EU to break Big Four stranglehold

Michel Barnier
Michel Barnier
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The European Commission has unveiled radical proposals to break up the dominant Big Four accountancy firms as it tries to deal with “serious weaknesses” in the audit market.

Legislators claim the plans will eliminate conflicts of interest and are urgently needed to reinforce confidence and prevent repeats of pre-crisis errors.

If approved by member states and the European Parliament, the legislation will force Deloitte, Ernst & Young, KPMG and PwC to change their business models.

A spokesman for the commission said: “A serious overhaul of the existing system is imperative to remedy serious weaknesses which led to banks getting clean audit reports in the run-up to a crisis during which European taxpayers committed 4.6 trillion euros in bank bailouts.”

Under the plans, the Big Four will have to separate audit from non-audit activities, such as tax and other advisory services, “to avoid conflicts of interest”. The plans also call for mandatory rotation of auditors and open tendering.

Michel Barnier, internal market commissioner, said: “Investor confidence in audit has been shaken by the crisis and I believe changes in this sector are necessary: we need to restore confidence in the financial statements of companies.”

The Big Four attacked the plans, while smaller firms accused Mr Barnier of a climbdown in the face of lobbying efforts by the dominant firms.

Ian Morrison, head of audit at PwC in the North, said some of the proposals “will add significant costs, increase regulatory complexity and threaten audit quality, all at a time of major financial upheaval and when growth is an imperative”.

PwC, which was auditor to failed lenders Northern Rock and Cattles, has 830 staff in Yorkshire.

Rolf Nonnenmacher, European head of KPMG, said: “While the audit profession was not the cause of the financial crisis... KPMG supports new policies and ideas to improve audit relevance and quality.

“KPMG believes that the proposals miss the opportunity to put in place a meaningful framework for a change, and would have no bearing on audit outcomes.”

KPMG was auditor to Halifax Bank of Scotland and Bradford & Bingley, which both needed rescuing by the taxpayer. It has 750 staff in Yorkshire and is market leader as auditor to the region’s biggest companies.

David Sproul, senior partner at Deloitte, said the audit profession “has taken to heart important lessons from the financial crisis”, but claimed that the proposals would have “significant negative unintended consequences” and make it more difficult to properly check the books of large complex institutions like big banks.

Deloitte audited Royal Bank of Scotland, which is now 83 per cent owned by the Government. It has 430 staff in Yorkshire.

A spokeswoman for Ernst & Young said several of the proposals would damage audit quality, provide little or no added value and increase the cost of audit at a time of economic uncertainty.

She claimed that multi-disciplinary firms improve audit quality and help attract the best talent. E&Y, the auditor to Lehman Brothers, has 337 staff in Yorkshire.

Mid-tier firm BDO criticised Mr Barnier’s decision to ditch original proposals for the largest companies to have joint audits, which it said would have de-risked the market.

James Roberts, senior audit partner, said: “There is some irony that proposals to address concentration, independence and quality in the audit market have been so turned on their head through the lobbying and extensive influence of the largest firms.

“The remaining proposals appear to be worse for the market than no proposals at all.”