In the wake of recent scandals and strategic missteps, the Big Four accounting and consulting firms—Deloitte, EY, KPMG, and PwC—are finding themselves at a crossroads, prompting a critical examination of their Governance, Risk Management, and Compliance (GRC) practices. The question arises: Do the Big Four need GRC reform?
Scandals Prompt Governance Rethink
A series of incidents has exposed vulnerabilities in the governance structures of the Big Four, necessitating a reassessment of how these industry giants manage risks, ensure compliance, and uphold ethical standards. The need for GRC reform has become increasingly evident as these firms navigate the complexities of a rapidly changing business environment.
EY’s Shift Towards a New Governance System
EY’s recent decision by US partners to adopt a new governance system, complete with a board overseeing management and strategy approval, signifies a proactive response to internal challenges. This move follows the rejection of a global consulting business spin-off plan, sparking conversations about the necessity of a more robust GRC framework.
PwC’s Global Boss Advocates for Governance Reforms
Bob Moritz, PwC’s global leader, recognizes the need for governance reforms within the industry. Moritz suggests that governance changes implemented in Australia, including the appointment of an external chair, could serve as a blueprint for other countries in the global PwC network. This acknowledgment underscores the importance of learning from governance practices across different regions.
US Audit Regulator’s “Culture Review”
The initiation of a “culture review” by the US audit regulator adds another layer to the discussion. The aim is to delve into the root causes behind the increasing number of public company audits failing to meet regulatory standards. This scrutiny includes an examination of the “tone at the top” and an evaluation of organizational structures, emphasizing the need for comprehensive GRC mechanisms.
Challenges within the Partnership Model
Laura Empson, a professor specializing in professional service firms, emphasizes that the Big Four’s governance, rooted in a partnership model, faces unique challenges as these organizations scale up. The circularity and potential conflicts of interest inherent in the partnership model call for a careful reevaluation of governance structures.
Learning from PwC Australia’s Governance Report
The scathing report on PwC Australia’s governance provides crucial insights. The commitment to enhancing the governance board, introducing independent members, and addressing power imbalances signals a proactive approach to rectifying deficiencies. This case becomes a valuable lesson for the entire industry.
Encouraging Independent Oversight
The encouragement from PwC’s global leadership to involve independent outsiders in local partnerships’ governance further reinforces the need for diverse perspectives and external oversight. Independent voices can contribute to breaking through echo chambers and fostering a more transparent governance culture.
EY’s Unique Governance Approach and Proposals for Reform
EY’s unique position, lacking a board overseeing global management, has sparked discussions on proposals for governance reform. The creation of a new board with hiring and firing powers for its US leader demonstrates a commitment to adapting and evolving its governance practices.
Divergence in National Regulatory Approaches
National regulators exhibit varying views on how the Big Four should be governed. While Europe mandates oversight boards, some countries recommend independent board members. In the UK, proposals include independent non-executives and the separation of audit businesses, highlighting the complexity of regulatory landscapes.
Challenges and Opportunities with Non-Executive Involvement
The introduction of independent non-executives is viewed positively for breaking through echo chambers and encouraging management to question established norms. However, challenges exist, such as underestimating the time and commitment required, making it difficult to attract the right talent for these crucial roles.
Conclusion: Charting a Course for Governance Evolution
In conclusion, the need for GRC reform within the Big Four is no longer a matter of debate but a critical imperative. Recent events underscore the urgency for comprehensive changes in governance structures, risk management practices, and compliance frameworks. The proactive steps taken by individual firms, coupled with global discussions on the subject, indicate a collective recognition of the need to evolve and adapt. As the Big Four navigate this transformative journey, the industry is poised for a new era of governance resilience and adaptability.
