(Reuters) -
The world's top four audit firms will have to split up and rename themselves
under a draft European Union law to crack down on conflicts of interest and
shortcomings highlighted by the financial crisis.
"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 on
Wednesday.
Policymakers
have questioned why auditors gave a clean bill of health to many banks which
shortly afterwards needed rescuing by taxpayers as the financial crisis began
unfolding.
Barnier
said recent apparent audit failures at AngloIrish and Lehman Brothers banks,
BAE Systems (BAES.L) and Olympus (7733.T) "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
most blue-chip companies in the world, a situation the Commission said was
"in essence an oligopoly."
Under
Barnier's plan big audit firms -- the four top ones -- 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."
REBRANDING
Claire
Bury, one of Barnier's top officials, said the plans, if approved by EU states
and the European Parliament, would have an impact on the business models of the
Big Four.
The audit
and non-auditing operations of the big firms, defined as having a revenues of
more than 1.5 billion euros in the EU, would have to have separate legal
ownership structures.
"The
will have to change names as well. I suppose we will have branding issues at
the end of the day," Bury told a press briefing.
Public
tendering of audit work by listed companies would be compulsory and include
consideration of second-tier auditors.
Commission
officials indicated that as the measure dealt with major structural reform of
the market, the industry would need time to adapt but they hoped the new rules
would be in place within 3-5 years.
"It's
not something that can be rushed through," Barnier's spokeswoman said.
EU states
and the European Parliament will have the final say on Barnier's draft law, a
process that involves haggling and likely changes.
ROTATE
Barnier,
under pressure from some fellow commissioners, dropped at the last minute a key
element of his plans -- mandating "joint audits" of listed companies
as a way to improve audit quality and help smaller auditors have experience of
checking the books of big companies.
Instead, he
has tried to introduce incentives to encourage joint audits by finessing
another part of the measure -- the mandatory switching or rotation of auditors.
A sole
auditor would only be allowed to audit the same firm for up to eight years but,
if a joint audit was being done, this mandate could be extended up to 12 years.
An audit
firm would not be allowed to offer non-auditing services, such as tax and other
consultancy services, to a company it is auditing.
The EU plan
also bans so-called loan covenants whereby banks lend money to companies on
condition they are audited by one of the Big Four.
Officials
from the big audit firms have warned that audit costs will increase and quality
could suffer but their smaller rivals welcome Barnier's plans, which would open
the door to new business for them.
The UK
Competition Commission is already probing the sector and regulators in the
United States are looking at audit firm rotation as well.
(Reporting
by Huw Jones; Editing by Helen Massy-Beresford)
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