It was reported that EY has been the focus of a request by the charity, ‘Spotlight on Corruption’ (SoC), to the Crown Commercial Service (CCS) – the government’s procurement body – for EY to be banned from bidding on any new public sector contracts. SoC’s argument being that although a number of high-profile accounting firms have recently found themselves under investigation for a variety of failings, EY’s purported misconducts were worthy of special attention.
This article will, therefore, look at the claims behind this letter and the organisation which created it – Spotlight on Corruption. We then ask how can you be sure that your audit partners are worthy of your trust, and offer four tips on how to have greater confidence about that trust.
Who are Spotlight on Corruption?
Their website states: “Spotlight on Corruption works to end corruption within the UK and wherever the UK has influence.” It is a registered charity which monitors court cases that focus on corruption, and tracks and publishes research on the implementation and enforcement of anti-corruption laws in the UK.
Their goal is to monitor the effectiveness of these laws, their impact on those suspected of breaching them, and how things can be improved. They also look to shine a spotlight on those they believe are breaking these laws. It seems EY has caught their attention, hence their letter to the CCS.
Spotlight on Corruption’s EY claims
Spotlight on Corruption suggests that EY is guilty of a “litany of misconduct”. They cite a few examples to support this claim:
- A High Court ruling found in favour of a former EY employee who claimed he was ignored and pushed out of his job for raising concerns over a client’s suspected money laundering and gold smuggling activities which EY reportedly then “helped to cover up”. This was the subject of a BBC Panorama investigation called Following the Drug Money aired at the end of 2019.
- Financial Reporting Council (FRC) investigations into accusations of serious fraud offences perpetrated by several EY clients.
- The multimillion-euro regulatory fines EY has been asked to pay for breaching audit, conflict of interest and competition rules in a number of EU countries.
- The investigation into EY’s role in the Wirecard scandal.
According to Sue Hawley, Executive Director of Spotlight on Corruption, the UK government loses up to £22.6bn, plus an additional estimate of up to £2.7bn at local government level, to fraud and error each year, with procurement fraud being one of the most common detected forms.
Ms Hawley’s quote is drawn from the 2017–18 stats in the Cabinet Office’s 2019 annual report on the Cross-Government Fraud Landscape. Though, for fairness, it should be pointed out that the figures in this report are quite broad as they state that estimated losses could be anywhere between £2.8bn and £22.6bn because much of it goes undetected.
So, there is a significant problem and a lack of resources to identify its true scale. Spotlight on Corruption is recommending that the CCS instigate a debarment against EY, which is a ban on any government body from awarding contracts to the accounting and professional services firm, for a period of three years.
The idea from SoC being that organisations believed to be guilty of poor practices should a) be discouraged from doing so by evidencing that there are consequences to their actions/inactions, and b) serve as a warning to others in the marketplace who have until now gone undetected.
Spotlight on Corruption go still further by asking the CCS to consider EY as a “high-risk supplier” and that to continue to award contracts to them would serve as an “unnecessary risk to the taxpayer”.
EY – 32 years as one of the UK’s leading professional services businesses
Established in 1989 when accounting firms Ernst & Whinney and Arthur Young & Co merged, Ernst & Young has grown to be one of the four largest professional services firms in the world, nicknamed the ‘Big Four’ – EY, KPMG, PricewaterhouseCoopers (PWC) and Deloitte. Today the organisation has around 300,000 employees and more than 700 offices across the globe. It specialises in consulting, assurance (primarily audit work), tax matters, and strategy and transactions.
Eight years ago the company rebranded itself as EY, defining its purpose as “building a better working world”. However, EY has also been reported to have been involved in a number of audit ‘scandals’ – though to be fair and balanced, none of the Big Four have been reported to have come through the last few decades unscathed.
