THE BUSINESS model of the “Big Four” accounting firms is under attack from the European Commission, which is pushing for tough rules that would force the firms to abandon their consultancy businesses and share audit work with smaller rivals.
A draft regulation aims to transform the accounting sector in the wake of the financial crisis and restore “trust” in financial reporting. It has the backing of Michel Barnier, internal market commissioner, whose officials have decided the audit world is in the grip of an oligopoly.
Under the plans, which are to be unveiled in November, companies with balance sheets greater than €1 billion would be forced to hire two auditors to conduct a “joint audit” of their books, including at least one firm outside the “Big Four” of Deloitte, PricewaterhouseCoopers, Ernst Young and KPMG.
Auditors will also be outlawed from working for a big company for more than nine years – a policy of “mandatory rotation” that Mr Barnier thinks will bolster independence and stimulate competition.
Some big multinationals have had the same auditor for more than a century.
Non-audit work is described by the commission as “a source of conflict of interest”. The draft says: “Audit firms of significant dimension should . . . not be allowed to undertake other services unconnected to their statutory audit function such as consultancy and advisory services.”
The ban strikes at the heart of the business model for big audit groups and goes much further than expected in restructuring the industry.
Audit is a steady but slow-growing business, while non-audit operations, including consulting, make up about two-thirds of the revenues of the Big Four in Britain – the biggest in the European networks.
A spokesman for Deloitte said the measures would “harm audit quality” and drive up costs for companies using auditors. The second-tier firms, such as BDO and Grant Thornton, have long campaigned for regulators to help reduce barriers to entry. But the Big Four have deflected many of the proposals.
Mr Barnier will face an uphill battle winning approval of EU member states and the European parliament, required for the regulation to be enacted.
Mr Barnier’s team believe the conflicting commercial interests of the big firms have eroded trust, stifled competition and compromised the scepticism of the accounting profession.
“Auditors play an essential role in financial markets: financial actors need to be able to trust their statements,” Mr Barnier said. – (Copyright The Financial Times Limited 2011)
