Plans by the European Commission to ban audit firms from offering tax and other non-audit services to audit clients are facing controversy as the issue moves to the European Parliament.
The Parliament is taking over from the Commission’s position, which is to address what it has described as “current weaknesses in the EU audit market.” The proposal tackles lack of choice in the auditor sector, “where the market share of the Big Four exceeds 85 percent.” However, it goes well beyond provisions of the Sarbanes-Oxley Act of 2002 in the United States that prompted several auditing firms to spin off their consulting divisions.
In arguing for the proposal in Europe, Internal Markets and Services Commissioner Michel Barnier referred to a “need to restore confidence in the financial statements of companies ... by facilitating more diversity in what is an overly concentrated market, especially at the top-end.”
The Commission announced its proposal in November (see Europe Proposes Splitting Audit Firms). The proposal also includes a mandatory change of auditors after six or nine years (nine if a Big Four firm works with a smaller firm); transparent tendering for auditors; European supervision of the audit sector; and the creation of a European passport for auditors to help facilitate a single market for auditing.
In the Parliament, Robert Fitzhenry, official spokesperson for the dominant center-rightist EPP party, forecasts that the most important single issue is likely to be the audit-consulting split. He told Accounting Today that the Socialists want to ban auditing companies from offering any other service. The EPP, which holds the majority in the Parliament, does support “strict segregation of auditing from other services offered by the auditing company.” But it does not want “a ban on other services.”
Criticism of the EPP party’s position comes from Socialist parliamentarian Antonio Masip Hidalgo. “A clear delimitation between auditing firms and consultancies should have become a top priority for any political body,” he said in an interview.
Parliamentary discussions are starting on January 25-26, with a “first exchange of views” in the Legal Affairs Committee, under the chairmanship of Klaus-Heiner Lehne, a center-rightist member from Germany. Delegates will express their views in some detail, and officials from the European Commission will explain the details of their proposals.
Erik Berggren, the adviser on accounting issues at the employer federation BusinessEurope, noted the “quite extreme” differences in the potential effects on the Big Four. They “would have to radically change their business models if the Commission’s proposals for a complete separation of auditing and consultancy, is upheld,” he said. Berggren foresees long drawn-out discussions.
The Federation of European Accountants complains that the Commission’s proposals are far more rigorous than the U.S. equivalents, which, it said, do permit auditors to carry out some audit services.
Writing in the European Parliament’s magazine, the FEE argued against the proposed limit on the provision of related financial services to less than 10 percent of the total audit fee. This could include functions such as a review of interim financial statements, other assurances, and certification on compliance with tax requirements, where such attestations are required by national law. An executive said these functions would be permitted in the U.S.
The Brussels-based federation represents not only the Big Four, but also mid-tier firms such as BDO and Grant Thornton, and all sorts of other accountancy interests. Its members employ 700,000 accountants, including government employees.
An American observer based in Europe, Patrick Giles, criticized the attitude opposing the audit-consultancy split. Giles, a former accountant and now a lawyer at the London branch of the law firm Rawlings Giles, described the accountancy profession in the EU as having “no concept of the conflict-of-interest issue”. He added, “They take it to be an opportunity to cross-sell!”
Investors voiced similar concerns at a Brussels conference in early 2011. Jules Muis, the former vice president and controller of the World Bank, said, “Auditing no longer speaks the language of finance.” Iain Richards, of the giant insurance company Aviva was critical of what he described as “widespread failure” by auditors.
Recently, a more nuanced point of view emerged from the European Parliament’s “rapporteur” (or coordinator) for the legislation. Syed Kamal, a Conservative member of the European Parliament for London, stated, “I am starting this process with an open mind. There may be a case for tackling the dominance of the Big Four and finding ways to improve auditing quality, but I want to hear from investors and companies whether they believe that the current auditing system is broken.” He added, “There could be significant unintended consequences if we legislate more than absolutely necessary.”
Lobbyists in Brussels are expected to gear up their efforts when the legislative packages move into the hands of the European Parliament, persuading members to introduce myriad amendments, which may cause delay.
The Parliament’s schedule to consider the legislation includes a hearing in March, a draft report in July, amendments ending in September, a committee vote at the end of November, and a final vote in plenary session in January 2013. However, the FEE estimated that the delay could extend to four or five years.
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