RADICAL plans to force the UK’s biggest auditing firms to hive off their huge consultancy arms or ban them from cross-selling services to their clients have been tabled by European authorities, it emerged yesterday.
The European Commission has set out new draft regulations to drastically curb the UK’s Big Four accountants Ernst & Young, PwC, Deloitte and KPMG, potentially depriving each of up to £1bn in annual revenue from their consulting businesses.
The shock heavy-handed proposals go much further than industry observers had expected and are now set to trigger a fierce battle. Countries such as the UK may decide to block or dilute the proposals.
The consultation document, from internal markets commissioner Michel Barnier, said Europe’s auditors’ independence was “neither assured nor demonstrable”.
The harshest option proposed would outlaw all sales of advisory and consultancy services, from tax advisory to risk management, to the firm’s clients – even those it does not audit.
Such a law could cause massive financial damage and disruption to professional services firms, as they would have to pull their business model apart and service clients from two separate entities. A watered-down alternative would bar firms from cross-selling to audit clients only.
The draft plans also propose forcing companies to change auditor at least once every nine years, a move the Commission believes would improve audit quality and competition by destroying the cosy relationships between partners and their clients.
It said the low rate of rotation – FTSE 100 companies change their auditor only on average once every 48 years – had “deprived audit of its key ethos: professional scepticism”, according to the draft document seen by trade publication Accountancy Age.
Further costly changes include making large, economically important companies employ two separate auditors, including at least one non-Big Four firm, to jointly audit their accounts.
Audit industry sources told City A.M. the bid to split audit and consultancy functions “wouldn’t make sense” and would be “a massive jolt”.
Unwinding their client services would be a costly and complex process that would raise the cost of providing services and could have wide-ranging tax implications.
They could also potentially spark a regulatory mismatch across the EU as different states adopted different levels of change, the sources said.
The vast majority of the more than 700 responses to the EC had already overwhelmingly opposed such a plan, they added.
Smaller auditors such as BDO and Grant Thornton would gain from parts of the proposed shake-up.