Big Four auditors face massive shake-up

The "Big Four" global auditors could be broken up, leaving them susceptible to take-overs if radical European Union plans to boost competition go ahead, a UK auditing official said on Tuesday. EU Internal Market Commissioner Michel Barnier is due to publish a draft law in November to curb what he sees as a conflict of interest when auditors check the books of and supply lucrative Consultancy services to the same customer.
Auditors, KPMG, Ernst & Young, Deloitte and PwC, audit nearly all big companies in the world, often serving the same clients for decades. A copy of Barnier's draft law seen by Reuters proposes that auditors be banned from offering Consultancy services to the companies they audit, or even banned from consulting altogether - a move that could force the firms to split their operations.
"Breaking up the Big Four audit firms would make them more susceptible to be taken over by emerging Chinese firms," a UK audit official said on Tuesday on condition of anonymity due to the sensitivities involved. Barnier's spokeswoman said he has made it clear that the audit sector displayed clear failings during the crisis, giving banks a clean bill of health just before they were rescued. He has trailed his plans for a year and the industry had hoped they would be watered down by the time he formally proposed them next month.
"To reinforce independence and professional scepticism, the prohibition of the provision of non-audit services to the audited entities and even the prohibition of the provision of non-audit services in general would effectively address this issue," the draft said.
"Better audits and more informative audit reports will enhance confidence in the markets while also informing stakeholders of any problems with regards to any particular entity," the draft added.
The EU plans go much further than the United States, another major base for the Big Four, where the standard setter PCAOB is mulling requiring firms to switch auditors regularly, but has stopped short of recommending audit-only firms. Deloitte said it supports improving audit quality but rejects joint audits, mandatory rotation and tendering, and a complete ban on non-audit services.
Auditing industry officials estimate that 28-30 percent of global revenues come from statutory audits, with about 18 percent from non-audit services provided to the same audit client. This means that about half of total revenues is earned from providing Consultancy services to clients, which are not being audited as well.