“Big four” safari: Shoot to kill

Currently, the audit market is hyper-concentrated, especially in the most lucrative segments. At the same time, global corporations don’t need global accounting firms, i.e. the big four, anymore. Regional headquarters of Fortune companies have no problem choosing their accounting firm on a regional level. Due to standardized accounting methods and technical capabilities, nowadays a consolidation of regional auditing results at the headquarter level is no problem.

{mosads}The response to the EU’s green paper was huge. 700 companies, associations and auditors participated in the consultation, sending in 10,000 pages of paper — an all-time record, but understandable. Because Barnier’s final goal is not about just breaking the audit oligopoly. It is about the separation of audit and non-audit services eventually.

This discussion is not new. After the collapse of Arthur Andersen in the so called Enron scandal — to this day probably the biggest criminal case in the audit sector — politics already demanded such separation. And this time the auditors are responsible for providing certificates to banks and corporations just a few weeks before the crisis. One cannot ignore their responsibility in the biggest financial and economic crisis which cost about 2.5 trillion euros of EU tax money. In Europe, like in the US, the starting-point still seems to be the idea of spinning off the audit practice. In other words, any personal or financial integration between auditors and consultants shall be prevented.

In the EU initiative it will be important to keep in mind three baselines:

1. Fair competition and independence have always been the most effective measures for quality in the capitalist system. Therefore, it is right to fight any oligopoly as long as the oligopoly is not the only way to provide basic supply security. While the latter argument works for water and electricity, it surely does not for accounting.

2. The spin off of the auditing business and the creation of “audit-only” firms and a mandatory change of auditors can also be counterproductive. It takes time for an auditor to learn about all the structures of a company. A permanent alternation of the auditor could become a problem. On the other hand, auditing is not rocket science. And the structural differences between Fortune companies are not that big either. Eventually they were all restructured at some point based on the consulting services of the same people with the same corporate models.

3. An auditor who also works in consulting — and vice versa — probably has a better understanding of the corporate world. The creation of pure accounting firms potentially involves the loss of know how. But companies will solve that. Someone working for an auditor would be hired tomorrow by a consulting firm — and the other way around — to make up for this loss of know how.

So what can be done? A general mandatory joint audit of two different auditors — with the participation of just one of the big four — would definitely solve the problem of independence. A four eye principle would disclose what some people just do not want to see. On the other hand, this would mean enormous extra costs for corporations. So maybe the EU will just take a first step this time: destroying the oligopoly without spinning off the audit practice. It could enact a prohibition of the already mentioned big four clauses in contracts of banks and lenders to enable Fortune companies to switch to smaller (and cheaper) auditors and increase competition in the market. In any case, EU Commissioner Barnier has blown the horn and started hunting down the big four.

Dr. Andreas Geiger is Managing Partner of Alber & Geiger, a leading EU government relations law firm in Brussels. He was Head of the EU Law Center of Andersen Legal in Brussels until the collapse of Arthur Andersen.

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