Big four auditors face break-up to restore trust

The world's top four audit firms will have to split up and rename themselves under a far-reaching draft European Union law to crack down on conflicts of interest and shortcomings highlighted by the financial crisis. "Investor confidence in audit has been shaken by the crisis and I believe changes in this sector are necessary," Internal Market Commissioner Michel Barnier said on Wednesday.
The big auditors said the plans would bump up costs and would not improve audit quality, while smaller rivals accused Barnier of a climbdown. Barnier said recent apparent audit failures at AngloIrish and Lehman Brothers banks, BAE Systems and Olympus "would strongly suggest that audit is not working as it should". More robust supervision is needed and "more diversity in what is an overly concentrated market, especially at the top end", he said.
Just four audit firms - Ernst & Young, Deloitte, KPMG, and PwC - check the books of 85 percent of blue chip companies in most EU states, a situation the Commission said was "in essence an oligopoly". UK data shows the Big Four profit margins are 50 percent higher than the next four audit firms, the commission said. Under Barnier's plan, the four top firms will have to separate EU based audit activities from non-audit activities, such as tax and other advisory services - "to avoid all risks of conflict of interest". There would have to be legal separation of audit and non-audit services if over a third of revenues from auditing comes from large listed companies and the network's total annual audit revenues are more than 1.5 billion euros in the EU.