Print | Share | Reprint

EC proposal would force Big Four business split

by Renee Cordes in Brussels | Published November 30, 2011 at 9:11 AM

The Big Four accounting firms will be forced to split up their auditing and consulting businesses as part of a wider reform adopted by the European Commission on Wednesday, Nov. 30.

The proposals, which must be vetted by the European Parliament and 27 European Union governments, aims to reduce the dominance of Deloitte LLP, Ernst & Young, Pricewaterhouse Coopers LLP and KPMG, who collectively control more than 85% of the audit market in most EU member states.

In Wednesday's announcement, EU Internal Market Commissioner Michel Barnier said the changes are needed to restore investor confidence in audits that had been damaged during the financial crisis.

"Today's proposals address the current weakness in the EU audit market, by eliminating conflicts of interest, ensuring independence and robust supervision and by facilitating more diversity in what is an overly concentrated market, especially at the top end," he said.

The Commission calls for requiring companies to switch auditing firms every six years at least, and for bringing the currently nationally regulated industry under the watch of the Paris-based European Markets and Securities Authority.

However, the Commission backed down from its original plan to require Big Four firms to share auditing work with smaller rivals, saying the matter needs further analysis. "It's clear that the benefits would outweigh the costs," said a Commission official, "but there is still a debate around that."

The audit shake-up has been in the works since January, following a Commission policy paper late last year pointing to "certain weaknesses" in the sector. Trade magazine Accountancy Age published a draft of the proposals this past September, prompting a widespread public debate.

Spirited debate will continue among the EU's three main institutions given the complexity of the dossier and keen industry interest, and it remains to be seen what the final package will look like.

If the current plan remains intact, the new rules would take effect within three to five years.

Syed Kamell, the U.K. legislator tasked with shepherding the package through the European Parliament, said Wednesday that while he will approach the issue with an open mind: "There could be significantly unintended consequences if we legislate more than absolutely necessary."

He also asked whether competition in the audit sector would be better dealt with by competition authorities as is the case in the United Kingdom, whose Competition Commission is currently studying industry concentration in that country.

Industry reaction to the latest proposal from Brussels was mixed.

Speaking on behalf of 21 midsized accounting firms including Grant Thornton International Ltd. and Nexia International Ltd., the Brussels-based European Group of International Accounting Networks and Associations, welcomed the Commission's proposals.

"Egian is confident that the political debate which is now about to begin will lead to a package of measures which will inspire trust in the audit market through improved competition and greater choice," it said.

Rolf Nonnenmacher, head of KPMG's regional operations in Europe, the Middle East, Africa and India, said that while the firm supports new initiatives to improve audit relevance and quality, the latest proposals "miss the opportunity to place a meaningful framework for change."

Specifically, he said the mandatory rotation requirement would cause serious disruption to major corporations, and would have no positive effect on audit quality.

Share:

Regulatory

EC proposal would force Big Four business split

Free preview

Meet the journalists

Renee Cordes

Correspondent: Brussels

Movers & Shakers

Video

Coming back for more

Sectors