Deloitte Breaks Cover in an Attempt to Reduce Reform


It was only earlier in the month that we looked at the comments made by the new Head of the Financial Reporting Council (FRC) regarding the audit oligopoly and the potential of reforms heading its way. In today’s business press, it is being reported that Deloitte – the second-largest British accounting firm – has altered its policies so that now Non-Executive Directors have the final say regarding the level of pay and bonuses that its auditors can obtain. In this short post we will look at these plans and assess the validity of the move with regards to the potential of regulatory reform making its way to the sector.

The Financial Times was clear this morning that the move was purely aimed at preventing ‘the perception of conflicts of interest between its audit and consulting divisions and avoiding a forced split’. The article says that the Non-Executive Panel – which includes former Barclays Chairman Sir Gerry Grimstone – ‘will review the policies and performance metrics by which Deloitte’s auditors are paid and monitor individual remuneration’. One of the reasons why this alteration to the firm’s policies has been brought in is because they are attempting to dampen criticism relating to the fact that auditors are paid from the firm’s total profits, which of course includes profits from the consultancy arm of the business. Sir Grimstone interestingly argued that the risks of conflicts emanating from the remuneration dynamic discussed above are low because ‘in partnerships, everyone is very aware of what everyone else gets paid and so there is a lot of self-policing that goes on’. The Chief Executive of the ICAEW was pleased with the development, which rival PriceWaterhouseCoopers are said to be considering also, stating that ‘it would be in accordance with the original vision for the audit firm governance code for them [the Non-Executive Board] to play an increasing role in decisions which are important to the public’.

However, Sir Grimstone’s assessment does not look at the wider picture. The issue for the public, as the ICAEW rightly focus on, is the perception of a transgressive culture founded upon the profits derived from consultancy services. Lest we forget, this dynamic threatened to rip apart the sector only two decades ago. It is therefore telling that Deloitte have taken this move in the same year that ‘Partners at Deloitte UK will receive their biggest payday in a decade’. This pay out, whereby the firm’s equity partners will be handed an average profit share of £882,000 – a 6% increase from 2018 – will do nothing but provide more fuel to the fire that is producing plenty of smoke in the sector. It will be interesting to see how this morning’s news is received by the wider sector on top of the comments already made by the ICAEW. Will it be the case that on the back of a number of high-profile and impactful failures on the watch of the Big Four auditors (and the top-six as well) the way out for them is to put remunerative policies in the hands of a non-executive board? That will probably appear to be quite a come-down from regulators after all the talk of incisive regulatory reform.

Keywords – Audit, Business, Deloitte, Accountancy, UK, @finregmatters

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