A draft document from the European Commission has proposed giving small-scale auditors the possibility to examine the account books of the world's multinationals.

The EU's green paper could pave the way for the "big four" accounting firms to concede some of their lucrative ground to smaller companies, and force them to decide whether to offer clients auditing or non-audit services.

The paper, which has the backing of EU Internal Market Commissioner Michel Barnier, says mandatory external rotation would shatter the "perverse pressure" on auditors not to lose longstanding clients.

Between them, the four big international auditing firms - Deloitte, Ernst & Young, KMPG and PricewaterhouseCoopers (PwC) – oversee the books of all major multinationals.

Mandatory rotation

While the four say they have evolved to be in their current position of being able to offer a worldwide service to their longstanding global clients, Barnier is due to publish a draft law in November that would remove that privilege.

Anti-corruption agency Transparency International (TI), has welcomed the draft regulation, which would make it impossible for a company to work with the same auditor for longer than nine years. But as Jana Mittermaier, head of TI liaison office, told Deutsche Welle, she would prefer to see an even tougher stance.

"We recommended that the maximum engagement should be limited to a period of three years, renewable once," she said. "The issue has to be seen in the broader context of conflicts of interest in the industry, one that needs to be tackled by enforcing professional ethics and assuring firms' independence."

But Sebastian Kuck, adviser to the EPP Group in the European Parliament, says mandatory rotation is not the right way forward, not least because there is absolutely no proof that it would in fact open up the market.

"If a company has to change auditors, it would rotate among the four big ones," he said.

Conflict of interests

The draft regulation also states that audit firms of "significant dimension" should no longer be allowed to act as consultants of advisers to their clients. Auditors currently generate some two-thirds of their revenue from non-audit services.

Mittermaier says audit firms should not have large consultancy practices, and if they provide advisory services, as most do, "these should not be offered to their own audit clients."

Kuck believes it would be the smaller accounting firms that suffer most under the ferocity of the proposed new division of labor rule.

"The big companies would just create two separate legal entities," he told Deutsche Welle. "But smaller companies could not live from auditing alone, they depend on tax advice or legal services."

Two's a crowd?

By the same token, he dismisses the idea of pairing up big and small accounting firms to conduct joint audits, which the document says would lead to higher-quality auditing.

"How should they divide the work when big companies relate to big audit firms and smaller companies want to go to small audit firms?" he said. "I don't see a model-building shop in central Germany going to PricewaterhouseCoopers for an audit."

Far from opening up the market for smaller companies, he says the Commission's proposals could have a potentially detrimental effect on the very businesses it claims to want to help.

"Big companies know how to help themselves, they lead the market - not because they are bad, but because that is the way things have developed," Kuck said.

Author: Tamsin Walker
Editor: Martin Kuebler