Julia Irvine 5 Jul 2019 09:29am

Rebuilding pride in audit: Q&A with PwC's Hermione Hudson

Earlier this week, PwC senior partner Kevin Ellis announced a number of changes to the Big Four firm’s management team

Caption: Hudson explains why PwC is spending an additional £30m a year on overhauling its audit practice

Former head of assurance Hermione Hudson’s role was restructured to allow her time to focus exclusively on the audit and audit-related services side of the business and on implementing plans the firm had revealed last month to improve the quality of its audits.

Along with the other Big Four firms, PwC has recently been on the receiving end of negative press. In its particular case, it was the issues over BHS that led to the firm being fined £6.5m by the Financial Reporting Council and former partner Steve Denison being prevented from practising as an auditor for 15 years.

Business secretary Greg Clark has said that it was the news that Denison had spent just two hours on reviewing the BHS audit that caused him to launch the series of investigations and reviews into all aspects of audit that we now know as Kingman, the CMA (Competition and Markets Authority) and Brydon.

Hudson says, however, that although reform is in the air, it is not the reason PwC has chosen to spend an additional £30m a year on overhauling its audit practice, including plans to recruit 500 extra experienced auditors, retrain its audit teams and embrace its critics by commissioning one of the fiercest – Karthik Ramanna, professor of business and public policy at Oxford University’s Blavatnik School of Government – to look at what a culture of challenge means for auditors in 2019.

Are you hoping that these plans for the audit practice will lead to lighter reform than is currently being anticipated?

This is not our answer to the reviews. It’s a package of measures for audit quality. Our organisational changes are only one part of it. Having said that, I think there are a number of things in the CMA recommendations that are around culture, the governance of the audit practice, all of which I believe that this would address. And in reality I think it would address the vast majority of the concerns that have been raised by the CMA and other external parties.

To be clear, the one thing we do not agree with is any kind of economic separation because we do believe strongly in the multidisciplinary firm. We also believe that the best thing for audit quality is to have access to those wider skills and resources.

This [all started] on 1 July. Our timing is driven by the fact that our financial year begins on 1 July. Obviously a number of them will take some time to implement so we won’t be seeing 500 people joining us immediately. We are also looking at the portfolio of all our directors and partners – so all of our lead auditors – to ensure they are substantially focused on audit and that they have the right amount of time for all the audits they have to do. And that will result in some changes and those will take a while to come through. The other thing we are looking at is a review of the entities that we audit to ensure we get a return that allows us a continual investment and the cost of auditing has gone up. So that will take some time as well. And yes, I expect audit fees will go up.

Does this mean you will be dropping clients who don’t make enough money for you?

I hope very much that we don’t have to do that. But there will be those who either can’t agree on a fair fee or where there is risk that we are not willing to take on. So there will be both a financial review and a risk review because there may be entities where we feel the risk is too high for the fee we are getting.
When I talk about risk, it’s not just the inherent risk in risky companies but for us it’s about whether the entities we audit take the same approach to quality and standards that we do. Where companies provide information very late or not to a high standard, for example, that can give us quality issues and so we need to be careful that we are being clear about the standards that we expect as well.

Where are you going to find 500 experienced auditors when they are already in much demand?

I do believe we will be able to attract people and not just locally. The UK has a really leading position in the audit world so I see a number of them coming from overseas. We think we have a great audit practice and a great brand in the market. Of course, we will be using our own international network to bring people in as well recruiting internationally.

Some of the additional auditors will be working on audits which will allow us to reduce excessive workloads in some instances. We had had people working very hard in some cases which we need to address to ensure we get the highest quality consistently across the practice. It will also make our practice more attractive.

We will also be putting more people into our audit quality control team, largely recruited from our own experienced auditors, to help us ensure that we get the highest quality across the whole practice.

On 1 July, the overall audit practice [had] 5,500 people and we will be adding around another 10%. We will be adding new recruits to the digital audit practice which will be somewhere between 200 to 300 people and the audit quality control team will increase by about two thirds to over 100 by the time we have finished.

You say you are sending your auditors back to be retrained – some have called it school for scepticism. Is that what it is?

That’s not our phrase! This is a training programme. We are investing more in training, particularly face to face training. In the last few years, we’ve gone to more computer-based training but we’ve found that it’s actually more effective to do more classroom-based face to face training because people learn better together. There’s a real benefit from people learning together in across-grade groups so partners can share their experiences and learn at the same time. A lot of this is about shared experiences. Say, examples of difficult situations that auditors have faced and how they’ve handled them. And that kind of sharing is better done in classroom situations.

We will be focused on the areas that have come up in regulatory reviews or our own inspections so some of those are technical areas like long-term contracts, some of them are judgments and estimates – core areas of auditing – and of course we will be talking about the culture of challenge which we are also looking at, which as you know involves a healthy scepticism. But scepticism has always been fundamental to auditing.

What motivated you to ask arch critic Karthik Ramanna [professor of business and public policy at Oxford University’s Blavatnik School of Government] to look at what a culture of challenge means for auditors in 2019?

There has been a lot of debate about what is the right culture for auditors and audit firms. If we are really going to investigate that, I think we should engage with our critics and those may be who see it differently. We can learn why they have the views they have, engage with it and work out what we can do to embed the right culture of challenge into the practice. It’s a two-way thing though: we can also help them to see what auditing is really like.

As part of that process, he will be spending some time with our people. He has made it absolutely clear he has all editorial rights and there must be no guidance from us on what anyone says or anything like that. And that’s exactly we wanted. We want to hear his independent view which is why we will be giving him access an audit team so he can actually sit in and observe them in action doing what they do, observing the interactions between them and how they really demonstrate their challenge. He is scheduled to report back to us in September.

Isn’t that a bit quick?

It’s been a fast-moving debate, to be honest. And if you think about everything that has gone on, it’s all happened in less than a year. The first CMA announcement was 9 October. I remember it well. And there’s been an awful lot since then. So we are trying to move things quickly and this is his independent paper. We were very keen to see something tangible early on. This whole project is a big deal for us.

Has it gone down well in the firm?

Actually, it has been very positive. Change can be threatening for people so you always worry about any large change programme. But I’ve been really pleased with the enthusiasm with which people have greeted this because they are so pleased that we are doing something proactive. The auditors in particular are so pleased we are investing in audit, that they will have their own line of service which is completely focused on what they do and it has given everybody a real sense of pride.

One of the things we have been talking about is the fact that audit and auditors are deep specialists and because of the heritage of the firm, it’s easy to forget that. We don’t often talk about auditors in that context yet we invest more in training auditors than any other parts of the business. So that has also given them a positive feeling, reinforcing their skills set and how important what they do is to the wider environment.

It must have been depressing for auditors to have to live through the last year?

Yes. It’s had a real impact on morale to see the profession be so much under so much negative rhetoric . One of the things that we are very keen to do is to rebuild pride in the profession and that really starts at home, doesn’t it? It’s got to be something that we push from within the firm.