European regulators have submitted new rules to the European Commission that, if adopted, will significantly change the accounting profession globally. The rules propose several significant changes.
First, the rules would ban auditors from performing consulting services to their clients. The draft says “audit firms of significant dimension should…not be allowed to undertake other services unconnected to their statutory audit function such as consultancy and advisory services." For 2009, tax and advisory services made up 52% of the global revenue of the Big Four. The rules would likely lead the Big Four to spin off their consulting and tax practices. We have been through this before with U.S. regulators. When Sarbanes Oxley was being developed all of the Big Four except for Deloitte spun off or sold their consultancy practices, but they have all gotten back into the lucrative business as the non-compete agreements expired.
Secondly, the rules will limit auditors from serving big companies for more than nine years. Mandatory audit rotation has been debated for some time, but the firms have usually succeeded in just rotating engagement partners.
Finally, the draft rules propose that companies with balance sheets over €1b must appoint two auditors and one of them must be from outside the Big Four. This will be a boon to the second tier firms, many of which have been thriving in China in recent years.
These rules would apply within the EU, but as we learned with SARBOX, they tend to spread like a virus. China may be particularly happy to adopt these rules as “normative”, since they will help to accelerate China’s plans to develop its own large accounting firms. In fact, there is some evidence that European regulators have this in mind. Reuters reports: "’Breaking up the Big Four audit firms would make them more susceptible to be taken over by emerging Chinese firms,’ a UK audit official said on Tuesday on condition of anonymity due to the sensitivities involved.” Taken over? Unlikely. Overtaken? Perhaps.