The UK audit and corporate reporting debate: Progressing with operational separation

UK Managing Partner for Audit & Assurance, Paul Stephenson, looks at Deloitte’s progress towards operational separation and speaks to two of the firm’s independent Audit Non-Executives, Baroness Ford and Jim Coyle.

We are committed to playing our part in the reform of the UK’s audit and corporate governance system. While some change will require legislative or regulatory action, others can be progressed by the firms themselves.

This year saw a significant milestone towards the reform of Deloitte’s audit business as we made the decision to move forward with the majority of operational separation from 1 June 2021, well in advance of the Financial Reporting Council’s (FRC’s) deadline in 2024.

Part of this included the launch of our independent Audit Governance Board (AGB). As my colleague Simon Cleveland has previously written, the AGB came into effect on 1 January this year, and provides the independent governance, advice and challenge that will be vital to operational separation. It is already getting right to the heart of the drivers of quality, including ensuring that people in the audit business are focused on the delivery of high-quality audits in the public interest – both today and in the future.

The AGB has a majority of Audit Non-Executives (ANEs), including chair Margaret, Baroness Ford of Cunninghame OBE (Baroness Ford), as well as Jim Coyle, Almira Delibegovic-Broome QC and Shirley Garrood. They bring a wealth of experience to our audit & assurance business, and provide valuable, independent challenge to me and my executive team.

Here I catch up with two of these ANEs – Baroness Ford and Jim Coyle – on their experience so far on the AGB, the importance of their roles, and their outlook for the industry.

How has the first six months of the AGB been, and what areas have you worked on?

Baroness Ford: The first months have been a successful and fulfilling period. It has been quite unique to any other non-executive role I have held, and that was part of the attraction for me.

Deloitte is the first firm to move on operational separation and, while it’s still early days, I’ve been impressed to see how seriously it has taken the governance around its audit business. It’s not about paying lip service.

As a group of ANEs, each of us has focused on different areas of interest and accountability, so that between us, we cover a wide net of public interest matters. These evolve around three key remits: audit quality, resilience and reputation.

Jim Coyle: I’d agree – it has been a success, and we’ve already overseen a range of areas. Just one recent example is our oversight of the audit partner promotion and remuneration process through the turn of the firm’s financial year end. Here, led by my fellow ANE Shirley, we ensured audit quality was central to the decisions made.

Other examples include looking at the KPIs and measurements the firm has developed to monitor the success of operational separation, audit quality review (AQR) results, the Audit Quality Plan as it develops, how the firm manages its transfer pricing – meaning how services are provided in and out of the operationally separate audit & assurance business – or ensuring lessons are learnt from past issues, such as Autonomy, which Almira led. Culture is another very important area for the FRC and us as ANEs, and we’ve spent a great deal of time considering areas like diversity, inclusion and wellbeing, particularly given the pressures teams have faced amid the pandemic this year.

Why is independent/external challenge important for the audit business?

Jim Coyle: As a group of ANEs, we bring independent challenge, rigour and an external perspective to the table. Between us we have a wide mix of experience from different parts of the business world. For me that’s as a finance director (FD), an audit & risk committee chair and from 30 years working in financial services. We all draw on the best practice we have seen from other organisations, and from the market as a whole.

As ANEs, we have a real focus on audit quality and ensuring that Deloitte’s newly ring-fenced audit business is resilient and strong. That’s really important from a regulatory perspective.

Baroness Ford: Yes indeed – and an outsider’s perspective is helpful in any walk of life. When you’re involved in the day-to-day running of a business, stepping back and seeing the bigger picture is always tricky. Having someone come in, who looks at things from a different lens, is important.

As non-execs we act as stewards of the public interest – and the regulator looks to us to carry that oversight, challenging the firm in its audit-related decisions and processes.

What is your view on audit and corporate governance reform? Is the system broken?

Baroness Ford: We’re at an important inflection point in the debate in the UK. I do not believe the system is broken, but high-profile failures suggest that parts of the system clearly must be improved.

Different areas in that system must come together – audit firms, company directors, shareholders and the regulator. None of this works if you take one measure or one set of players in isolation. As the 98 questions in the BEIS consultation indicate, reform is complicated and now that the consultation has closed, it’s important to focus on the big things that will make biggest difference across the system.

Jim Coyle: I’ve been very pleased to see that corporate governance has been getting the right level of attention from the UK Government, and the White Paper proposals suggested there is an expectation from each participant in the system to play its role. It’s now really important that the final result of this consultation addresses the problems that have been clear to the market in recent years and any changes enhance audit quality in the public interest.

It is also very important that the momentum is maintained and voluntary adoption of some of the proposals is encouraged, pending legal and regulatory changes. As Margaret notes, this must have that balance and proportion across the system and unintended consequences must be avoided.

Is audit still an attractive profession, or has trust in it gone?

Jim Coyle: Personally, I genuinely still believe audit is one of the most attractive, intellectually challenging and high profile careers out there, and as the expectations of an auditor grow and evolve, it’s only going to become even more so.

In many ways the debate has reflected the essential role the profession plays in the corporate markets. The rise in importance of both financial and non-financial information, such as those relating to ESG and climate, mean that the scope of training now offered to auditors has evolved a long way from my own days as a trainee accountant!

Baroness Ford: I believe trust hasn’t gone completely in audit, but there’s clearly been a dent in it, and reform will go a long way towards rebuilding it.

I would agree with Jim though that there’s never been a better time to be an auditor. Sir Donald Brydon’s vision of the profession demonstrates the fundamental role it provides to the capital markets – assuring shareholders, employees, the supply chain and everyone else who relies on financial statements that what they are reading is a true and fair picture of the company.

This means, as an auditor, you are truly acting in the public interest and at the centre of change in the corporate world. Given the importance of all the issues you get to work across and the intellectual challenge that requires, I truly believe the audit profession will continue attracting some of the brightest and best minds both today, and in the years to come.

For a summary of Deloitte’s recent submission to the BEIS consultation – “restoring trust in audit and corporate governance” – please see here.