Bosses should take blame for bad corporate reports, says Big Four’s EY
One of the UK’s biggest audit firms has said top bosses and directors should take individual responsibility if their companies make errors in financial reports.
EY, one of the Big Four audit firms, said regulators should adapt the US system of corporate responsibility, which stipulates C-level executives must personally confirm the integrity of their companies’ submitted accounts, to the UK market.
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In a memo to the firm’s partners seen by City PM, EY’s UK chairman Steve Varley said: “Management and directors (including audit committees) are primarily responsible for the accuracy of corporate information, upon which shareholders and stakeholders rely. They must play a greater role in that regard and should be held accountable through a framework of enhanced regulatory oversight.”
The firm’s comments, details of which were first reported by Sky News, arrive as part of a quickfire review of the sector by the Competition and Markets Authority (CMA), which is looking at how to drive competition in audit following several major scandals.
Varley said the UK could create its own version of the US Sarbanes-Oxley reforms – introduced in the US after the seismic collapses of energy firm Enron and telecoms company WorldCom – which he said could be called UK-SOX.
EY is the first of the Big Four firms, which collectively audit 97 per cent of the FTSE 350, to have its response to the CMA revealed. The other three – Deloitte, KPMG and PricewaterhouseCoopers – said they would wait for the CMA to decide whether to release all their replies.
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EY declined to comment.
Together, the four firms have been accused of ‘cartel-like' behaviour by Labour, and were subject to stinging criticism by MPs for their role in the collapse of construction giant Carillion. Among several high-profile cases in recent years, auditors have also come under fire for their role in the collapse of department store BHS and, recently, serious and potentially fraudulent accounting errors at cafe chain Patisserie Valerie – which was audited by challenger firm Grant Thornton.
Sector regulator the Financial Reporting Council (FRC), described as “toothless” in a parliamentary report earlier this year, is also under review. On Friday, its chief executive Stephen Haddrill announcing that he would step down at the end of next year.
EY’s response joins those of industry body the Institute of Chartered Accountants in England and Wales (ICAEW), and Mazars, a challenger audit firm – both of which have called for the CMA to look at caps on market share for the Big Four, and for the introduction of joint audits, in which two or more auditors produce a single audit report for which they carry shared liability.
Read more: Mazars says joint audits and market caps are solution to audit sector woes
David Herbinet, Mazars’ global head of audit, told City PM joint audits were “the most guaranteed way of delivering change in the market.”