Saturday, December 3rd, 2011 - Russell Bedford International
The European Commission’s December 2010 Green Paper on Auditing, Audit Policy: Lessons from the Crisis, was viewed by many as a ‘knee-jerk’ response to the perceived role of auditors’ lack of independence in the failure to predict the global financial crisis.
In a clear attempt to break the Big Four’s dominance of the audits of European listed companies (PwC, Deloitte, Ernst & Young and KPMG together manage around 85% of all FTSE 350 equivalent company audits across the EU), the European Commission’s new Draft Regulation, published November 30, seeks to improve market access for the mid-tier audit firms whose competence and capacity have never been questioned. This is a move which can only improve choice and reduce costs for mid-cap companies.

Commissioner Barnier’s proposed reforms – revealed in a leaked document in September – included regular and fair tendering, joint audits, the separation of audit and non-audit services, greater transparency, the abolition of restrictive lending clauses, and mandatory audit firm rotation (whereby public-interest entities (PIEs) would be forced to change their auditors at regular intervals). The past few months have seen intense lobbying by both the Big Four (appalled at mandatory rotation breaking their very comfortable market dominance) and the mid-tier (hoping for a new market bonanza with the introduction of compulsory joint audits).
But the final Draft Regulation, in abandoning the introduction of compulsory joint audits while retaining provisions for mandatory rotation, would appear to be a welcome victory for both clients and common sense.

While this latest development has incensed his peers in the mid-tier accounting firms, Geoff Goodyear, chairman of global audit network Russell Bedford International, has broken ranks to welcome the reforms. “Barnier is to be commended for standing up to lobbyists on both sides and for putting forward the most crucial reforms likely to benefit clients. While both the Big Four and the mid-tier have lobbied intensely against its introduction, we have always maintained that mandatory rotation, in particular, is the only way to break the obvious over-concentration in this market – and provide public interest entities with a proper choice.”

Mandatory audit rotation: essential for market change

The introduction of mandatory audit rotation had been almost universally condemned – by industry and academia as well as both the Big Four and the mid-tier accounting firms. But Russell Bedford has always endorsed the one overriding argument in its favour: that the mid-tier firms would never get a chance to compete for the audits of the larger listed companies without it.
“Unless and until the mid-tier accounting firms are given a real opportunity to compete on a level playing field for the audits of mid-cap listed companies, clients will see no reduction in costs and will have no greater choice.”

On the practical management of end-of-tenure handover under mandatory rotation, however, the proposals do appear to be somewhat lacking in detail.

Mandatory rotation: delivering on the detail

We have never shared our peers’ enthusiasm for obligatory and permanent joint audits. Quite apart from the (now well rehearsed) arguments against inefficiencies and costs, we have always believed genuine market access would allow ourselves and others to compete directly for greater market share, without the need for the sort of market ‘nannying’ that obligatory joint audits would introduce.
But for mandatory rotation to be effective, regulators do need to consider very carefully how this is to be handled in practice. How will handover be managed?

It is often argued that mandatory rotation is likely to lead to loss of detailed knowledge of the audited entity on the transition between audit firms – and there is some evidence to support this view. It is here that the introduction of joint audits could have a limited utility. This potential problem could be resolved through the introduction of a transitional joint audit arrangement, involving both the out-going and in-coming audit firms, for a (strictly limited) period of two years.

Debate must move on

Given their approximate 85 per cent market share of the audits of FTSE 350 equivalent companies in Europe, the need to control the Big Four’s dominance of the audit market can no longer be ignored, and in retaining proposals for mandatory audit rotation, Barnier has secured the one single mechanism likely to achieve this. The abandonment of obligatory joint audits is also a welcome assertion of clients’ needs over those of the profession. But it is now time for both the mid-tier and the Big Four to put aside what has, for far too long, been a quite damaging display of self-interest in favour of a concentrated and practical analysis of how Barnier’s attempt to improve market access can be secured in practice.

For further information, contact Geoff Goodyear on +44 20 7490 7766 or Kempton Bedell-Harper on +44 20 7410 0339. Alternatively, visit the website at

Contact Profile

Russell Bedford International

Established in 1983, Russell Bedford International is a global network of independent firms of accountants, auditors, tax advisers and business consultants.

Ranked amongst the world's leading accounting and audit networks, Russell Bedford is represented by some 460 partners, 5000 staff and 200 offices in more than 80 countries in Europe, the Americas, the Middle East, Africa and Asia-Pacific.

All Russell Bedford affiliates are well-established firms offering international business advice and services to local and multinational clients. Most provide a full range of services comprising accounting, auditing, tax advice, general business guidance and financial consulting. In addition, many have special expertise in particular fields, such as international taxation or information technology.

In January 2008 Russell Bedford International was named one of the first 17 full members of the IFAC Forum of Firms after reporting it had implemented a globally coordinated quality assurance programme, committed to the use of International Standards on Auditing (ISAs), and met other specific ethics requirements.
Kempton Bedell-Harper
P: +44 20 7410 0339


accounting, tax, audit, international, Russell Bedford, network, CPA, European Commission, Green Paper



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