Accountancy firms face radical EU reform

Less cosiness needed in auditors’ relationship with companies, EU internal markets commissioner says

EU internal markets commissioner Michel Barnier with Minister for Finance Michael Noonan after the Ecofin ministers’ meeting at Dublin Castle on April 12th. Mr Barnier said: “We need diversity, more competition, less cosiness, less familiarity between the auditors and the companies they audit.” Photograph: Mac Innes Photography/Getty Images

EU internal markets commissioner Michel Barnier with Minister for Finance Michael Noonan after the Ecofin ministers’ meeting at Dublin Castle on April 12th. Mr Barnier said: “We need diversity, more competition, less cosiness, less familiarity between the auditors and the companies they audit.” Photograph: Mac Innes Photography/Getty Images

 

Accountancy firms face “fundamental reform”, EU internal markets commissioner Michel Barnier has warned, as Brussels prepares to intensify efforts to overhaul the auditing industry after the financial crisis.

Speaking to The Irish Times at a meeting of EU finance ministers in Dublin this weekend, Mr Barnier said “very serious and real mistakes” by auditors had played a role in the crisis.

“We need diversity, more competition, less cosiness, less familiarity between the auditors and the companies they audit,” he said. “We need to get rid of the conflicts of interest which exist and we need full transparency.”

Brussels first tabled draft proposals to overhaul the audit industry in November 2011 but has faced intensive lobbying.

The “big four” accountancy firms in Ireland have also been lobbying civil servants in Dublin to water down the proposals, which included plans to separate the auditing from the consulting business, make joint audits obligatory and force companies to rotate their auditors.

The failure of auditing firms to spot financial irregularities in their audits of banks has been widely criticised, which resulted in taxpayers bailing out banks in some countries.

IBRC commenced legal proceedings against its former auditors Ernst & Young late last year. Those proceedings are continuing, despite the liquidation of IBRC, with Ernst & Young due to file an application for security for costs next week.

Ernst & Young was criticised in a 2011 report by a Chartered Accountants Regulatory Board investigator.

The European Commission specifically name-checked Anglo Irish Bank in its initial policy proposals to reform the industry, noting the “apparent audit failures” at the Irish bank. The recent KPMG insider trader scandal, and the announcement by the British regulator that it is considering investigating KPMG’s audit of HBOS, has also highlighted the issue.

Mr Barnier said the Irish banking crisis resulted from “a weakness of supervision, a weakness in audit, conflicts of interest, and banks which don’t have enough capital”. He said the KPMG affair also highlighted the need for reform.

Ernst & Young, PWC, Deloitte and KPMG audit 85 per cent of Europe’s big listed companies, Brussels estimates.