Archive for the ‘FTSE 100’ Tag

The future of the independent auditor

Audit market dominated by the Big Four

A fundamental tenet of corporate governance is the need for independent, external audit of the financial records and the accounts presented by boards to their members. This applies to every corporate entity, but particularly to listed public companies. Consequently, the provision of reliable audit services is vital.

A recent report from the U.K.’s Financial Reporting Council[1] (FRC) showed that in 2019 the Big Four audit firms[2] continued to audit all of the FTSE 100 companies.  The Big Four also audited all but 10 of the FTSE 250 companies—the other 10 being audited by the two largest firms outside the Big Four[3]. Audit fee income for the Big Four firms increased by 6.9% from 2018 to 2019, compared to 1.7% from 2017 to 2018.

The FRC recently questioned the procedures of the Big Four, following the highly visible collapse of some of their major audit clients including DHS and Carillion.

Separation of audit from consultancy

The dramatic collapse of the energy company Enron (case 1.2 in the fourth edition of my textbook) resulted in its Finance Director being jailed for sophisticated financial maneuvering, and drew attention to the extent of non-audit consultancy work carried out by its auditor, Arthur Andersen. This fiasco and other problems led to the collapse of the global Andersen firm, and the reappearance of its consultancy arm as Accenture.

It also produced the Sarbanes-Oxley Act (2002), which forever enshrined the names of Senator Sarbanes and Congressman Oxley in the annals of corporate governance. This act imposed stringent and expensive regulation on the American audit profession at the Federal level.

According to the FRC report, the Big Four’s fees, for non-audit work for their UK audit clients, declined 20.8% in 2019. This probably reflects the cap imposed by the government on non-audit services for public interest entities. It may also be a response to the operational separation of audit work from consultancy and other non-audit work by accountancy forms, which the FRC has demanded by 2024.

The regulation of the UK accountancy profession

When I served on the Council of the Institute of Chartered Accountants[1] (1979 to 1983), the accountancy profession regulated itself. Committees of the Institute disciplined members and their firms for misdemeanours and breaking the rules. At the time, self-regulation of professions was considered appropriate. But, as the trade guilds of the Middle Ages had already shown, self-regulation can be self-serving.

Regulation of the accountancy profession has shifted towards oversight by independent bodies authorised by the state. The number of audit firms registered with the Recognised Supervisory Bodies (RSBs) is declining: 5,660 in 2017, 5,394 in 2018, and 5,127 at the end of 2019.

Given current global problems, the need for financial and strategic advice by organizations (both profit and not-for-profit) is likely to be dramatic. The challenge of how such consultancy services are overseen and regulated, world-wide, has yet to be met. Some will respond that the market will winnow the wheat from the chaff, others might find this flailing process too cumbersome.

Bob Tricker

November 2020

[1] The Institute of chartered accountants in England and Wales

[1] Financial Reporting Council, 16 October 2020.

[2]  As discussed in a recent blog (30 January 2020) the big four are: Deloitte (comprising Deloitte, Touche, and Tohmatsu); EY (resulting from the 1989 merger of Ernst and Whiney and Arthur Young);KPMG (Klynveld, Peat Marwick, Goerdeler (formed from Peat Marwick International – previously Peat, Marwick); PwC (Price Waterhouse and Coopers)

[3].The five largest second-tier UK audit firms are: Baker Tilly, BDO, Grant Thornton, Mazars, PKF (a grouping of independent firms),

Ethnic Diversity on UK Boards

There has been much emphasis on the importance and value of board diversity. However the focus has generally tended to be on gender diversity, for example, in the UK the Davies Report (2011) recommended that representation of women on FTSE 100 boards be increased to at least 25% by 2015. By 2015 this 25% target had been exceeded with FTSE 100 boards having 26.1% of women on the board.

Various corporate governance codes and guidelines have stated that firms should have a ‘balanced board’. In 2014, when updating the UK Corporate Governance Code, the Financial Reporting Council pointed out that constructive and challenging debate on the board can be encouraged ‘through having sufficient diversity on the board. This includes, but is not limited to, gender and race. Diverse board composition in these respects is not on its own a guarantee. Diversity is as much about differences of approach and experience, and it is very important in ensuring effective engagement with key stakeholders and in order to deliver the business strategy’.

‘A Report into the Ethnic Diversity of UK Boards: Beyond One by ’21’

Earlier this month The Parker Review Committee, chaired by Sir John Parker, issued ‘A Report into the Ethnic Diversity of UK Boards: Beyond One by ’21’.

Starting from the premise that UK boardrooms, including those of leading public companies, do not reflect the UK’s ethnic diversity nor the stakeholders that companies engage with (customers, employees, etc.), the Parker Report states that ‘ethnic minority representation in the Boardrooms across the FTSE 100 is disproportionately low, especially when looking at the number of UK citizen directors of colour’. For example, the Report highlights that of 1087 director positions in the FTSE 100, UK citizen directors of colour represent only about 1.5% of the total director population with 90 individual directors of colour (four hold two Board positions) whilst total directors of colour represent about 8% of the total (compared to 14% of the UK population). Some 53 FTSE 100 companies do not have any directors of colour. Seven companies account for over 40% of the directors of colour, interestingly five out of the seven companies have headquarters historically located outside the UK. In terms of the key board roles of Chair and CEO, only nine people of colour hold the position of Chair or CEO.

The Parker Report’s recommendations can be found at$FILE/Beyond%20One%20by%2021%20PDF%20Report.pdf and are as follows:



  1. Increase the Ethnic Diversity of UK Boards

1.1. Each FTSE 100 Board should have at least one director of colour by 2021; and each FTSE 250 Board should have at least one director of colour by 2024.

1.2. Nomination committees of all FTSE 100 and FTSE 250 companies should require their internal human resources teams or search firms (as applicable) to identify and present qualified people of colour to be considered for Board appointment when vacancies occur.

1.3. Given the impact of the ‘Standard Voluntary Code of Conduct’ for executive search firms in the context of gender-based recruitment, we recommend that the relevant principles of that code be extended on a similar basis to apply to the recruitment of minority ethnic candidates as Board directors of FTSE 100 and FTSE 250 companies.

  1. Develop Candidates for the Pipeline & Plan for Succession

2.1. Members of the FTSE 100 and FTSE 250 should develop mechanisms to identify, develop and promote people of colour within their organisations in order to ensure over time that there is a pipeline of Board capable candidates and their managerial and executive ranks appropriately reflect the importance of diversity to their organisation.

2.2. Led by Board Chairs, existing Board directors of the FTSE 100 and FTSE 250 should mentor and/or sponsor people of colour within their own companies to ensure their readiness to assume senior managerial or executive positions internally, or non-executive Board positions externally.

2.3. Companies should encourage and support candidates drawn from diverse backgrounds, including people of colour, to take on Board roles internally (e.g., subsidiaries) where appropriate, as well as Board and trustee roles with external organisations (e.g., educational trusts, charities and other not-for-profit roles). These opportunities will give experience and develop oversight, leadership and stewardship skills.

  1. Enhance Transparency & Disclosure

3.1. A description of the Board’s policy on diversity be set out in a company’s annual report, and this should include a description of the company’s efforts to increase, amongst other things, ethnic diversity within its organisation, including at Board level.

3.2. Companies that do not meet Board composition recommendations by the relevant date should disclose in their annual report why they have not been able to achieve compliance.


Chris Mallin

November 2016