UK Big 4 to be audited Quarterly on Employee Conduct Complaint

Key Facts: The UK’s accounting watchdog has told the Big Four firms Deloitte, PwC, EY and KPMG, as well as their smaller rivals including BDO and Grant Thornton, that they must provide quarterly reports on complaints involving professional and sexual misconduct.

What caused this? Last year, 37 UK partners at Big Four firms had been forced out over bullying and harassment issues since 2014, leading to criticism of national accounting watchdog for failing to focus on misconduct claims at the firms it supervises.

Bigger Picture: It was said at the time that there was no duty on firms to inform it of such issues unless the probe involved “regulated activities” such as audit failures. Accounting firms have been given a deadline of October 11 to provide the first round of complaints data, and a separate deadline of August 30 to provide details to the Financial Reporting Council on their whistleblowing, harassment, discrimination and substance abuse policies.

Furthermore, the FRP has demanded information on complaints about alcohol or drug abuse, including the seniority of the employees implicated and their area of business. Even though the UK regulator is not expected to publish the firms’ complaints, it is worth remembering that politicians, academics and former Big Four employees have previously said the FRC should do more to stamp out sexual misconduct and bullying in the industry. Jess Phillips, a Labour MP who sits on the House of Commons’ Women and Equalities Committee, stated in December she was “astounded” that the FRC did not monitor sexual harassment of staff at the companies it monitors. A threat to the reputation of major UK firms is at stake. This, for the first time, exclusively includes matters related to non-financial conduct. The determination of what matters are ‘significant’ in this regard will be subject to the firm’s judgment but should not be limited to audit partners and RIs [responsible individuals] but include all partners of the firm.

Atul Shah, visiting professor at City University in London, said: “The FRC has long been captured by the Big Four and FTSE corporates, never seeing the critical importance of culture and ethics to good corporate management, governance and accountability. It has proved itself to be a regulator with no bite on any major public issue. Time for urgent and radical reform.”

The FRC expects firms to showcase « strong procedures » in place to establish why prospective employees have moved on from precedent firms.

What is an audit failure? It is an instance where the auditor said that the financial statements were fairly stated when in fact, they were not.

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