September 13, 2011 / 5:06 PM / 6 years ago

EU lawmakers give backing to auditing shake-up

LONDON, Sept 13 (Reuters) - Audit firms should be banned from simultaneously providing book-checking and non-auditing services to a company, the European Parliament said on Tuesday.

European Union lawmakers approved a report that called for more competition and closer supervision of a sector dominated globally by the Big Four of KPMG , Ernst & Young , PwC and Deloitte .

Policymakers say it’s too easy for them to offer cheap auditing in return for more lucrative consultancy work as well.

“There should be a clear demarcation between the audit services and non-audit services ... internal and external audit services should not be provided simultaneously,” the report, approved in full parliament in Strasbourg, France, said.

Accounting officials urged lawmakers to move with caution.

“We do, however, acknowledge that the simultaneous provision of internal and external audit services presents a particular problem for auditor independence and there may need to be legal measures,” said John Davies, head of technical at the Association of Chartered Certified Accountants (ACCA), said.

The ACCA said it rejects any EU plans to introduce “rotation” or requiring firms to change auditors every so often to avoid them becoming too familiar with management.

The report, authored by Spanish centre-left lawmaker Antonio Masip Hidalgo, is non-binding but will shape an EU draft law now being finalised.

The bloc’s financial services chief Michel Barnier is due to present the legislation on auditing in November with parliament and EU states having the final say.

NEAR CERTAINTY

Most of the ideas aired so far by Barnier are included in parliament’s report, meaning they are now a near certainty in the draft law.

The sector was blamed by some policymakers for giving banks a clean bill of health just months before lenders collapsed or had to be shored up with taxpayer money in the crisis.

The report backed many of Barnier’s ideas, such as requiring audit firms to be more sceptical and to blow the whistle to regulators if a company is heading towards trouble.

Lawmakers want more competition amid worries that if one of the Big Four collapsed, it would severely disrupt markets.

They called for the four to set out contingency plans and “living wills” to “reduce the uncertainty and disruption” which could result if a firm collapses.

Covenants or agreements tied to business loans that stipulate the company must use an auditor from the “Big Four” should be banned, the lawmakers added.

Lawmakers, who want direct EU supervision and for Barnier to develop a European liability regime, backed making International Standards on Auditing (ISAs) mandatory to ease supervision, a step the ACCA backed.

“As a global accountancy body we believe that ISAs should be made legally binding throughout the EU as some member states may not otherwise adopt them, with attendant detriment to the single market,” ACCA’s Davies said.

The EU was instrumental in giving International Financial Reporting Standards critical mass to become global accounting rules and making ISAs mandatory could have a similar impact. (Editing by David Holmes)

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