26 October 2011

FT: Auditing has moved into the realms of sitcom

The play Enron proved that arcane accounting matters could make for compelling theatre. Now, after some assertive prodding by the European Commission, the auditing profession appears to be veering into television sitcom territory.

Brussels’ apparent determination to push for major changes to the cosy audit market is causing increasing friction between the four biggest audit firms, which have most to lose from a shake-up, and their smaller rivals, which have most to gain.

But at the same time as deepening divisions within the profession, the Commission’s draft reforms – leaked last month – demand that these two jostling factions work more closely with each other in the future by conducting joint audits of the biggest European companies, a practice already followed in France.

That the gloves are coming off in the auditing debate was evident from comments made by Michael Andrew, the new global chairman of KPMG. In a series of unusually blunt put-downs, he claimed it would be “ludicrous” for Europe to oblige KPMG, PwC, Deloitte or Ernst & Young to share bank audits with smaller rivals. “I just don’t know if they have the capacity to do it”, he said.

Joint audits are not the most extreme reform in the draft legislation drawn up for Michel Barnier, the EU internal market commissioner. That accolade goes to a measure that raised the prospect of a break-up of the Big Four into separate auditing and consulting businesses.

But the existence of the break-up option could take some of the heat off the joint auditing option, making it more likely to become law. And if that is the case, all auditors – but particularly the Big Four – will need to put aside their differences and demonstrate to investors that auditing is a customer-focused activity that actually makes a difference to the quality of financial communications.

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