?Accountancy was my life,? ran the old advert. ?Until I discovered Smirnoff.? Plenty of auditors could turn to the bottle after they see the reforms Brussels is considering. The changes, according to a draft circulating the European Commission, have caught the industry off guard. Most stunning is the suggestion that the Big Four – PwC, Deloitte, KPMG, and Ernst & Young – should spin off all their non-audit operations. Michel Barnier, internal market commissioner, also plans to mandate joint audits of large companies and make them rotate auditors far more frequently.
Some of the ideas, such as forcing rotation, are gaining ground elsewhere, including in the US. These are sensible and should be accepted by the industry. Regardless of whether long relationships get too cosy – and there is evidence they can – auditors must understand that they appear that way, eroding trust. Other ideas have, however, less merit. Forcing large companies to use two auditors, one a non-Big Four firm, in an effort to open the audit market, is laudable. But its execution carries risks that complicate audits and potentially allow either auditor to avoid taking responsibility. The option is also technically available in most countries but companies have seen no need to adopt it.
Splitting up the firms too, seems ill thought out. Restricting the interaction of audit and non-audit work is good and could go further, but some crossover with a firm?s other teams such as its actuaries and tax experts is actually desirable in improving auditors? expertise and helps retain the brightest staff.
The most extreme plans will get watered down. But the debate is worth having – and loudly. For too long these experienced lobbyists have succeeded in trapping the issues in the regulatory weeds. Mr Barnier should be commended for forcing them into the open.
? The Financial Times Limited 2011