“Investor confidence in audit has been shaken by the crisis and I believe changes in this sector are necessary,” Internal Market Commissioner Michel Barnier said yesterday.
Large auditors said the plans will not improve audit quality, while smaller rivals accused Barnier of a climbdown.
Policymakers questioned why auditors gave a clean bill of health to banks which shortly afterwards, needed rescuing by taxpayers. Barnier said recent apparent audit failures at Anglo Irish and Lehman Brothers banks, BAE Systems and Olympus, “would strongly suggest that audit is not working as it should”. More robust supervision is needed and “more diversity in what is an overly concentrated market, especially at the top end”, he said.
Just four audit firms — Ernst & Young, Deloitte, KPMG, and PwC — check the books of 85% of blue-chip companies in most EU states, a situation the Commission said was “in essence an oligopoly”.
Under Barnier’s plan, the four firms will have to separate audit activities from non-audit activities, such as tax and other advisory services, “to avoid all risks of conflict of interest”.
There would be legal separation of audit and non-audit services if over a third of revenues from auditing is from large listed firms and the network’s total annual audit revenues are over €1.5 billion in the EU.
Claire Bury, one of Barnier’s top officials, said these conditions would alter all of the big four’s business models. “They will have to change names as well. I suppose we will have branding issues at the end of the day,” Bury said.