16 October 2017

Financial Times: EU rules force US banks to overhaul ties with auditors

US banks and insurers will be forced to review their auditor relationships that often stretch back decades after being caught by new European rules aimed at ending the cosy relationships between companies and the “big four” accounting firms.

Goldman Sachs, Citigroup, Wells Fargo and Morgan Stanley are among the large financial institutions that will need to change their auditor arrangements to comply with the new rules, potentially putting lucrative audit contracts worth hundreds of millions of dollars up for grabs.

The new rules, which came into force last year, require listed companies in Europe to appoint a new auditor at least every 20 years and to tender these contracts every decade. However, the reforms also apply to so-called public interest entities, dragging the European arms of US banks and insurers into their scope.

US financial institutions that have a large presence in Europe and longstanding auditor relationships will have to choose between appointing a new accounting firm to oversee their entire business — a contract typically worth tens of millions of dollars — or selecting a second firm to audit their European business, according to several accounting experts.

Richard Sexton, global head of assurance at PwC, one of the “big four” firms, said US financial institutions have 18 months to decide how to respond to the reforms. “This is a big deal for the institutions, and for the auditors. It is very high on their agenda,” he said.

Andy Baldwin, managing partner for Europe, the Middle East, India and Africa at rival accountancy firm EY, added: “This is a very active conversation for a large number of institutions. The big wave of tenders for these banks has not started yet, but audit committees are discussing it more [to decide whether to change] the overall relationship with their audit firm or appoint a subsidiary auditor.”

Mr Sexton said most banks are reluctant to go through the expensive process of appointing a new auditor for the entire group, but also want to avoid the increased cost and confusion of having multiple auditors in different regions.

“The decision point for these major groups is do they wish to have more than one auditor, or do they move to a single auditor? At the moment the major US financial institutions are very reluctant to move to multiple audit firms,” he said.

US banks and insurers that decide to appoint a second auditor for their European business will face the additional problem of not being able to use two of the “big four” firms — which also include Deloitte and KPMG — for non-audit services such as consulting and tax advice because of independence concerns.

Full article on Financial Times (subscription required)

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