Wednesday

26th Apr 2017

EU audit reform reduced to 'paper tiger'

  • In Spain, KPMG acted both as advisor and 'independent arbiter' for Bankia in a dispute with angry depositors (Photo: Line Orstavik)

The EU is close to overhauling rules for financial auditors, but critics say the reform will be a paper tiger unable to break up the dominant position of the world's four biggest audit firms.

The legal affairs committee of the European Parliament on Tuesday (21 January) approved a draft agreement struck late last year with member states and the European Commission on the so-called audit reform package.

Dear EUobserver reader

Subscribe now for unrestricted access to EUobserver.

Sign up for 30 days' free trial, no obligation. Full subscription only 15 € / month or 150 € / year.

  1. Unlimited access on desktop and mobile
  2. All premium articles, analysis, commentary and investigations
  3. EUobserver archives

EUobserver is the only independent news media covering EU affairs in Brussels and all 28 member states.

♡ We value your support.

If you already have an account click here to login.

Its proponents are saying that the new rules will weaken the dominance of the "Big Four" audit firms: PriceWaterhouseCoopers (PwC), Deloitte, Ernst&Young and KPMG.

All four are multinationals comprising of a myriad smaller national firms who are - in theory - independent of each other and in competition with the other rival names.

But among the four names, as practice has shown, there is no real competition, as they often work together or subcontract to and from one another - for instance, in the case of the Spanish bank bailout, when all four were hired by the Central Bank of Spain for a total of €19.1 million to assess the value of local banks' credit portfolios.

In addition, failure by the Big Four to properly audit and scrutinise US investment banks in the run-up to the 2008 financial crisis has raised questions about their real motivation: to reveal problems in their clients' books, or to keep lucrative contracts going?

British Conservative MEP Sajjad Karim, who drafted the Parliament's position on the audit reform package, said on Tuesday (21 January) that this reform will have "positive ramifications not just for the audit market, but for the financial sector as a whole."

"We are rebuilding confidence one step at a time,” he said.

The agreed text introduces a prohibition of "Big 4-only" contractual clauses requiring that the audit be done by one of these firms. It also forbids these firms from offering non-audit services to their clients, such as tax advice, which influences the company's financial statements.

In Spain, KPMG has acted both as financial advisor and "neutral arbiter" for Bankia in a dispute with depositors who say they were scammed by the bank to convert their savings into "preferred shares" - a scheme which then went bust.

But apart from the bans, MEPs have failed to put a meaningful cap on the period of time one or several of the Big Four can prolong their contracts with a firm or a public authority.

"To ensure that relations between the auditor and the audited company do not become too cosy," a mandatory rotation rule has been agreed, but the audit firm only has to leave after 10 years.

If it wins a new tender, it can stay for another 10 years, or even for an extra 14 years, if there are joint audits, as it is often the case.

In its original proposal, the EU commission had said firms should be rotated after six years and have "cooling off periods" of four years before being allowed to return to the same client.

“A majority in committee judged that this would be a costly and unwelcome intervention in the audit market," the British Conservative Party said in a press release.

Close to the interests of the financial industry, the Conservatives have fought any provisions that would have upset the Big Four, two of whom - PwC and Ernst&Young - have their global headquarters in London.

German Green MEP Sven Giegold, who sits on the economics committee, where his group tried to push for more scrutiny and for shorter contracting periods, did not hide his disappointment at the deal, which is likely to be adopted by the European Parliament in April.

"The audit file is a strong wind for the financial lobby here in Brussels. Honestly I don't expect any resistance before the plenary," he told this website on Wednesday.

He said the proposal was weak to begin with, and has gradually become even weaker.

"The Big Four will continue to dominate the market. After this failure to regulate it, it is up to the Commission's directorate general for competition to act on this oligopoly. So the battlefield moves to [EU competition commissioner] Almunia," he said.

For his part, Kenneth Haar from Corporate Europe Observatory - a campaign group which monitors lobbying in the EU capital - calls the reform a "paper tiger."

"There has been talk in the EU institutions of breaking the monopoly of the Big Four for about a decade now, and this is what they come up with: rules that will allow companies to have the same auditing company up to 24 years," he said.

"We've seen extensive and aggressive lobbying on this initiative from the very beginning. It's difficult to reach any other conclusion that the financial lobby was successful on this one," he added.

Tom McDonnell, an Irish expert from the Dublin-based think tank Tasc, told this website by email that "auditing firms contributed significantly to Ireland's banking crisis yet there have been no consequences for the offending audit firms."

