Plans to Ban Non-Audit Work for Big Four
The Big Four could face a ban on non-audit work and mandatory rotation on the audits of large companies, if proposed new regulations from the European Commission are given the go ahead later this year.
According to a leaked draft of a green paper on audit which is due to be published in November, firms that audit big international businesses could be barred from doing anything else, which would effectively require them to divest their auditing businesses.
Non-audit work is described by the Commission as ‘a source of conflict of interest.’ The draft says: ‘Audit firms of significant dimension should... not be allowed to undertake other services unconnected to their statutory audit function such as consultancy and advisory services.’
Another option under consideration is barring the provision of non-audit services to audit clients. This would cost the Big Four about £1bn a year according to calculations by the Daily Telegraph. In the draft's current form, the embargo would cover tax advisory and consulting services, actuary, risk management, legal and valuation services, and book-keeping.
The proposals, which have the backing of Michel Barnier, the internal markets commissioner, also suggest that companies should be required to change auditors every nine years as part of a policy of ‘mandatory rotation’ designed to encourage ‘professional scepticism’ and to stimulate competition.
Companies with balance sheets greater than €1bn (£86m) would be required to hire two auditors to conduct a ‘joint audit’ of their books, including at least one firm outside the Big Four.
Barnier said: ‘There are weaknesses in the way the audit sector works today. That’s why the European Commission will make ambitious proposals in coming weeks to overhaul the audit sector.’
The draft proposals state that ‘auditors are the dog that did not bark during the crisis and their role has been put into question’ and describes them as too willing to ‘satisfy management’ to secure fees at the cost of providing a ‘service in the interest of shareholders and generally in the public interest’, according to the Daily Telegraph.
Barnier described the proposals as ‘ambitious’ and said their one key objective was ‘ensuring robust and completely independent audits in the wider context of a better functioning internal market for audit services’.