European Union plans forcing companies to change accountants regularly were watered down on Thursday (25 April), providing some relief for the "Big Four" auditors that check most large company books.
The European Parliament’s legal affairs committee backed allowing companies to keep the same accountant for up to 25 years, significantly diluting original proposals calling for a switch every six years.
The six-year proposal ran into a barrage of criticism from companies and investors claiming that such a provison would cost companies in time and manpower involved in the re-tendering process.
The lawmakers also ditched a controversial part of the European Commission's draft reform, caps on audit market share, that could have seen the four firms that dominate the industry – KPMG, PwC, Ernst & Young and Deloitte – being split up.
Rules proposed after failures of the financial crisis
The move to reform book-keeping practices came after auditors were widely criticised for giving banks a clean bill of health just before they needed taxpayer bailouts in the financial crisis.
The changes seek to stop auditors becoming too cosy with clients, make them challenge what they are told and inject more competition into the market.
PwC said it remained opposed to any mandatory rotation of accountants for firms, arguing it could damage audit quality.
"It prevents company audit committees from making the decision about who they should appoint as auditor," said Pauline Wallace, head of regulatory affairs at PwC.
But smaller rivals like Grant Thornton welcomed the changes.
"Rotation will bring greater liquidity to the market," said Ed Nusbaum, CEO of Grant Thornton International.
Smaller firms like Mazars and BDO as well as Grant Thornton have been reluctant to make big investments without regulatory intervention that might help them pick up blue-chip clients.
The committee voted by 15 to 10 with the Socialists and Greens opposed, seeing 25 years as too long a tenure. Some companies have kept the same accountant for decades.
List of permitted services scrapped
The reform seeks to boost auditors' independence by banning them from giving tax and other advice to the same client.
But the European Commission's plan for a list of "white" or permitted advisory services was scrapped in favour of a "black list" of banned services.
The reform also bans clauses in bank loans to companies that stipulate their accounts must be audited by one of the Big Four. Auditors would also have to give an overall assurance over the accuracy of company accounts.
Thursday's vote opens the way to talks with EU states on a final text with a full parliament vote by year end.
Britain's Competition Commission said earlier this year the UK audit market was "sticky" and will announce in July whether mandatory switching should be introduced. Rotation now looks set to become part of an EU law that Britain will have to apply.