EU could ease auditor ownership restrictions

By Huw Jones

BRUSSELS, Nov 18 (Reuters) - Restrictions on owning auditing companies could be eased to attract new entrants into a sector where just four firms check the books of most blue chip companies, the European Union's executive said on Tuesday.

Few new auditors are set up due to ownership restrictions that bar banks or other companies taking stakes. Smaller auditors are seen as having too little capital to expand and offer services to multinationals.

"In order to ensure a sustainable international audit market, more players are needed to meet the demand by international companies," EU Internal Market Commissioner, Charlie McCreevy, said in a statement.

"This is especially true in the light of the current financial turmoil, which might also contribute to widening the existing gap between the Big Four and the mid-tier audit firms," McCreevy said.

After a series of mergers and an accounting scandal involving Arthur Andersen in the wake of the collapse of the U.S. energy trader Enron, four big firms now dominate -- PricewaterhouseCoopers [PWC.UL], Deloitte Touche Tohmatsu [DLTE.UL], Ernst & Young [ERNY.UL] and KPMG [KPMG.UL].

The European Commission launched a public consultation on how best to increase competition in auditing.

EU rules require auditors to hold a majority of voting rights in an audit firm and that a majority of auditors control the management board.

Auditors say this is to avoid a conflict of interest whereby an auditor is checking the books of a company that owns it.

"I want to hear more about both sides of the argument," McCreevy said. The consulation will look at other issues such as reasons why companies will not switch auditors regularly.

Easing the EU ownership rule would be a more radical step than the auditor governance changes being mulled in the United States.

Auditor officials said conflicts of interest arising from changes in ownership could be managed and that a separate EU initiative would have a bigger impact on competition.

In June McCreevy issued guidelines to EU states asking them to chose measures that limit the civil liability of auditors.

"We have to recognise that one of the significant barriers to new entrants is unlimited liability," said Jeremy Jennings, chairman of the European Contact Group which represents the six largest international auditors.

Jennings said McCreevy's guidelines were already having a positive impact as about half the bloc's 27 member states now either have a liability cap in law or draft law compared with only a few states three or four years ago.

(Editing by David Cowell)