Big Four auditors face massive shake-up

LONDON, Sept 27 Tue Sep 27, 2011 6:26am EDT

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LONDON, Sept 27 (Reuters) - The "Big Four" global auditors could be broken up, leaving them susceptible to takeovers if radical European Union plans to boost competition go ahead, a UK auditing official said on Tuesday.

EU Internal Market Commissioner Michel Barnier is due to publish a draft law in November to curb what he sees as a conflict of interest when auditors check the books and supply lucrative consultancy services to the same customer.

Auditors, KPMG , Ernst & Young , Deloitte and PwC , check the books of nearly all big companies in the world.

A copy of Barnier's draft law seen by Reuters proposes that auditors be banned from offering consultancy services to the companies they audit, or even banned from consulting altogether - a move that could force the firms to split their operations.

"Breaking up the Big Four audit firms would make them more susceptible to be taken over by emerging Chinese firms," a UK audit official said on Tuesday on condition of anonymity due to the sensitivities involved.

Barnier has trailed his plans for a year and the industry had hoped they would be watered down by the time he formally proposes them in November.

"To reinforce independence and professional scepticism, the prohibition of the provision of non-audit services to the audited entities and even the prohibition of the provision of non-audit services in general would effectively address this issue," the draft said.

"Better audits and more informative audit reports will enhance confidence in the markets while also informing stakeholders of any problems with regards to any particular entity," the draft added.

The European Parliament, which will have the final say with EU states, gave the plans its broad backing this month.

Auditing industry officials estimate that 28-30 percent of global revenues come from statutory audits, with about 18 percent from non-audit services provided to the same audit client. This means that about half of total revenues is earned from providing consultancy services to clients which are not being audited as well.

Barnier has chosen to legislate in the form of a regulation, which will be directly binding on EU states, giving no room for local discretion.

Britain, as home to the Big Four's European base, is likely to oppose some of Barnier's more radical proposals though its Office of Fair Trading said in July a full blown competition probe into the sector is warranted.

Accounting officials say such a probe would become redundant if pro-competition elements in Barnier's draft make it onto the statute book.

"If I was the UK Competition Authorities I would be inclined to leave this up to Europe. It's not a UK issue, it's actually a global issue," the auditing official said.

Other elements of the draft regulation include;

-- Regular dialogue between auditors and their regulators

-- A company would have to change or "rotate" auditors every nine years to end the custom of decades long auditing by the same firm

-- A ban on so-called covenants whereby banks insist that a company receiving a loan must be audited by one of the Big Four

-- Introduction of "joint audits", so that the Big Four share auditing work with smaller rivals. Would apply to companies whose balance sheet is above 1 billion euros.

-- The European Securities and Markets Authority to play a coordinating role in supervising auditors in the EU.

Some of the plans are already being applied, like rotation in Italy and joint audits in France.

An EU law that came into force in 2008 sets out rotation of auditing partners -- but not the actual auditing firm -- every seven years.

It also says an auditor cannot provide non-auditing services to the same customer if it gives rise to a major conflict of interest but many EU states have yet to fully implement this law. (Reporting by Huw Jones; Editing by Erica Billingham)

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