The EC proposes splitting up accounting giants in wake of multiple scandals.
European Commission Internal Market Commissioner Michel Barnier November 30 proposed forcing KPMG, PricewaterhouseCoopers, Ernst & Young and Deloitte to split up and rebrand their successor companies in an attempt to improve standards and reduce conflicts of interest. Barnier cited accounting failures at AngloIrish, Lehman Brothers, BAE Systems and Olympus as examples of what his draft European Union legislation is meant to avoid.
The bill would force the Big Four to split their accounting and consulting businesses, and bar any firm providing audits to a company to serve in an advisory role as well. It also requires that audit mandates be rotated every eight years. The bill will be examined and debated in the European Parliament for over a year, and come into effect within three to five years. Its provisions are divided into three categories:
1. Auditor independence:
- Mandatory rotation of the auditor to address the risks of ‘over familiarity’ between the auditor and the audited company;
- Restrictions on non-audit services so that consultancy work can no longer be provided to an audit client;
- Pure audit: firms with a very substantial size in audit, they would no longer be able to provide non-audit services.
2. Opening the top end of the market:
- Rotation as well as regular and transparent mandatory tendering and stronger audit committee seriously involved in the auditor selection process;
- The prohibition of the Big Four clauses where for example a lender may require only a Big Four auditor for the borrower;
- The opening up of ownership rules so that more capital can be attracted.
3. Better supervision:
- Mobility for appropriately qualified auditors;
- A more detailed audit report through the Union;
- An European Quality Certificate allowing a next tier firm to demonstrate its abilities to audit larger entities;
- The application of international standards of auditing;
- ESMA ensures the co-operation of audit supervisors.
Barnier did not, in the end, require joint audits, a move he considered and one that was supported by smaller accounting firms. He did, however, strongly recommend them.
Representatives of the second-tier firms like BDO, which audit only 20 percent of the EU market, said Barnier’s bill would actually reinforce the audit oligopoly since rotation would strip smaller firms of hard-won mandates.