"Genuine reform means making audit firms accountable for mistakes - with adverse consequences (e.g. fines and suspensions) for the firm in the event of professional negligence," he added, referring to a provision which is missing from the EU package.

Eurogroup makes 'progress' on Greek deal

Eurozone ministers endorsed an agreement in principle between the Greek government and its creditors over a new package of reforms. But talks on fiscal targets and debt could still block a final agreement.

New anti-trust complaint looms over Microsoft

At least three security software companies “met several times” with the European Commission to complain about Microsoft’s alleged abuse of its market position. A formal case could follow.

Commission stops German-British stock merger

The decision to block the merger of the London Stock Exchange and Deutsche Boerse was expected, as negotiations between the parties broke down a few weeks ago.

SMEs lack support in EU financial plan

The European Commission's plan for a capital markets union is said to be aimed at small and medium-sized enterprises, but many could end up being left out in the cold.

New anti-trust complaint looms over Microsoft

At least three security software companies “met several times” with the European Commission to complain about Microsoft’s alleged abuse of its market position. A formal case could follow.

Investigation

MEPs oppose EU agency to prevent Dieselgate II

The European Parliament said on Tuesday that there should be more EU oversight on how cars are approved, but stopped short of calling for an independent EU agency.

News in Brief

  1. Hungary's Orban will participate in EU parliament debate
  2. Malta floats cash-for-refugees plan
  3. Ivanka Trump to meet Merkel at Berlin women's conference
  4. Arctic Ocean could be ice-free in 20 years
  5. Nord Stream 2 to get €4.8bn from European energy firms
  6. Defeated Fillon retires from French politics
  7. Hollande: Vote Macron to avoid 'risk' for France
  8. Italy misses deadline on air quality warning

Stakeholders' Highlights

  1. UNICEFRace Against Time to Save Millions of Lives in Yemen
  2. Nordic Council of MinistersDeveloping Independent Russian-Language Media in the Baltic Countries
  3. Swedish EnterprisesReform of the European Electricity Market: Lessons from the Nordics, Brussels 2 May
  4. Malta EU 2017Green Light Given for New EU Regulation to Bolster External Border Checks
  5. Counter BalanceCall for EU Commission to Withdraw Support of Trans-Adriatic Pipeline
  6. ACCAEconomic Confidence at Highest Since 2015
  7. European Federation of Allergy and Airways60%-90% of Your Life Is Spent Indoors. How Does Poor Indoor Air Quality Affect You?
  8. European Gaming and Betting AssociationCJEU Confirms Obligation for a Transparent Licensing Process
  9. Nordic Council of MinistersNordic Region and the US: A Time of Warlike Rhetoric and Militarisation?
  10. European Free AllianceEFA MEPs Vote in Favor of European Parliament's Brexit Mandate
  11. Mission of China to the EUXinhua Insight: China to Open up Like Never Before
  12. World VisionViolence Becomes New Normal for Syrian Children

Latest News

  1. Russische schwarze Kassen bedrohen EU Demokratie
  2. Libya commanders in Brussels for migration talks
  3. Mixed review for EU asylum spots in Greece and Italy
  4. France still anxious over possibility of Le Pen win
  5. Free wifi plan backed by MEP committee
  6. Report: Germany blocks post-Dieselgate reform
  7. Russia suspected of Macron hack
  8. EU to exclude financial services from post-Brexit deal

Stakeholders' Highlights

  1. International Partnership for Human RightsTime to Turn the Tide and End Repression of Central Asia's Civil Society
  2. European Free AllianceAutonomia to Normalnosc - Poland Urged to Re-Grant Autonomy to Silesia
  3. UNICEFHitting Rock Bottom - How 2016 Became the Worst Year for #ChildrenofSyria
  4. Malta EU 2017Green Light Given for New EU Regulation to Bolster External Border Checks
  5. ACCAG20 Citizens Want 'Big Picture' Tax Policymaking, According to Global Survey
  6. Belgrade Security ForumCall for Papers: European Union as a Global Crisis Manager - Deadline 30 April
  7. European Gaming & Betting Association60 Years Rome Treaty – 60 Years Building an Internal Market
  8. Malta EU 2017New EU Rules to Prevent Terrorism and Give More Rights to Victims Approved
  9. European Jewish Congress"Extremists Still Have Ability and Motivation to Murder in Europe" Says EJC President
  10. European Gaming & Betting AssociationAudiovisual Media Services Directive to Exclude Minors from Gambling Ads
  11. ILGA-EuropeTime for a Reality Check on International Day for the Elimination of Racial Discrimination
  12. UNICEFHuman Cost to Refugee and Migrant Children Mounts Up One Year After EU-Turkey Deal