Audit watchdog shines light on Big Four’s cross-selling

The controversial practice of selling non-audit services to audit clients is
frowned upon by authorities and expressly forbidden from being taken into
account during staff appraisals, however audit inspections have found the
practice survives and, in some cases, auditors want to be rewarded for it.

New data released this week reveals an audit industry under pressure, with
partners pushed to pull in the pounds and eager to show off how much money they
brought in.

The last of the Financial Reporting Council’s Audit Inspection Unit (AIU)
reports was released on Monday, completing a picture of on an industry under
financial pressure and concentrating on boosting its bottom line.

The report noted particular examples which point to an industry under

Deloitte’s audit directors and managers referred to cross-selling when trying
to secure promotions, according to the AIU. At Ernst & Young, the AIU found
some staff had attached their personal sales data in their annual appraisals.

In November, the AIU reported that PricewaterhouseCoopers had changed its
bonus criteria to emphasise business growth, which jumped from 25% to 40% as a
proportion of its KPIs.

Meanwhile, audit quality portion dropped from 25% to 20%. The AIU also found
audit quality was not significantly represented in the performance assessments
at KPMG. Mid-tier firms also came under the AIU’s spotlight.

According to the report, managers at mid tier firm BDO “had either not

or had only superficially” explained how they contributed to audit quality,
according to a sample of performance evaluation forms.

At Grant Thornton, the AIU found explicit reference to audit quality in the
staff appraisal sections was variable.

E&Y said it does not reward its staff for cross-selling and Grant
Thornton said it has strict guidelines in place to protect against conflicts.
The remaining four firms either expressly forbid rewards for cross-selling or
have internal guidelines that protect against the practice, according to public
documents. While the AIU found that “the overall quality of major public company
audit work to be fundamentally sound” it did refer to ongoing issues, including
cross-selling, which need to be addressed.

In recent years firms have taken steps to guard against potential threats to
their independence.

Richard Sexton, PwC’s head of assurance, said he recognises that to maintain
public confidence it is vital all his auditors understand the “critical
importance” of independence. “PwC has a strong culture in this regard, well
understood by our people, as well as comprehensive policies and procedures to
underpin compliance with ethical standards.”

A BDO spokesperson said the company complies with official ethical standards
on cross-selling. “We don’t set objectives for members of the audit team to
cross-sell to their clients and we would not reward cross-selling through
appraisals, bonuses or promotions.”

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