Accountants' ABS ambitions hit by new EU audit rules

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1 December 2011

Europe: bid to break up the big four's oligopoly

The ambitions of larger firms of accountants to offer legal services have become more complicated after the European Commission announced plans to stop auditors offering non-audit services.

If it becomes law, the move will lead to the break-up of the ‘big four’ accountants into audit and consultancy businesses.

The commission’s proposals, part of the fall-out from the financial crisis, highlights concerns over possible conflicts of interest and the independence of auditors, and the “oligopoly” enjoyed by the big four of KPMG, PwC, Deloitte and Ernst & Young.

The proposals relate to the statutory audit of “public interest entities”, such as banks, insurance companies and listed companies. Their auditors will not be allowed to offer them non-audit services, which specifically include legal services.

Further, where an audit firm generates more than a third of its annual audit revenues from “large public-interest entities and belongs to a network whose members have combined annual audit revenues which exceed €1,500 million within the European Union”, it cannot provide non-audit services to any public interest company.

However, while this would lead to the break-up of the larger audit firms, it means the changes are unlikely to affect smaller firms of accountants looking at the opportunities offered by alternative business structures (ABSs), such as Sussex-based Spofforths, which we reported last week is planning to become an ABS.

The commission said its rationale was the “obvious issues of potential conflicts of interest when the same audit firm offers both audit and other services to the same client. A ban on the provision of any non-audit services to audit clients will ensure that high-quality audits are the primary focus of the audit provider. It will prevent potential conflicts of interest, as well as reinforcing independence and professional scepticism”.

Internal market and services commissioner Michel Barnier said: “Investor confidence in audit has been shaken by the crisis and I believe changes in this sector are necessary: we need to restore confidence in the financial statements of companies.

“[The] 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, especially at the top-end.”

Other elements of the proposals include the mandatory rotation of audit firms, mandatory tendering when selecting a new auditor and a “proportionate application of the standards in the case of small and medium-sized companies”.

The big four and business organisations have criticised the proposals. KPMG’s European head Rolf Nonnenmacher was quoted as saying: “The capability of firms to provide quality audits will be diminished if auditors are separated from wide-ranging advisory expertise including, crucially, risk management in the financial sector.”

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