Thursday, 2 January 2014 00:00
REUTERS: The European Union has reached a deal on forcing companies to periodically change accountants, as the bloc aims to improve book-keeping quality in the wake of the financial crisis.
The EU hopes a requirement for companies to regularly switch auditors will break up too-cosy relationships, increase competition between accountants and help avoid a repeat of the 2007-2009 crisis, which resulted in the bailout of banks given a clean bill of health by their auditors only months earlier.
The deal, as set out in documents seen by Reuters and which is still subject to the final agreement of member states, signals that parliament made concessions.
A company would have to switch accountants after 10 years. It could keep the same accountants for another decade if the work has been put out to tender with a decision not to change.
Michel Barnier, the EU’s financial services chief, had originally proposed switching more frequently, but said the new law would reduce excessive familiarity between auditors and their clients.
Firms who use two sets of accountants, known as a joint audit, could keep the same book-keepers for up to 24 years.
Sajjad Karim, a British centre-right lawmaker who led negotiations for parliament, said the new law was balanced and would go a long way to restoring confidence in audit markets.
There would be a phase-in period of several years for the mandatory rotation to take effect, but the “Big Four” firms - PwC, Deloitte, KPMG and EY - have still warned of a messy and costly patchwork emerging across Europe.
“It’s pretty horrid,” a senior Big Four official said.
The next tier down of auditors, such as BDO and Grant Thornton, hope mandatory switching will help open the audit market in blue-chip companies over time.
The deal also imposes a cap on how much can be earned in advisory fees from a company whose books are being checked. And it creates a blacklist of some such advisory services, including on tax, which an accountant can’t provide if it is also auditor, though Germany engineered some flexibility in this stipulation.
“It is important not to underestimate the considerable practical impact the reform package will have, not only on the auditing profession but also on companies across the European Union,” said Michael Izza, Chief Executive of the ICAEW, a London-based international accounting body.
Member states and the European Parliament have joint say on the new law. Ambassadors will be asked to formally rubber stamp the deal on Wednesday, with parliament holding a plenary vote in early 2014. The law will come into force around 2016.
The rotation periods laid down under the new law will be minimum requirements, as some countries like Italy and the Netherlands have adopted shorter periods. Next year Britain will require mandatory re-tendering after 10 years.
Some banking industry bodies worry that lenders from outside the 28-country EU will be snared by the rotation rule.
“That means the branch of a US bank in London would be caught, and therefore the US parent as well, if part of same legal entity,” said Pablo Portugal, director for advocacy for the Association for Financial Markets in Europe.
“Subsidiaries of non-EU banks will also be caught. As they often rely on a single world-wide auditor, the rotation policy could be extended to parent companies in practice. This raises challenges and could prove sensitive with U.S. or Chinese regulators,” Portugal said.
Moves to consider mandatory rotation in the United States were rebuffed by Congress.
“The challenge for the audit profession will be to implement these changes in a way that helps restore public confidence in the audit and in auditors,” said Sue Almond, technical director at the ACCA, an accounting body.