Draft EU law would split the Big Four
Source: Agencies |
December 1, 2011, Thursday
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THE world's top four audit firms will have to split up and rename themselves under a draft European Union law to crack down on conflicts of interest and shortcomings highlighted by the financial crisis.
"Investor confidence in audit has been shaken by the crisis and I believe changes in this sector are necessary," Internal Market Commissioner Michel Barnier said yesterday.
Policymakers have questioned why auditors gave a clean bill of health to many banks which shortly afterwards needed rescuing by taxpayers as the financial crisis took hold.
Barnier said recent apparent audit failures at AngloIrish and Lehman Brothers banks, BAE Systems and Olympus "would strongly suggest audit is not working as it should."
More robust supervision is needed and "more diversity in what is an overly concentrated market, especially at the top end," he said.
Just four audit firms - Ernst & Young, Deloitte, KPMG and PricewaterhouseCoopers - check the books of most blue-chip companies in the world, a situation the commission said was "in essence an oligopoly."
Under Barnier's plan the four big firms will have to separate audit activities from non-audit activities, such as tax and other advisory services, "to avoid all risks of conflict of interest."
Claire Bury, one of Barnier's senior officials, said the plans, if approved by EU states and the European Parliament, would affect the business models of the Big Four.
The audit and non-auditing operations of the big firms, defined as those having revenue of more than 1.5 billion euros (US$2 billion) in the EU, would have to have separate legal ownership structures.
Bury said: "They will have to change names as well. I suppose we will have branding issues at the end of the day."
Public tendering of audit work by listed companies would be compulsory and include consideration of second-tier auditors.
Commission officials indicated that as the measure dealt with major structural reform of the market, the industry would need time to adapt but they hoped the new rules would be in place in three to five years.
EU states and the European Parliament will have the final say on Barnier's draft law, a process that involves haggling and possible changes.
Barnier, under pressure from some fellow commissioners, dropped a key element of his plans - mandating "joint audits" of listed companies as a way to improve audit quality and help smaller auditors gain experience of checking the books of big companies.
"Investor confidence in audit has been shaken by the crisis and I believe changes in this sector are necessary," Internal Market Commissioner Michel Barnier said yesterday.
Policymakers have questioned why auditors gave a clean bill of health to many banks which shortly afterwards needed rescuing by taxpayers as the financial crisis took hold.
Barnier said recent apparent audit failures at AngloIrish and Lehman Brothers banks, BAE Systems and Olympus "would strongly suggest audit is not working as it should."
More robust supervision is needed and "more diversity in what is an overly concentrated market, especially at the top end," he said.
Just four audit firms - Ernst & Young, Deloitte, KPMG and PricewaterhouseCoopers - check the books of most blue-chip companies in the world, a situation the commission said was "in essence an oligopoly."
Under Barnier's plan the four big firms will have to separate audit activities from non-audit activities, such as tax and other advisory services, "to avoid all risks of conflict of interest."
Claire Bury, one of Barnier's senior officials, said the plans, if approved by EU states and the European Parliament, would affect the business models of the Big Four.
The audit and non-auditing operations of the big firms, defined as those having revenue of more than 1.5 billion euros (US$2 billion) in the EU, would have to have separate legal ownership structures.
Bury said: "They will have to change names as well. I suppose we will have branding issues at the end of the day."
Public tendering of audit work by listed companies would be compulsory and include consideration of second-tier auditors.
Commission officials indicated that as the measure dealt with major structural reform of the market, the industry would need time to adapt but they hoped the new rules would be in place in three to five years.
EU states and the European Parliament will have the final say on Barnier's draft law, a process that involves haggling and possible changes.
Barnier, under pressure from some fellow commissioners, dropped a key element of his plans - mandating "joint audits" of listed companies as a way to improve audit quality and help smaller auditors gain experience of checking the books of big companies.
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