Additional information on our response to the Audit Firm Governance Code
Good governance plays a vital role in our constant drive to improve the quality of services we provide. We firmly support the aims of the Audit Firm Governance Code toward more effective audit firm governance.
Below is detailed information about how EY maintains the highest standards of audit firm governance.
Legal, governance structure and management
EY is a global leader in assurance, tax, transaction and advisory services. Worldwide, our 190,000 (as of 30 June 2013) people in more than 150 countries are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, clients and wider communities achieve their potential.
EY refers collectively to the global organization of member firms of Ernst & Young Global Limited (EYG or Global), a UK company limited by guarantee. EYG is the central entity of the EY network and coordinates the member firms and facilitates cooperation among them. EYG does not provide services to clients and each member firm is a legally distinct entity. The member firms’ obligations and responsibilities are governed by the regulations of EYG and various other agreements.
The member firms of EYG are grouped into four geographic Areas: Americas, Asia-Pacific, EMEIA (Europe, Middle East, India and Africa) and Japan. The Areas comprise a number of Sub-Areas, which are composed of member firms or sections of those firms.
The structure of our global organization is centered on two guiding principles:
1. Separating management and governance roles
2. Operating EY as a global organization with one shared strategy
EYG’s principal global bodies include:
Global Advisory Council
The Global Advisory Council is the main advisory body of the global EY organization. It comprises a number of member firm partner-level professionals (referred to as “partners”) drawn from across the four geographic Areas and includes independent non-executive representatives (INEs). The partners, who otherwise do not hold senior management roles, are elected by their peers for a three-year term, with provision for one successive reappointment. The INEs are nominated by a dedicated committee. The Global Advisory Council advises EYG and EY on policies, strategies and the public interest aspects of their decision-making. The approval of the Global Advisory Council is required for a number of significant matters that could affect EY.
The Global Executive brings together the leadership of EY functions, services and geographies. It is chaired by the Chairman and Chief Executive Officer of EYG, and includes its Chief Operating Officer; the Area Managing Partners; the global functional leaders — the Global Managing Partners of People, Markets, Quality & Risk Management and Operations & Finance; the global Service Line Vice Chairs — Assurance, Advisory, Tax and Transaction Advisory Services and the Global Vice Chair, Public Policy. The Global Executive also includes a representative from the emerging markets practices.
The Global Executive and the Global Advisory Council approve nominations for the Chairman, the Chief Executive Officer and the Chief Operating Officer of EYG and ratify the appointments of Global Managing Partners. The Global Executive also approves appointments of Global Vice Chairs. The Global Advisory Council ratifies the appointment of any Global Vice Chair who serves as a member of the Global Executive. Furthermore, the Global Executive approves appointments of Area Managing Partners. Such appointments are subject to ratification by the Global Advisory Council.
The Global Executive’s terms of reference include the promotion of the global objectives and the development, approval and, where relevant, implementation of:
» Global strategies and plans
» Common standards, methodologies and policies to be promoted within member firms
» People initiatives, including criteria and processes for admission, evaluation, development, reward and retirement of partners
» Quality improvement and protection programs
» Proposals regarding regulatory matters and public policy
» Policies and guidance relating to member firm’s service of international clients, business development, markets and branding
» Business plans, development funds and investment priorities of EY
» Annual financial reports and budgets of EYG
» Global Advisory Council recommendations
» Mediation and adjudication of disputes between member firms
» Any other proposal that supports the global objectives
Global Executive Committees
Chaired by members of the Global Executive and bringing together representatives from the four Areas, the Global Executive Committees are responsible for making recommendations to the Global Executive. We have committees for People, Quality & Risk Management, Markets, Operations and Finance, Assurance, Advisory, Tax, and Transaction Advisory Services.
Global Practice Group
This group brings together the members of the Global Executive, Global Executive Committees and Sub-Area leaders. The Global Practice Group seeks to ensure common understanding across member firms of EY’s strategic objectives and consistency of execution across the organization.