Four tips for building and maintaining trust in your audit partners
One of the primary issues faced by most sizable accountancy and professional service firms is that of a conflict of interest. As their client organisations grow, these large professional service firms diversify, and as well as conducting audits for their clients, they often also offer consulting services. What happens when advice for one impacts on the others and which side wins out – best practice or commercial priorities?
It is reported that each of the Big Four brings in around one fifth of its revenue through audit work. However, their consulting practices are often far more profitable, and SoC are concerned that recent findings in a number of media reports have identified that there seems to be some incentive for firms to not always conduct themselves to the highest standards of their profession.
The Institute of Chartered Accountants in England and Wales (ICAEW) is aware of this and its code of ethics expects its members to perform their duties in an independent and unbiased way, incorporating all of the in-house measures required to ensure that they do.
Over the last few years the Financial Reporting Council (FRC) has been looking into this very question. To steer both accounting firms and public confidence in them in the right direction, it has announced that the largest accounting firms will, in the future, have to evidence a clear separation between audit and consulting, so the conflicts of interest that have been at the heart of so many reported complaints, can be avoided.
These firms will need to implement changes by October 2024. So, if this is a little too far away for your liking, here are our four tips for building and maintaining trust in your audit partners.
- Assess their compliance with FRC recommendations
While the Big Four are not required to conform to FRC recommendations on departmental separation for another three years or so, and it may not be obligatory for other firms to do so, it would be perfectly acceptable to assess compliance right now if you are considering engaging a new audit partner.
The reason for this is that what is being stipulated by the FRC is not wholly new; it is in line with current best practices in the industry and, therefore, the FRC recommendations simply offer a reminder to the sector of what every firm should already be doing as a matter of course. If your audit partners are able to evidence compliance, this can be one step towards greater confidence in them.
- Build, resource and trust in your intelligent client function team
Relationship management is key to success in any strategic partnership, and a very effective vehicle for achieving this is the creation of an intelligent client function (ICF) team. In this case, such a team would include those with operational and audit skills who are tasked with developing close working relationships with their counterparts in your auditor’s organisation.
Through their collaborative dealings, they will have an opportunity to identify issues at a distance – both those within the partner organisation and those to do with the work they are conducting for you – giving you ample time to address them. This team will, therefore, be an invaluable resource in ensuring that your trust in your audit partners is validated on an ongoing basis.
- Determine collaborative behaviour when under stress
The strongest evidence of trustworthiness comes not from when activities and processes are going well, but from when adverse issues arise. How do your audit partners deal with critical friend challenge, what happens when they themselves hit a challenging patch, when they receive bad press or if they start to lose some of the key talent on your account?
Your relationship with them may last years, plenty of time for an observant client to identify signals (however small or significant) as to whether any challenges make them more collaborative or less. And once you understand their nature better, you can make a better judgement on the level of trust you are willing to afford them.
- Legal, incisive and insightful relationship management
The tone you set in your relationship will influence the trust you earn and the trustworthiness your supplier evidences through their commitment to common goals. This tone is at least in part determined by how you deal with issues (however small or significant) in your relationship.
Know your terms of engagement to understand your legal rights and everyone’s responsibilities so you know when they are being stretched, understand your audit partner through listening to your ICF team’s insights, act with justifiable evidence and swiftness to steer the relationship away from issues, and through doing so set the behavioural tone of the relationship.
It is easy to look at claims of failings in one organisation outside of the context of the good aspects that organisation also delivers. However, if these failings can be seen to be mirrored across many others in the sector, individual cases should be judged accordingly.
We’ve already mentioned that not only are clients becoming far more attuned to the potential for conflicts of interest with their audit partners which could impact on their relationships, even with members of the Big Four, but also that the FRC are positively looking to implement sector-wide change.
For now, from a client’s perspective, it’s vital that you develop your relationship with an ‘eyes open’ attitude to the realities of modern-day audit partnerships. Choose your partners carefully, monitor their delivery of service, keep an eye and an ear out for factors which could destabilise your relationship, and act fairly, yet decisively, to ensure that you set the right tone for your partnership.