Deloitte has given a final say over the pay and bonuses of its auditors to its non-executive directors in a first for the accounting sector, as the Big Four firms seek to fend off demands they should be broken up.
The second-largest UK accounting firm’s decision is aimed at preventing the perception of conflicts of interest between its audit and consulting divisions and avoiding a forced split.
The firm’s independent non-executive directors, which include ex-Barclays chairman Sir Gerry Grimstone, will review the policies and performance metrics by which Deloitte’s auditors are paid and monitor individual remuneration. Deloitte partners earned an average of £882,000 in 2019 — their biggest payout in a decade.
Auditors at Deloitte and its main rivals PwC, KPMG and EY are paid from total profits, which include fees made by consultants. This has led to concerns that they could be less motivated to challenge companies over their accounts if this jeopardised more lucrative advisory fees.
The Big Four have strongly denied that their auditors are conflicted by a shared profit pool but agreed the perception of a conflict had fuelled calls from politicians and regulators for a break up. Deloitte’s move to hand oversight of pay to its independent non-executives is an attempt to reduce the risk of a conflict.
None of its rivals have yet made such a move, although PwC UK said in September it was considering a similar change.
The Institute of Chartered Accountants in England and Wales, an accounting professional body representing 150,000 members, has called for independent non-executive directors at the Big Four to do more to police accounting firms on issues such as conflicts and independence.
Michael Izza, ICAEW chief executive, said: “All the larger firms have independent non-executives of significant stature. It would be in accordance with the original vision for the audit firm governance code for them to play an increasing role in decisions which are important to the public.”
The Big Four have come under intense scrutiny over a decline in the quality of their audits following corporate collapses and accounting scandals, including at companies such as Carillion and Patisserie Valerie.
Deloitte said its independent non-executives would have the final say on individual auditor pay for the first time this year as part of a number of measures, ahead of sweeping reforms expected in the accounting sector.
Its non-executives are Sir Gerry, Ruth Markland, a former Freshfields lawyer, and Jim Coyle, formerly financial controller at Lloyds Bank.
Stephen Griggs, UK head of audit, said Deloitte was implementing a “stronger, fully accountable” governance structure in its audit practice “to address issues around incentives and conflicts and preserve resilience”. Other measures will include appointing an independent chair of its audit practice and giving the non-executives oversight of policies linking partner and staff pay to audit quality.
Sir Gerry told the Financial Times the role of independent non-executives at Deloitte had been “gradually strengthened”.
“We started off seeking reassurance about audit quality, we then moved into areas such as culture, helping develop performance dashboards and a range of other activities, including meeting the firm’s stakeholders,” he said. He added that Deloitte’s non-executives were in regular discussion with the Financial Reporting Council, the industry’s regulator.
Sir Gerry played down the risk of conflicts from auditors being paid by fees received by Deloitte’s consulting divisions. “In partnerships, everyone is very aware of what everyone else gets paid and so there is a lot of self-policing that goes on,” he said.
Deloitte has 142 audit partners and a further 127 “responsible individuals”, who are able to sign off its audits. Its largest audit clients include advertising group WPP, petrochemicals company Ineos and defence company BAE Systems.
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