The business model of the four largest accounting firms in the world will be subjected to an unprecedented attack from the European Commission, through a set of rules that will force companies to waive advisory services and focus only on the audit, but only in conjunction with a smaller rival, writes Financial Times. A draft law seen by the British newspaper plans to transform the field of accounting, to restore the confidence of markets after the financial crisis. The initiative belongs to the European Commissioner for Competition, Frenchman Michel Barnier, whose office has decided that the audit is characterized by an oligopolistic dominance.
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The project that will be released in November states that companies with turnover exceeding 1 billion euro are required to employ at least two companies to audit them, one of which must be outside of the Big Four – name given to the four largest companies of audit and advisory, Deloitte, PwC, Ernst & Young and KPMG. Also, auditors will not be allowed to work for a large company for more than nine years, a policy of “rotation” which – believe Barnier – will foster competition and independence of auditors. Some of the big multinational companies have been working with the same auditor for more than a century, notes the FT.
Other services provided by audit firms considered ‘non-audit’ are seen by the European Commission as a “conflict of interest”. The draft states that “audit firms of significant size should not be allowed to provide other services out of their statute, such as consulting”.
The new restrictions hit directly in the heart of the audit sector and go further than expected in the intention to reform the industry. If the audit is a business that grows steadily, providing consulting services brings in about two thirds of the revenues of Big Four companies.