Accountants blast EU plans to break up auditing monopolies

PLANS to break-up up the “oligopoly” of auditing in Europe have been slammed as damaging, costly and ineffective by big firms and business lobbyists.

In the latest of a series of financial regulation reforms, EU politicians yesterday adopted proposals aimed at improving the quality of auditing the annual accounts of Europe’s biggest quoted companies, banks and insurers.

The European Commission proposals would forcibly split the largest accounting groups into separate organisations.

Citing the clean bill of health given to banks just weeks before many had to be rescued at the height of the financial crisis, supporters of the shake-up argue that auditors are too cosy with client companies to provide an independent view on their financial stamina.

Michel Barnier, the EU’s internal market commissioner, said: “Investor confidence in audit has been shaken by the crisis. We need to restore confidence in the financial statements of companies.”

Though some aspects of Barnier’s long-awaited reforms were weaker than originally proposed, the UK industry was caught off guard by suggestions that “Big Four” accountancy firms Deloitte, Ernst & Young, KPMG, and PwC could be forced to split their auditing operations into separate businesses from tax and consultancy services. The latter tends to be more lucrative work, but has led to accusations of conflicting interests when the same firm that supplies consultancy services is also called upon to audit the books.

Barnier is also suggesting auditors be forced to rotate after a maximum of six years with any particular company, followed by a “cooling off” period of four years before re-engaging the same client.

The rotation deadline could be extended to nine years if companies voluntarily agree to joint audits by a big firm and one of the smaller-sized accountants. Joint audits, intended to open up the market to other players, had been mandatory under Barnier’s original plans.

Big industry players and business groups were not mollified, however, and have rounded on the proposed changes.

Ernst & Young said the proposals could actually “damage audit quality and provide little or no added value”. The Institute of Directors predicted a rise in the cost of auditing, while the CBI warned that the quality of services available to businesses would be undermined without any boost to competition.

Matthew Fell, the CBI’s director for competitive markets, said: “These proposals are the latest in a long line of unnecessary distractions coming out of Brussels that will only serve to add to business costs at a time when the focus should be on promoting growth and job creation.”

The Institute of Chartered Accountants of Scotland flatly opposes the ban on providing consultancy services to audit clients, saying audit committees are best-placed to determine what services their company requires.

“Smaller listed companies in particular may be unduly impacted by such a prohibition at a time when business growth is key, particularly given [Tuesday’s] downgraded economic forecast,” Icas chief executive Anton Colella said. “There is undoubtedly a long road ahead as these proposals work their way through the legislative process”