The £4m fine issued to Grant Thornton after four senior staff admitted misconduct in relation to two audit clients is a wake-up call to aspiring independent non-executive (iNEDs) board members, who must be demonstrably independent to meet regulatory standards and avoid sanctions.
It is the latest in a series of reprimands for the accountancy profession since the demise of Carillion earlier this year, each working to undermine confidence in the profession.
All former accountancy partners sitting in board positions should now be considering their positions and whether they are able to demonstrate their own independence. They should consider whether they need further training and, given the current spotlight on conflicts, whether they have taken up appropriate positions.
Examining the collapse of Carillion, the Department for Business, Energy & Industrial Strategy (BEIS) and Work and Pensions committees found the audit market to be a “cosy club incapable of providing the degree of independent challenge needed”, and recommended it be referred to the Competition and Markets Authority (CMA).
The competition watchdog is resisting pressure to investigate the sector for a second time in seven years, but for how long?
Rather than waiting for statutory sands to shift, the accounting profession must act now to take a stronger stance on actual and apparent conflicts. The time has come for a profession-wide moratorium on former partners taking up board positions with both former and current clients. While some firms may have such moratoria, they clearly need policing with far more vigour going forward.
The events at Grant Thornton Manchester seem to have spiralled quite quickly but they need never have got so serious, if the profession genuinely prided itself upon independence.
Having spent 25 years with Grant Thornton, retiring as a senior partner in June 2009, Eric Healey joined the audit committee of the University of Salford, an audit client, in May 2010 and then, in March 2011, its council. Earlier in 2011 he had also become chair of the audit committee at Nichols Plc, at that time an AIM- listed audit client.
It might have just about been okay had Healey cut ties with Grant Thornton when he retired, but he was also “engaged by the firm under a consultancy agreement”, the Financial Reporting Council (FRC) found. The firm initially paid him £1,000 for a day a week over a 12-month contract. In total he collected £82,000 for the work he did for Grant Thornton between 2009 and 2011.
As a consultant, Healey attended partner meetings as well as high-level strategy meetings where the firm laid out its plans for the next 3-5 years. He mentored senior staff at the Manchester office and advised its in-house legal department on matters relating to professional indemnity claims against the firm.
All this, the FRC said, amounted to “serious familiarity and self-interest threats” resulting in the “the loss of independence” over eight audits conducted between 2010 and 2013.
As well as a £200,000 fine (discounted for settlement at £150,000) for Healey, the FRC issued fines to three other Grant Thornton staffers who it said, should have raised a red flag.
Healey should have been a gleaming beacon of danger to the firm. Instead he was overlooked or simply ignored.
The time has come for top firms to put an end to this practice and show that they are truly independent by barring former partners from joining the boardrooms of client, until they have served a required period (e.g. 24 months) after retirement. If the profession itself fails to end the conflicts culture, then the accounting professional bodies should step in and mandate it. This area is clearly prone to murky practices, so change must be delivered one way or the other.
The asset management sector, accused of failing to provide enough consumer protection at a senior level, has already been ordered by the FCA, a regulator with far sharper teeth, to put its house in order. The regulator has imposed a tough solution on the asset management sector.
From later next year, regulated asset managers must appoint a minimum of two independent non-executive directors (iNEDs) so they make up at least 25% of the total board membership. To ensure independence, potential candidates cannot have been paid by the fund manager for five years before their appointment, nor have had any business relationship with the fund within the previous three years.
It is a regulatory trend that is spreading across the financial services market, with consumer protections quickly becoming the direction of travel for all City regulators.
While firms and regulators can do their part to ensure ethical walls are built, these have so far not been wide enough and, ultimately it is down to the individual to show their integrity and step back where conflicts arise.
This is a profession where individuals identify very strongly with their firms. Many have spent years building their professional careers and, long after retirement, they remain fiercely loyal to their old colleagues, such is the nature of professional partnerships. It is also a profession where people rely on their networks for referrals and recommendations and expect the same from their contacts for mutual benefit.
The accounting sector must be seen to be embracing independence, and senior professionals must lead by example. Make no mistake, accountants and their professional bodies must act now. It should not be the FRC which takes retrospective disciplinary action. Prevention is better than cure.
Gary Dixon, FCA, is the chair of the Association of Independent Non-Executive Directors (AiNED), the not-for-profit organisation that provides a wide range of support services to iNEDs.