Terms of reference and composition of the Global Advisory Council, whose membership includes independent non-executives
The Global Advisory Council shall approve:
» Member firm admissions following Global Executive recommendations
» Appointment of the Chairman, Chief Executive Officer and Chief Operating Officer following Global Executive recommendation
» New regulations
» A change in global name
» New, or amendments to, global strategies and plans
» Any significant combination, sale, or transfer of any part of EY business or any significant acquisition
» A global balanced scorecard
» The process for the evaluation and reward of Global Executive members
» Business plans, development funds and investment priorities of EY
» Annual financial reports and budgets of EYG
The Global Advisory Council shall:
» Where appropriate initiate discussions with the Global Executive regarding performance of the Chairman, Chief Executive Officer and Chief Operating Officer of EYG
» Consider and discuss any other items of any nature brought to its attention, including:
» The public interest aspects of the organization’s decision making, stakeholder dialogue and management of reputational risks and other governance issues, including those that are not otherwise effectively addressed by regulation
» People management policies and procedures
» Issues raised under whistle-blowing policies and procedures
Independent non-executive representatives (INEs)
We believe that considerable benefits are to be secured from the appointment of INEs at a global level. This approach, which is unique to EY, recognizes the cross-border nature of much of the business and the extent of globalization more generally in many public interest matters.
As individuals from outside EY the INEs bring to the Global Advisory Council and our organization as a whole the benefit of significant outside perspectives and views. We draw on the experiences of high-level professionals with globally diverse backgrounds in regulation, business, public service, investing or academia. The INEs collectively enhance shareholder confidence in the public interest aspects of EY’s decision-making, stakeholder dialogue and management of reputational risks.
As of September 2011, three Independent Non-Executives (INEs) have been appointed in accordance with the UK Audit Firm Governance Code (the Code). They are:
» Mark Olson, a former Chairman of the Public Company Accounting Oversight Board, which regulates US auditors
» Sir Richard Lambert, former Director-General of the Confederation of British Industry, the UK employers’ body
» Klaus Mangold, a former member of the Board of Management of DaimlerChrysler
Appointment: The INEs are nominated by the INE Nominating Committee, comprising the Chairman of EYG, the Presiding Partner of the Global Advisory Council, and other persons as the Chairman and the Presiding Partner in their discretion deem appropriate. The nominations will require approval by the Global Executive and ratification by the Global Advisory Council.
Support: INEs are entitled to receive all necessary information about global affairs. To ensure the effectiveness of each INE, they receive full administrative support, and the cost of any independent professional advice that may be required will be met.
Term: The term of an INE will be three years with provision for one successive reappointment at the behest of the INE Nominating Committee and the Global Executive.
Disagreements: Any disagreement with an INE should be resolved by mediation by the Chairman of EYG through a defined process of notification and consultation. In the event of an unresolved disagreement, the INE shall have the right to resign from the position.
Independence: We have considered the auditor independence standards as they apply to INEs in their role as members of the Global Advisory Council. INEs are not in the chain of command or otherwise covered persons, as defined, and accordingly will not have financial interest restrictions except an INE will not be able to be or become a substantial stockholder of an audit client of an EY member firm. In addition, an INE is not able to be an officer, director or employee of an audit client of an EY member firm.
We have have considered further requirements regarding the INEs and their independence, as defined, from EY. INEs are not permitted to have direct or material indirect business relationships or direct or indirect joint investments with EY member firms or have immediate family members who are partners or employees of an EY member firm.
Our commitment to the professionalism, openness and risk management principles of the Audit Firm Governance Code
Instilling professional values
Setting the right “tone at the top” is a key responsibility of senior leadership teams. We communicate to our people that quality and professional responsibility starts with them and is the most important thing they do every day. Our approach to ethics and integrity is embedded in training programs and internal communications.
Senior management regularly reinforces these expectations and the importance of performing quality work and complying with professional standards and our policies. The member firms assess quality of professional service as a key metric in evaluating and rewarding all professionals.
Our internal message consistently has been that no single client is more important than professional reputation — the reputation of EY and the reputation of each of our professionals. “Quality In Everything We Do” is a message that we continually reinforce to our people and clients.
Our global culture strongly supports collaboration and consultation and places special emphasis on the importance of consultation in dealing with complex or subjective accounting, auditing, reporting, regulatory and independence matters. We also emphasize the importance of determining that an engagement team and client have correctly followed consultation advice when necessary.
