Auditing firms in the European Union face more competition and curbs on their activities to restore their “tarnished” image, the bloc’s financial services chief has announced.
“One can no longer say ‘move on, there is nothing to see’ on audit issues,” EU Internal Market Commissioner Michel Barnier told a webstreamed hearing on auditing in Brussels.
“I shall make suggestions with the aim of presenting a proposal for a directive in November,” Barnier said.
The sector is dominated by the “Big Four” – KPMG, Deloitte, Ernst & Young and PriceWaterhouseCoopers – who check the books of most blue-chip companies across the world.
Lawmakers worry the sector is too concentrated and if one of the four collapsed it could destabilise markets.
Policymakers also ask why auditors gave banks a clean bill of health when many of them had to be rescued by taxpayers as the financial crisis unfolded.
Ernst & Young is being probed in Britain and pursued in the US courts over its role in signing off on the accounts of Lehman Brothers, the US bank that collapsed in September 2008, sparking a near meltdown in the global financial system.
“The auditing market is hyper-concentrated. It is even more so on the most profitable segments of the market, and this inhibits the emergence of new big audit firms,” Barnier said.
Barnier said record feedback from a public consultation on the future of auditing in the EU – 700 responses totalling 10,000 pages – showed some support for putting ceilings on the total market share of the bigger auditors for listed companies.
“There is also the idea of joint auditing, which to my mind is having your audit done by two different audit firms, one of which at least is not part of the Big Four,” Barnier said.
Auditors could have a “European passport” to operate across borders and there could also be a “two-speed” set of rules, with a lighter touch for smaller auditors to help them grow.
Critics have said it will be difficult to boost competition when auditors face unlimited liability and caps on ownership which hamper their capital raising and ability to expand.
Barnier said the role of auditors should also be “clarified” to see whether they should go beyond endorsing accounts and give an opinion on the state of health of the company.
Separately, the Bank of England and the FSA published a draft code for consultation to require auditors to tell regulators about concerns over clients.
“The code announced today will help us to achieve this and makes it more likely that auditors will identify issues and risks that relate to our objectives of market confidence and financial stability,” FSA auditing and accounting sector leader Richard Thorpe said in a statement.
Michael Izza, head of UK accounting body ICAEW, said the dialogue must be two-way so that auditors are made aware of concerns authorities may have that would affect audit opinions.
Barnier said the financial crisis has tarnished the image of auditors by highlighting certain conflicts of interest and his legislative proposal would pursue several possible options:
– banning a firm from providing audit and non-audit services for the same client;
– requiring rotation of audit firms for the same company;
– requiring that periodically a company puts out to tender who their audit firm will be;
– company audit committees could have a bigger role in selecting auditors;
– possible mandatory supervisory approval in choice of audit firm for key firms like a big bank.