04 January 2023

Delors Centre's Mack: The EU must not procrastinate on urgent audit market reforms

After the Wirecard accounting scandal, the EU Commission promised to reform the rules for auditors. Now it must finally present them: The problems are clear and there are plenty of proposed solutions.

For years, the auditing firm EY certified Wirecard clean balance sheets, but in the end, 1.9 billion euros were missing. In response to the collapse of the payment processor, the EU announced far-reaching reforms. By the end of 2022, the responsible Commissioner Mairead McGuinness wanted to present a legislative proposal.

But now the EU Commission seems to be in no hurry. At the beginning of December, McGuinness stated that the Commission would have to further deepen its assessment of the problems. She did not name a date for concrete reform proposals.

This is unjustified. The problems of the audit market dominated by the "Big Four" Deloitte, EY, KPMG and PwC are well known and there are enough proposed solutions. The Commission itself conducted a public consultation and commissioned a study on the rules introduced after the financial crisis. The results were published beginning of December and underline the acute need for action:

Market concentration remains high

Since 2016, there has been a Europe-wide obligation to rotate auditors. Large, listed companies must change their auditor every ten years at the latest and put out a call for tender. This is intended to strengthen competition and counteract excessive proximity between the auditor and the audited company.

However, more than half of the companies invite only the Big Four to tender. As the costs of participation are high, smaller audit firms often do not participate in tenders, even if they are invited. This has consequences: In Italy and Ireland, the Big Four share about 90% of the total audit fees among themselves, in Germany they dominate the market with 95%.

More independence, less competition

In order to reduce conflicts of interest, the EU established a blacklist of prohibited consultancy services that auditors are not allowed to offer to their audit clients. In addition, the fee from permitted consultancy services may not exceed 70% of the audit fee.

While the 70% cap is too high to effectively strengthen independence, the blacklist harms competition. For large, complex companies, only a handful of audit firms qualify anyway. If one or two are then excluded from the audit because of consultancy services, companies have little choice....

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