17 January 2012 | Paul Snell
It is ironic that the auditing sector has recently found itself under significant scrutiny.
As reported last month, the Office of Fair Trading in the UK has referred the market to the Competition Commission, saying it “lacks sufficient competition and does not work well for customers”.
And toward the end of December, the European Commission also set out its proposals for reform of the market, which will have a radical impact on those working in the sector and those that purchase their services. The EC is worried about dominance of the so-called “big four” – Deloitte, Ernst & Young, KPMG and PwC.
“[These] proposals address the current weaknesses in the EU audit market, by eliminating conflicts of interest, ensuring independence and robust supervision and by facilitating more diversity in what is an overly concentrated market, especially at the top-end,” said EU commissioner Michel Barnier.
The changes will include the prohibition of clauses in contracts that demand the use of a specific auditor. Firms will only be allowed to work for a company for six years and will not be allowed to audit that firm for a further four years once the term ends. Public sector authorities will also have to hold an open tender process to select an auditor.
All audit firms will now no longer be able to provide alternative services to clients if they are auditing them to avoid conflict of interest. And major audit firms will have to split up their audit and non-audit services. This will have a knock-on effect on other markets, such as consultancy, in addition to audit.
The EC says the planned reforms will “reinforce the independence and professional scepticism of the auditor”. But they have met with a lukewarm response from the sector.
“The Commission’s own consultation process has indicated a lack of support across Europe for proposals such as audit only firms,” said PwC chairman Ian Powell. “The Commission has not provided any concrete evidence for any positive impact of these proposals on audit quality or properly assessed the additional cost burdens for business.”
☛ More information about the reform of the audit market can be found here.
