Commission’s reported plans reflect unease at the role played – or not played – by auditors in the financial crisis
- Joint audits of companies with a balance sheet of over Euro 1 billion, with at least one of the joint auditors being a firm outside the “Big Four” of PwC, Deloitte, Ernset & Young and KPMG – to encourage the next tier of audit firms to get a foothold in the large company audit market, which at the moment is entirely dominated by the Big Four.
- Mandatory rotation of large firm audits after nine years – to prevent too close an identification between client and auditor.
- Consultancy and advisory services no longer to be provided by large audit firms – to avoid perceived conflicts of interest.
All of these proposals will be opposed by the Big Four, given that they – particularly the spin-out of consultancy businesses – pose a direct threat to their business model.
The Commission’s reported proposals should be seen in the context of the debate about the trust that can be placed in audited financial statements and the wider work of large firm auditors. In the UK, the Economic Affairs Committee of the House of Lords produced an report in March 2011 that was extremely critical of the large firm audit market - see our discussion in this post and the supportive response of the Financial Reporting Council here – and the Office of Fair Trading is on the cusp of reporting the large firm audit market to the Competition Commission, as we discuss here.
For more on auditors, their business model and role, click on our “Reporting and Accounts” category.
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