Big Four to focus on governance following regulatory pressure

In the wake of a series of scandals and strategic missteps, the Big Four accounting and consulting firms – Deloitte, EY, KPMG, and PwC – are set to rethink their governance structures in 2024. This move is aimed at strengthening oversight and holding management accountable, following a year that exposed significant shortcomings in their governance.

The Big Four firms, which collectively employ 1.5 million people and audit most of the world’s largest public companies, are considering new ways to hold management accountable; the past year has highlighted vulnerabilities within their governance models, which are now under intense scrutiny.

EY’s US partners, for instance, voted to introduce a new governance system that includes a board to oversee management and approve strategy. This move was prompted after EY’s current US management team vetoed a plan to spin off the firm’s global consulting business, causing discontent among many partners.

“The current governance of the Big Four encompasses the worst aspects of partnership governance and the worst aspects of corporate governance,” said Laura Empson, a professor specialising in the management of professional service firms at the University of London’s Bayes Business School.

In addition to internal changes, the Big Four are also facing external pressures. The US audit regulator has launched a culture review of the firms to root out the cause of a rise in the number of public company audits that fail to meet regulatory standards. The review will examine whether something had gone wrong with the ‘tone at the top’ and will also scrutinise the organisational structure of the firms.

In the UK, the Financial Reporting Council has recommended the introduction of independent non-executives from outside the firm for those auditing 20 or more listed companies.

Among the Big Four, KPMG has been particularly challenged, posting the slowest growth in global sales during the latest financial year. The firm has faced numerous challenges across several markets, including scrutiny over its audits at three failed US banks, a governance scandal at its Dubai business, and a record regulatory fine in the UK.

In response, KPMG has promised to invest $4.2bn by 2026 to boost performance and has extended the term of Bill Thomas, the longstanding chair and chief executive of KPMG International, by another year to oversee the investment strategy.

Actionable insights for accountants

• Accountants should advocate for and participate in creating a transparent culture within their firms. This includes being open about decision-making processes and being receptive to oversight mechanisms.
• Prepare for increased scrutiny by enhancing your knowledge of regulatory standards and participating in continuous professional development to ensure compliance with the highest audit quality standards.
• Understand the new governance models being implemented. If your firm is adopting a board to oversee management, consider the criteria for board selection, the scope of its authority, and how it will impact day-to-day operations.
• Accountants play a pivotal role in upholding the integrity of their firms. Engage with integrity initiatives, report unethical behavior, and support measures that strengthen the firm’s reputation.
• For those in multinational firms, it’s crucial to understand how changes in one region may affect global operations. Consider how governance reforms can harmonize international practices and how you can contribute to a cohesive global strategy.
• Governance reforms may create new roles focused on compliance, risk management, and oversight. Stay informed about these opportunities and consider how you can align your career goals with these emerging positions.
• Use governance changes as an opportunity to reinforce client trust. Communicate how these reforms will enhance the quality and reliability of the services you provide.