Called to account

Michel Barnier has picked a good battle to fight. Europe’s audit industry is an oligopoly, dominated by the Big Four: KPMG, Ernst & Young, Deloitte and PwC. In EU states, they audit 85 per cent of listed companies. But draft proposals from the European Commission’s internal markets commissioner are not all they might be.

Barnier has made some progress. He’s against over-restrictive covenants that prevent companies being audited by any firm other than the Big Four. If the plans are adopted, corporates must also rotate accountants at least every six years.

But if competition is to be improved, and audit firm diversity enhanced, the rules need to be framed to make it easier for smaller audit firms to enter the market. BDO, a non-Big Four player, worries mandatory rotations may actually prove counter-productive. These rules may help free the market, but they will also pass on some of the smaller firms’ hard-won clients to their bigger competitors.

 

Barnier has also has binned the idea of joint audits, where a company is audited by two firms at the same time. If this were poorly designed, it might have pushed up general costs in the economy. But it could also have offered a good way for smaller players to win the trust of new clients.

The reforms could result in big structural changes among accountants.

Barnier wants to stop Big Four firms offering audit and non-audit work such as tax consultancy. Making them split themselves up could reduce the scope for conflicts of interest. But if auditor diversity is the problem – and it is – it would be better to force them to divide their actual audit functions to create smaller players.

The UK’s Competition Commission, which is also looking at the issue, may be more robust. Unlike draft EU proposals, which are notoriously sensitive to political horse-trading, the UK watchdog is autonomous, and holds a wealth of data suggesting the oligopoly has too much power. This investigation might give the Big Four bigger headaches.