EU Moves To Curb Powers Of Big Four

 The European Union yesterday proposed radical rules to reform the audit sector, in a move that could potentially end the dominance of the accounting Big Four. 

In a draft of regulation due to be published in November, EU internal markets commissioner Michel Barnier argues that the recent financial crisis “highlighted weaknesses in the statutory audit” and proposes a series of measures that would impose significant changes to the industry. 

 The European Union yesterday proposed radical rules to reform the audit sector, in a move that could potentially end the dominance of the accounting Big Four. 

In a draft of regulation due to be published in November, EU internal markets commissioner Michel Barnier argues that the recent financial crisis “highlighted weaknesses in the statutory audit” and proposes a series of measures that would impose significant changes to the industry. 

The proposals broadly push for greater competition within the industry, and large companies would be required to undergo a joint audit by two auditors with at least one coming from outside the Big Four. The proposals also call for a ban that would restrict auditors from providing consultancy services to companies and clients they audit, or even be banned from consulting. This is in line with what Barnier sees as a “conflict of interest” when audits charge high consultancy fees for the books that the check.

This could possibly be the biggest shake up for the industry since the collapse of Enron that subsequently led to the 2002 Sarbanes-Oxley Act. 

Other proposals include the requirement that companies change their auditors after every nine years. 

[quote] “This will provide opportunities for the smaller firms to get exposure, demonstrate their capability and build reputation over time so that they become real competitors to the current biggest audit firms,” the draft proposal said. [/quote]

The Big Four firms include KPMG, Ernst & Young, PricewaterhouseCoopers and Deloitte LLP.

In terms of numbers, the Big Four perform 99 percent of audits for all FTSE 100 companies, and 95 percent of those on FTSE 250 companies, and more than 85 percent of big companies in a majority of the EU nations. 

But the proposals will be opposed by the industry, with many raising concerns that it could have a negative impact on audit quality. John Davis of the Association of Chartered Certified Accountants said that greater competition and choice would be in the interest of the public, but warned against too much regulatory intervention. “We recommend that regulators put in place contingency plans, rather than taking early but costly market-wide measures which so far have not been successful in diversifying the market,” Davis said.

Still, the proposals have not been finalized. A commission spokeswoman said on Tuesday that the legislation would have to go through the commission’s internal review process and get the approval of the European Parliament and the national governments of the European Council, where they may face strong opposition from the United Kingdom who is home to thousands of Big Four employees.