EU Seeks to Split Big Four Auditing Firms in Rule Overhaul

The big four auditing firms would be required to split off their consulting arms under European Union proposals aimed at reining in their market dominance and preventing conflicts of interest.

The plans published by the European Commission today would also force banks and listed companies to rotate the auditors they use.

It’s “critical” that audits are carried out “in an independent manner without any pollution from other commercial interests,” the Brussels-based regulator said in a statement on its website.

The EU is reviewing audit rules following the collapse of Lehman Brothers Holdings Inc. (LEHMQ), which the commission said raised questions about the quality of company audits. Regional arms of the top four auditing firms -- KPMG, PricewaterhouseCoopers, Ernst & Young, and Deloitte Touche Tohmatsu -- have a market share that exceeds 85 percent in the majority of EU member states, the commission said.

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

The requirement for large firms to separate audit activities from non-audit activities would amount to “a complete ban on the provision of non-audit services,” the commission said.

Auditing firms criticized the proposals, saying customers would suffer.

‘Detrimental Effect’

The “detrimental effect” of the commission plans “would be most severe for financial institutions,” David Sproul, U.K. chief executive officer of Deloitte, said in an e-mail.

“The capability of firms to provide quality audits will be diminished if auditors are separated from wide ranging advisory expertise,” Rolf Nonnenmacher, co-chairman of KPMG Europe LLP, said in an e-mailed statement.

Banks, insurers and listed companies would be required to rotate the audit firm they use every six years, with a four year gap before the firm could be rehired, the commission said.

Such rotation “would cause serious disruption to major corporates, and have no positive effect on audit quality,” Nonnenmacher said.

Rotation Period

The rotation period could be extended to nine years if a company uses more than one auditor, the commission said.

“Many of the measures proposed by the commission threaten to reduce audit quality and raise costs for businesses,” PricewaterhouseCoopers said in an e-mailed statement. They “risk putting Europe at a competitive disadvantage.”

Today’s proposals will have “little or no added value while increasing the cost of audit at a time of economic uncertainty,” Ernst & Young said in an e-mail.

Firms would be banned from providing consulting services to their audit clients in order to avoid conflict of interest, the commission said.

“Today’s proposals address the current weaknesses in the EU audit market by eliminating conflicts of interest, ensuring independence and robust supervision and by facilitating more diversity in what is an overly concentrated market,” Barnier said.

The proposals “are the latest in a long line of unnecessary distractions coming out of Brussels,” Matthew Fell, director for competitive markets at the Confederation of British Industry, said in an e-mail.

To contact the reporters on this story: Jim Brunsden in Brussels at jbrunsden@bloomberg.net.

To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.