of their non-execs, the big audit firms also underestimate how much they need to pay them. As a result, it is not always easy to attract enough of the right people for the job.”

In the UK, the FRC previously recommended the introduction of independent non-executives from outside the firm for those auditing 20 or more listed companies. Its latest audit firm governance code recommends that larger firms have at least three independent non-executives who are in the majority on a supervisory body that oversees public interest matters. 

Under separate plans for the Big Four in the UK, they will be required to have a separate audit board with a majority of non-executives to oversee audit quality and the activities of their audit arms.