Public Interest Body

Sir Richard Lapthorne

Chairman of the Public Interest Body

 

This is my third annual report on the operation of the Public Interest Body (PIB) since the body was established in late 2010. For the independent nonexecutives, this means we are approaching the end of our current initial three-year term of appointment. Hence, this is an appropriate point at which to reflect on how the PIB has evolved and performed against its initial objectives, and, just as important, how we will develop in the years to come.

Before doing this, it is worth reiterating that the PIB’s membership and activities reflect the objectives of the Audit Firm Governance Code, which states that the independent non-executives should improve confidence in the public interest aspects of the firm’s decision-making, dealings with stakeholders and management of reputational risks. The PIB is also designed to complement the firm’s internal governance structure.

Reflections on our first three-year term
We have reached a point where we have obtained – through engagement with the firm’s leaders and with those responsible for managing the risks in each of the four principal service lines of Assurance, Tax, Deals and Consulting – a good understanding of those businesses and the public interest and reputational issues relevant to each area. We hear first-hand from those responsible for decision-making in the firm. More importantly, we ask questions, request more information where appropriate and make suggestions.

Speaking for the non-executives, our view is that the firm is well-managed and that it conducts its business to a high standard of professionalism. That is not to say that there is no scope for improvement. The independent non-executives bring a different perspective, which can help the firm to consider where processes could be improved or examined through a different lens.

Inevitably, since the Code is focused on ‘audit’, that is where we have spent the most time, both in relation to how the day-to-day risks are managed and the busy regulatory agenda affecting statutory audit. We have discussed each year the firm’s annual inspection reports from the Audit Quality Review Team (AQRT) of the Financial Reporting Council (FRC). This year, for the first time, I attended a ‘clearance meeting’ with the firm’s Assurance Leader and senior FRC staff, so that we could hear about the AQRT’s findings, prior to publication. This interaction was very helpful and positive, and will enable us to better understand how the regulator’s priorities compare with our own.

We are also briefed at each meeting on the Risk and Quality processes and any contentious matters (for example any disciplinary inquiries) across the firm. The non-executives also suggest for discussion some specific areas of the business which could impact on the firm’s reputation. In the past year, we have heard from the firm’s Public Sector leader on how the reputational risks in that area are managed. Also, given the recent spotlight on corporate taxes, we have discussed with the firm’s Leader for Tax how the firm manages the reputational risks around providing tax advice and how it has contributed ideas and evidence to the debate on how much tax companies pay.

Trust and the regulatory agenda
The subject of ‘trust’ in the business community is being debated by stakeholders and in the press as never before. Professional services firms are key players in this debate. Restoring the trust of society in business and in our institutions is essential if the UK is to recover from recession and contribute to economic growth. PwC has staged a number of debates involving senior business leaders, regulators and commentators, and a number of us have contributed to these. This is an important initiative. We need a thoughtful, balanced and properly informed view of how business, and the professional services sector in particular, moves forward in the interests of consumers of goods and services.

It is important in the regulatory and public policy activity around audit and, increasingly, tax, that we keep in mind these broader considerations. We have discussed in each of our meetings how the firm is addressing the Competition Commission’s inquiry into the audit market for FTSE350 companies in the UK, the legislative proposals on Audit published by the European Commission and the recent series of consultations on important topics issued by the FRC. The firm has welcomed input from us and the firm’s leaders agree that we have influenced their thinking – for example by challenging them to see alternative arguments.

The accounting profession has a reputation for being conservative. We have consistently urged the firm’s leaders, as they engage with the regulatory agenda, to be receptive to change and, where they disagree with proposals, to explain the reasonable grounds for doing so and to suggest alternative approaches. The PIB members continue to be satisfied that the firm has followed an appropriate and comprehensive process in order to arrive at the public policy positions it is taking.

In the last year, the firm has also refined its policies on how it contributes to parliamentary and similar inquiries, and we were consulted on those measures before they were implemented.

Assessing our contribution
I reported last year that an effectiveness review of the PIB had been undertaken by PwC’s specialist on corporate governance matters, to which all members of the PIB including the firm members and secretariat contributed. We will continue to build on that work by considering actively our remit and what we can deliver to a firm such as PwC.

Last year’s review demonstrated that, while the members unanimously believe that the PIB should not be a decisionmaking forum, it provides an appropriate setting – with the right constituencies involved – where the firm’s positions on public interest matters can be debated and challenged.

The Code is an audit firm governance code and audit is where the main focus should remain. However, the public tends to see PwC as a whole rather than its constituent parts and, as noted above, other parts of the firm’s business such as tax, deals and consulting could also raise issues of reputation. In recent meetings, the non-executives have increasingly provided insights to the firm on a broader range of issues facing the business, while at the same time being cognisant of our ‘public interest’ responsibilities. For example, in the last year we have looked at any risk and reputation issues associated with the firm’s acquisition strategy, such as its alliance with the Middle East practice. As we go forward, we will do more of this type of activity.

Stakeholder engagement
Internally, it is important that the PIB has links to the wider body of the partnership, who are the owners of the business. In addition to hearing at each meeting from our two Supervisory Board representatives, we meet with all the members of the Supervisory Board at least once a year. During our first three years the non-executive members have also been keen to meet more of those who are working in the business, by making office visits and attending the annual partner meetings and other events.

Externally, the Code identifies investors and the corporate community as primary constituencies. Recent contact with some representatives from those groups has demonstrated a measure of surprise that we are approaching them to discuss matters covered by the Code. The FRC has committed to review the Code after its initial few years of operation, and it will be a useful by-product of such a review to gauge the expectations of stakeholder engagement of the different groups. In the meantime, we are taking steps to refocus our engagement with institutional investor organisations. Additionally, if any of PwC’s stakeholders would like to raise issues related to the Code, do please get in touch.

Finally, I would like to take the opportunity here to thank Richard Sexton and Duncan Skailes from the firm for their significant contributions to our PIB discussions and we look forward to working with their respective successors, James Chalmers and Matthew Thorogood.