Code of conduct
We promote a culture of integrity, as well as the performance of high-quality audits, among all professionals. The Global Code of Conduct provides a clear set of standards and behaviors that guides our actions and business conduct and guides the member firms’ and their people’s actions and business conduct. It is organized into five categories containing principles that are to be followed by everyone within EY and guide behavior across all areas of activity:
1. Working with one another
2. Working with clients and others
3. Acting with professional integrity
4. Maintaining our objectivity and independence
5. Respecting intellectual capital
The Global Code of Conduct is overseen by the Global Executive or its delegates, who are responsible for evaluating potential breaches, deciding on appropriate sanctions or remediation and monitoring consistent application thereof. Through procedures to monitor compliance with policies and processes and through frequent communications, we strive to create an environment that encourages all personnel to act responsibly, including reporting misconduct without fear of retaliation.
We also have in place EY/Ethics, a global ethics hotline, to provide EY people, clients and others outside of the organization with a confidential means to report activity that may involve unethical or improper behavior that may be in violation of professional standards or otherwise inconsistent with the Global Code of Conduct. EY/Ethics is operated by external organizations that provide confidential and, if so desired, anonymous, hotline reporting services for companies worldwide.
In addition to the Global Code of Conduct we have specific anti-bribery and insider trading policies.
Our whistle-blowing policies and procedures
We have long promoted a consultative culture at EY. In addition to established internal relationships, we have created a support network that is available for consultation and advice, to help each of us live up to our commitments under the Audit Firm Governance Code. Here are some of the resources our people can use for advice and guidance:
» Quality and Risk Management Leaders, who have been appointed at the Global, service line, Area, and local level
» The People Team at all levels within the global organization
» The Office of the General Counsel or local Legal Counsel
» Professional Practice Directors
» Global, Area, and local policies and procedures, including online resources and databases » EY/Ethics, our global ethics hotline (described above)
Recruitment and hiring
Recruiting and retaining talented individuals and then creating the right teams across borders, are keys to success. Member firm recruiting is performed primarily on university campuses and supplemented, when necessary, by hiring people with prior work experience.
Candidates are evaluated based on the following competencies:
» Technical skills and knowledge
» Intellectual competence
» Leadership skills
» Team/personal skills
» Communication skills
» Administrative skills
Following its launch last year, we continue to deploy EYU, our globally consistent career development framework. Through EYU, we provide EY people opportunities to gain the right experiences, learning and coaching to help them grow and achieve their potential.
EYU expands our commitment to coaching via various forms of counseling and mentoring from the moment people are recruited through the various phases of their careers.
The learning component of EYU is based on an extensive and globally consistent learning curriculum that helps all EY people develop the right technical and personal skills wherever they are around the world. The core audit training courses are supplemented by learning programs that are developed in response to changes in accounting and reporting standards, independence and professional standards, and emerging practice issues.
Audit professionals are required to obtain at least 20 hours of continuing professional education each year and at least 120 hours over a three-year period. Of these hours, 40% (8 hours each year and 48 hours over a three-year period) must cover technical subjects related to auditing and accounting.
In addition to formal learning, professional development occurs through the coaching and experiences our professionals receive on the job. Coaching helps to transform knowledge and experience into practice. Experienced professionals are expected to coach and develop less experienced personnel to create a continual learning environment.
A comprehensive performance management process requires our people to set goals, have clear work expectations, receive feedback and talk about their performance. The Performance Management and Development Process (PMDP) is designed to help our people grow and succeed in their careers. Under the PMDP, periodic job performance reviews are combined with annual self-appraisal and annual reviews. As part of the annual review process, each professional, in conjunction with his or her counselor (an assigned, more experienced professional), identifies opportunities for further development. Professionals and their counselors are guided by a set of service line competencies that articulate the knowledge and skills that should be maintained and developed for the respective rank.
Policy and principles
The global financial crisis and continuing financial instability have highlighted the importance of public confidence in the capital markets. We are acutely aware of the important role the audit profession plays in supporting investor confidence in financial reporting. Regular two-way dialogue with our stakeholders, and in particular investors, is a priority for us. We listen carefully to our stakeholders to inform our views and actions and, as the most globally integrated organization in our profession, EY brings a unique perspective to these conversations.
