EU audit reforms and China | China Accounting Blog | Paul Gillis

EU audit reforms and China

A draft European Union law that was unveiled yesterday will dramatically change accounting firms in Europe, and might inspire Chinese regulators to adopt similar reforms. 

The proposal would require firms to separate their consulting businesses. While three of the Big Four (excluding Deloitte) disposed of their consulting businesses in the wake of Sarbanes/Oxley, they have all started them up again as the noncompete agreements with the buyers expired. By 2009, tax services totalled 24% of Big Four global revenue and advisory services totalled 28% - in sum 52% of the Big Four global revenue.  

The proposal would create pure audit firms and require the firms to spin off or sell the consulting practices. While the rules would only apply in the EU, they likely have global implications. Because most Big Four clients seek globally integrated services, the firms are likely to be pressured by the market into creating separate consulting firms in other countries - in particular the important markets of the U.S. and China. 

The other significant proposal is to require mandatory audit rotation every six years, which can be deferred to nine years if the audit is shared with second tier firms.  

While these proposals would only apply to the EU, Chinese regulators might consider copying them. Official Chinese policy has been to promote the development of ten Chinese CPA firms to serve Chinese companies globally. Both of these proposals would weaken the Big Four's hold on the Chinese audit market and may be attractive to Chinese policy makers.  

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