EU May Force Big Four to Split Operations

Deloitte, PricewaterhouseCoopers, KPMG and Ernst and Young, collectively known as the Big Four firms, may be forced by the European Union to break up into smaller companies, leaving them vulnerable to future takeovers, according to Reuters. The potential move comes in the form of a draft law written by EU Internal Market Commissioner Michel Barnier that would ban auditors from offering consultancy services to the companies they audit, which could lead them to split their operations to prevent what Barnier feels is a vast conflict of interest, continued Reuters.

Such a move would eventually force companies to choose between whether they are auditors or consultants, as they would be unable to be both. It is estimated, according to Reuters, that 28-30 percent of the Big Four’s global revenues come from statutory audits, with 18 percent coming from non-audit services provided to the same audit client, which means that about half of total revenues is earned from providing consultancy services to clients which are not being audited as well, according to Reuters.

Needless to say, spokespeople from Big Four firms were not pleased with this proposal. Deloitte said it does not support the ban, while KPMG said that such reform would lead to the breakup of the best performing firms. A spokesperson from PWC, meanwhile, said there was no evidence that these measures would improve audit quality. Ernst and Young had no comment.

Other aspects of the regulations, according to Reuters, include a requirement that companies rotate auditors every nine years, a ban on banks requiring that companies receiving a loan be audited only by a Big Four firm, mandatory regular dialogue between auditors and regulators, the introduction of joint audits allowing Big Four firms to share work with smaller companies, partially extending the regulatory authority of the European Securities and Markets Authority over auditors, and making mandatory international auditing standards.