Brussels: The European Commission looks set to reveal its plans for the future of audit later today, with proposals that could undermine the professional services business model of the Big Four firms and force them to sever their consulting arms.
The Commission postponed, at short notice, the announcement of its proposals last week but Internal Market Commissioner Michel Barnier now seems ready to take on the audit establishment. He is expected to demand auditor rotation and shared audits, as well as imposing limits on the advisory services offered by audit firms to their audit clients.
Barnier believes that the market dominance of Big Four is monopolistic and that the provision of non-audit services can lead to conflicts of interest. His determination to tackle PwC, Deloitte, Ernst & Young and KPMG in Europe has been further fuelled by the perceived failure of the audit process during the banking crisis.
In a preparatory statement last night The Commission said, "As part of its work in creating a sounder and stronger financial system, the Commission will table proposals to reform the European audit market on 30 November. In the light of the 2008 financial crisis, important questions and doubts have been raised on the credibility and reliability of audited financial statements, notably those of banks and other financial institutions. Questions have also been raised on the role of auditors, their independence and the general sustainability of the current highly-concentrated audit market that is dominated by four large companies (the "Big Four": Deloitte, Ernst & Young, KPMG and PwC).
"The Commission proposals will address the weaknesses identified, by ensuring auditor's independence, robust supervision and by facilitating the creation of more capacity at the top end of the market.
"Auditors form an integral part of the financial environment. It is their role to contribute to the credibility and reliability of financial statements of banks, other financial institutions and listed companies for example.
"But the financial crisis highlighted weaknesses in the system. Although audits of some large financial institutions just before or during the crisis resulted in 'clean' audit reports, there remained serious intrinsic weaknesses in the financial health of the audited institutions. With a view to learning all the lessons from the crisis and in the wider context of the current financial reform, the Commission launched a consultation last year to have a debate on the role of audit. More than 600 responses were received and these were taken in to consideration in the preparation of the proposal to be unveiled."