EU states say bloc's accounting reform too strict
* Germany wants limited audit switching, if at all
* Many countries reject centralised EU supervision
* Countries back much looser cap on advisory fees
By Huw Jones
LONDON, May 29 (Reuters) - Plans to inject more competition into accounting should be watered down, European Union states said on Wednesday, signalling less than initially expected will be done to undermine the dominance of the sector's "Big Four" audit firms.
PwC, KPMG, Deloitte, and Ernst & Young check the books of most big companies worldwide and were criticised in the financial crisis for giving banks a clean bill of health before some had to be rescued by taxpayers.
The draft EU law on the sector proposes that companies must appoint a new auditor every six years to end what policymakers see as overly close relationships with clients that sometimes span decades.
But most of the bloc's business ministers - meeting in Brussels to scrutinise the draft law for the first time - were either against mandatory switching or wanted it over a much longer period.
A committee from the European Parliament, which has final say with member states on the law, has already voted in favour of allowing companies to keep the same auditors for up to 25 years.
Both parliament and member states have now signalled that a short rotation period will not pass and that other core parts of the draft law must also be loosened up.
When the draft law was proposed, the Big Four had feared they could end up having to split up their audit and advisory work but this threat has now effectively passed.
Germany on Wednesday went further, saying it could only accept mandatory rotation for auditing banks, a position Britain said it could also support.
"It certainly needs to be a lengthy period," the UK representative said.
Some big investors have complained tendering for a new auditor every few years would be costly and time consuming.
Most states backed parliament's push for a "blacklist" of advisory work an auditor cannot provide to a client it also audits, but many wanted the list to be much shorter.
The draft law, written by the bloc's financial services chief Michel Barnier, has proposed capping income auditors can earn from additional financial advisory services for clients as a percentage of the value of the client's audit fee.
The proposed 10 percent cap would have potentially forced the Big Four to forego millions in revenue but most states said the cap should be raised to 70 percent while Germany, Sweden and Luxembourg want no cap at all.
"Don't change what already works," Sweden said.
A large number of states rejected a proposal for the pan-EU European Securities and Markets Authority (ESMA) to become the umbrella body for national audit supervisors, saying they preferred bolstering how national audit supervisors work together.
"ESMA does not have the expertise. This would risk generating a highly activist regime in audit regulation which we don't support," the British representative said.
Barnier said he was willing to compromise on the length of rotation and cap on fees. Member states will flesh out a common position ahead of talks on a final deal with parliament.
The draft law is being closely watched by the United States which is looking at auditor rotation.
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