EY’s auditors will have their pay determined by a new committee of independent non-executives as the group prepares to split its operations in response to regulatory reforms targeting the UK’s largest accounting firms.
The Big Four auditor announced the change on Monday alongside the creation of a new independent board that will oversee its audit practice in the UK.
The shake-up is part of a partial split of EY’s audit and non-audit businesses in the UK ahead of a 2024 deadline.
EY and the other Big Four accountants — Deloitte, KPMG and PwC — agreed with the Financial Reporting Council last year to ringfence their UK audit businesses from their tax and advisory arms after public outcry at auditors’ failure to sound the alarm before corporate collapses, including at BHS and Carillion.
The FRC’s principles for this “operational separation” include requirements that non-executives should oversee audit partner pay and that pay should be based primarily on the quality of partners’ work and leadership, rather than on other factors — such as passing business to other parts of the firm.
The changes, intended to reduce conflicts of interest and improve audit quality, are also designed to increase auditors’ independence by preventing the audit divisions of the Big Four from receiving cross-subsidy from other parts of the business.
EY is under investigation by the FRC over its audits of travel firm Thomas Cook and former FTSE 100 hospital group NMC Health.
EY’s UK audit board will be chaired by David Thorburn, who is already an independent non-executive at the firm. The board will also include Mridul Hegde, a non-executive director of HSBC UK, and Philip Tew, a former PwC partner. A new audit remuneration committee, made up of independent non-executives, would oversee the remuneration policy of the audit business, EY said.
Hywel Ball, EY’s UK chair, said the introduction of the audit board was “a significant milestone in the operational separation of our UK audit practice”.
“To be truly effective though, it’s important that operational separation is accompanied by changes in the wider corporate governance and audit ecosystem through the government’s proposed package of reforms,” he added.
The proposed corporate governance reforms, which would make directors personally liable for information in company accounts, are open for consultation until Thursday.
The creation of EY’s audit board follows the introduction of similar oversight bodies at rival Big Four firms.
PwC’s audit oversight body, chaired by former Whitehall mandarin Philip Rycroft, began meeting in October while Deloitte’s audit governance board has been in place since the start of the year.
KPMG is yet to announce the appointment of external non-executives to its UK audit board but plans to do so before the 2024 deadline, a person briefed on the matter said.
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EY announces creation of independent auditor pay committee - Financial Times
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