The Commission is likely to impose new limitations on audit firms' activities, in a bid to lower the potential conflict of interest and improve the sector's credibility, which has been shaken during the crisis by the default of many companies previously judged sound.
“The financial crisis has highlighted weaknesses in the statutory audit, especially with regard to public-interest entities (PIE), entities which are of significant public interest because of their business, their size, their number of employees or their corporate status is such that they have a wide range of stakeholders,” reads the draft of the new EU regulation seen by EurActiv.
Measures contained in the draft - prepared by the department chaired by Internal Market Commissioner Michel Barnier - could shape up the sector if they are approved by the college of commissioners.
'Big Four' under threat
The EU executive's objective is also to limit the power of the so-called ‘Big Four’, the top auditing firms that dominate the global market and are all based in the United States: Deloitte, KPMG, Ernst & Young and PwC.
In his draft document, Barnier denounces the power of the top global companies: “The market is so polarised that rare is the occasion when the auditor of a PIE is not a Big Four firm. In the majority of member states, the Big Four audit more than 85% of large listed companies.”
European officials have similarly criticised the influence of credit rating agencies, also dominated by American firms.
In its proposals on auditing firms, the Commission intends to eliminate certain oddities that are deemed to affect the quality of auditing and potentially damage competition.
According to the draft, which is still subject to change, the EU executive plans to prohibit auditors from providing additional non-auditing services to their clients, in order to avoid conflicts of interest when the auditor is also consultant of its client.
“The statutory auditor, audit firm or member of the audit firm's network will be prevented from providing non-audit services (other services than audit and related financial audit) to their audited entities,” the draft says.
'Rotation and joint auditing?'
But the heaviest blow that the Commission is about to deal to the 'Big Four' is possibly obliging the rotation of auditors in order to avoid excessive “familiarity” between the auditor and the audited company.
“With a view to address the threat of familiarity that results from the audited undertaking often appointing and re-appointing the same audit firm for decades, the regulation introduces mandatory rotation of audit firms after a maximum period of 9 years,” the draft document says.
Moreover, “to increase the choice of audit providers, joint audits (obligation to have more than one audit firm, at least one of which is not among the largest audit firms) should be introduced,” the document says.
By favouring joint audits, the Commission is paving the way for a gradual emergence of alternative providers of auditing services which may ultimately challenge the dominion of the Big Four.