Call for increased competition in audit sector
Posted On March 22, 2020
MEPs will next week (24 May) vote on a report calling for the EU to impose rules to guarantee the independence of audits and to encourage more competition in the audit industry.
The European Parliament report, which will be voted on by its legal affairs committee, calls on the European Commission to come up with rules that would help smaller audit firms to gain a larger market share, reflecting the concerns of many observers that one of the industry’s most significant problems is the dominance of the ‘Big Four’: Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers.
The Commission is scheduled to present proposals in November to address flaws in the current legislative framework that it identified in a green paper in 2010.
Commission officials have pointed to the huge losses revealed by banks between 2007 and 2009, despite clean audit reports, as an example of the inadequacy of current rules.
The Parliament’s report, whose author is Antonio Masip Hidalgo, a Spanish centre-left MEP, argues that auditors should be obliged to inform regulators if they spot problems that could jeopardise a company’s future. It also asks the Commission to consider extending the role of auditors, obliging them to audit companies’ risk reports and not just their main financial statements.
Lessons from the crisis
Robert Hodgkinson, executive director at the Institute of Chartered Accountants in England and Wales, said the industry acknowledged that there were lessons to be learned from the crisis but warned against an approach that assumed all 27 audit markets in the member states had the same problems.
He said that there was “a degree of uncertainty” in the profession over the effect of the Commission’s legislative proposals, including the possible introduction of joint audits or mandatory tendering of audit contracts. Mandatory tendering, an idea raised in the Commission’s green paper and advocated in the Parliament’s report, would require listed companies having to appoint two audit firms to increase competition. Only in France is there currently such a requirement.
Hodgkinson said compulsory tendering and radical ideas to reform the market’s structure could be expensive and disruptive.
The Parliament’s report calls for the Commission to carry out an in-depth assessment of the financial impact of the proposals it will put forward in November.
On Tuesday (17 May), the UK’s Office of Fair Trading (OFT) announced that it had provisionally decided that there were competition problems in the audit market that should be referred to the country’s Competition Commission. The OFT is to discuss the issue with regulators, government, business and the audit industry before deciding on the next step.