Bad days ahead for Big 4

The Big Four global auditors could be broken up, leaving them susceptible to takeovers 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 and supply lucrative consultancy services to the same customer. 

Auditors, KPMG, Ernst & Young, Deloitte and PwC, check the books of nearly all big companies in the world. 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 has trailed his plans for a year and the industry had hoped they would be watered down by the time he formally proposes them in November. 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 European Parliament, which will have the final say with EU states, gave the plans its broad backing this month. 

Auditing industry officials estimate that 28-30 % of global revenues come from statutory audits, with about 18% 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. 

Barnier has chosen to legislate in the form of a regulation, which will be directly binding on EU states, giving no room for local discretion. Britain, as home to the Big Four's European base, is likely to oppose some of Barnier's more radical proposals though its Office of Fair Trading said in July a full blown competition probe into the sector is warranted. Accounting officials say such a probe would become redundant if pro-competition elements in Barnier's draft make it onto the statute book.

http://articles.economictimes.indiatimes.com/2011-09-27/news/30208236_1_auditing-barnier-consultancy