EY shares a common interest with investors and other stakeholders in the quality of financial reporting, the quality of audits, enhancing transparency and good governance. To help maintain their trust and confidence, EY seeks to listen and learn what they say about these areas to be able to respond constructively. We are committed to continuous enhancement of the quality of the work of member firms and engaged with investors and other stakeholders to hear their views about our member firms’ effectiveness and how what they do might be improved.
Furthermore, as discussed earlier, the INEs who are members of the Global Advisory Council are collectively enhancing our stakeholder dialogue. We will continue to weave the INEs into our stakeholder dialogue.
Stakeholder engagement channels
Investors, investor groups and other global stakeholders
EY engages with investors and global investor groups that share our commitment and seek to raise standards of corporate governance around the globe.
For example, along with the other large globally active accounting and audit organizations, EY participates in the Global Investor-Auditor Dialogue. This global dialogue consists of an informal network of leading global institutional investors and major global auditing networks and exists for the exchange of views on current financial reporting and auditing issues. EY is also an active member of the International Corporate Governance Network, and our member firms participate in a number of investor groups in different countries.
Furthermore, we convene dialogues with stakeholders in order to understand their perspectives and to explore topics of mutual interest. This helps to deliver on stakeholders’ expectations with respect to the public interest aspects of their work.
For example, in 2011, EY launched a program of corporate governance dinners, bringing together shareholders, independent directors, corporate secretaries and others involved in corporate governance to consider broad issues related to corporate governance. We held two successful dinners in 2011 and will be building on these to hold similar events in a number of different countries in the coming year.
Management and audit committees
A fundamental part of member firms’ engagement with the management and audit committees of listed companies is the audit process itself.
Member firms have regular and ongoing conversations with management during the normal course of an audit, which cover all aspects of the engagement, including governance matters.
Member firms typically meet with their clients’ audit committee several times a year to discuss items related to the planning, interim and final phases of the audit. Member firms also have discussions with audit committees about current developments in auditing and financial reporting. This interaction with audit committees contributes to achieving audit quality.
In addition, on a regular basis, meetings with groups of audit committee chairs are held to seek input on pragmatic approaches to enhancing audit and financial reporting and the overall functioning of financial markets, including ways to strengthen communication between EY, leading companies and their directors for the benefit of investors and the public.
Around the globe, EY runs a program for clients of all service lines called Assessment of Service Quality (ASQ), which seeks input on how member firms consistently deliver quality services. It also helps member firms build strong, mutually respectful relationships at all levels and across all the sectors of the businesses with which we are working. It enables EY to monitor the quality of our services and act on feedback received.
The program seeks both quantitative and qualitative information through:
» Face-to-face interviews with key people in the business, including audit committee chairs and board members, where relevant. Interviews are conducted by senior partners who are independent of any service delivery in the business’ sectors.
» Questionnaires that are used to gather objective feedback about specific engagements or the overall relationship.
EY continues to contribute to public policy debates in markets around the world and engages with many different international organizations.
We want to hear from you
We encourage investors, audit committee members and listed companies to talk with us about matters covered by the Audit Firm Governance Code. If you have questions or would like to discuss any aspect of it, please click here.
These inquiries and our responses are likely to be relevant to many stakeholders, and contribute to enhancing public understanding of our work, our governance and commitment to quality and independence.
We are strong advocates of transparency because it provides stakeholders with an enhanced understanding of our organization, governance and approach to high-quality work.
To that end, we were one of the first professional services organizations to publish a global transparency report. It provides an overview of our structure, governance and our quality and independence standards, and demonstrates the advanced state of our global integration. We believe our enhanced global integration enhances our ability to deliver seamless, consistent, high-quality service worldwide.
EY member firms around the world also comply with local transparency reporting requirements, including, where applicable, the European Union’s 8th Directive, which requires statutory auditors of EU public interest entities to publish an annual transparency report disclosing certain information, including information about governance.
Read our Global Transparency Report 2010 which provides further information relevant to the Audit Firm Governance Code.