Europe News

Big Four Accountants Face Audit Reform

By Alex Barker and Adam Jones, Financial Times

The European arms of the four biggest accountants are being threatened with a break-up under sweeping European Commission reforms to be unveiled on Wednesday.

Sami Sarkis | Getty Images

Michel Barnier, the EU internal market commissioner, wants to split the profession’s “Big Four”—PwC, Deloitte, Ernst & Young and KPMG—into separate audit and consulting arms in Europe as part of a package of measures designed to improve the vetting of accounts.

Under pressure from fellow European Union commissioners, Mr. Barnier has reluctantly dropped a plan that would also have forced these dominant groups to share audit work with their smaller rivals through mandatory “joint audits”.

But he won support for rules compelling companies to rotate auditor at least every six years, a move that would end the decades-long relationship between some companies and their auditors.

Mr. Barnier’s audit reforms have prompted furious lobbying in Brussels, particularly since the leaking of draft proposals that triggered protests from the Big Four and business groups, which feared they would increase costs.

The provision of both audit and consulting work by accounting firms has long been seen as a potential conflict of interest. The EC reforms would stop all auditors from offering most types of consulting to their audit clients in the EU.

The Commission also wants to go well beyond the limits imposed on “non-audit” work in other countries such as the US by forcing the biggest networks to split their member firms into separate audit and consulting businesses if they exceed a certain threshold.

One senior Big Four accountant called this “completely disproportionate”. But before becoming law, the proposals could be altered in negotiations between MEPs and finance ministers. This could see the rules tweaked to at least permit the Big Four to keep audit and consulting side by side.

The move to drop joint audits will disappoint medium-sized auditors such as BDO and Grant Thornton, which had seen them as a means to compete more effectively with the Big Four. Some EU states—including Denmark—had strongly opposed joint audits after abandoning them in the past.

Mr. Barnier’s aides admitted that concessions had been necessary to win political support for the broader reforms, but insisted it was still an ambitious attempt to promote independence, increase competition and improve audit quality.

During Commission negotiations, Mr. Barnier hardened his draft provisions on mandatory rotation, cutting the maximum duration from nine to six years.

And although mandatory “joint audit” is no longer included, the proposals would encourage companies to use two auditors by allowing them to rotate every nine years if they opted for a joint audit voluntarily.