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EU hopes to break the market power of the auditor

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BRUSSELS. EU Internal Market Commissioner Michel Barnier to take auditor on a short leash. Intent he has above all the big four of the industry: PwC, KPMG, Deloitte and Ernst & Young had at the annual examination of companies in most EU countries have a market share of more than 90 percent. " Such market concentration mountains "systemic risk," says a Green Paper, which will introduce the Commissioner today, and the Handelsblatt is already available. On the Green Paper is the first stage of an EU legislative process. 2011, Barnier to submit an EU directive or regulation.

The auditors have to adjust to hard times. For Barnier considerable doubts as to the independence of the currently used accounting exam. EU Commissioner dislike particular, that are engaged auditors of the companies to be audited and paid. Barnier sees a "small". Therefore be considered whether the "appeal and payment of" an accounting firm in the responsibility of a third party, perhaps a regulatory body, "must be transferred. In plain English: Businesses should choose its auditors no longer himself, and the fee could be fixed by the Government.

Financial crisis exposes the problems

Such far-reaching federal intrusion into the industry in the EU Commission itself controversial. Barnier’s German counterpart Günther Oettinger already submitted a protest. Barnier’s infringement was "excessively interventionist," it says in the context of the German Commissioner. The freedom of the profession was threatened.

Barnier in turn refers to the fact that the financial crisis, major weaknesses, the auditor had unearthed. They had not received warning of the latent risks in bank balance sheets. Hence, some EU countries have already drawn conclusions and to adopt strict rules for auditors.

Company must submit its balance sheet in France two auditors. Such a "double check" could be needed anywhere in the EU, says the Green Paper. The Commission will also require companies to rotate their auditors regularly. There is no such principle of rotation in the EU legislation already on rating agencies.

Barnier to intervene deeply in the business model of the auditor. The Commission will examine whether a ban on parallel consultation was possible to test, says the paper. The "possible outcome" of this test could be that in future "clean audit firms’ admit. Would lead to a ban on consulting accountants, would have far-reaching consequences. Because prices for audit services to be broken up to 30 percent, build PwC and Co., the consulting business of solid. Sun PwC Germany in 2009 was € 680 million while sales of financial statements which is already € 310 million with consulting.

The customer structure of the auditor wants to change Barnier. A company should assemble by any customers too dependent. Why should the "share of the fees for a single client" are limited to the total revenue. Barnier also wants to reform the management of the examiners. They should – as already today the rating agencies – independent supervisory board members appointed at the head of their companies.

The Green Paper also questioned whether the large accounting firms could only remain in possession of partners. After examining errors could lead to high claims, which the partners can no longer cover. The large auditors would therefore have "alternative structures" reflect "to capital from other sources" to obtain.

For state oversight of auditors to the ideas of Brussels, an EU agency should be responsible. National supervisors are no longer sufficient, as public accounting firms are already active internationally. Fore the European Group of Auditors? Oversight Bodies (EGAOB), work together in the national guard, will be upgraded to an EU supervisory body.

Auditors are opposing the plans

In the major auditors Barnier met with his proposals on a broad front of opposition. "Global and National has created a huge gap between the ‘big four? And other market participants," said Martin Plendl, CEO of Deloitte Germany. "If Brussels lead the examiners should take the advice, the even greater distances than before, because smaller companies often have high proportions advice."

Criticism also comes from the medium-sized auditors. "I am opposed to mandatory rotation of external auditors. In general, occur most cases liability of auditors immediately after a change of society," Marian Elle Rich, a partner with the company PKF Fasselt blow. The challenge Barnier to the big four it is not convincing. "I doubt that regulatory intervention to help medium-sized auditors to more market power."

Klaus-Günter Klein, CEO of Grant Thornton Warth & Klein speaks out against fixed fees for accountants: "That would be an excessive intrusion into the market." Klein also commented "skeptical that a European body that awards the contracts centrally, can actually contribute to greater competition among auditing firms.

A little praise is only by Klaus-Peter Naumann, CEO of the Institute of Chartered Accountants in Germany (IDW): "The fact that the EU Commission investigates after the crisis, how to improve the efficiency of the final examination, at the time and shows the importance the test for the functioning of markets. "

Some medium-sized accounting firms, of which there are several dozen in Germany found Barnier’s proposals in some ways not so bad. They hope for the dismantling of the cartel of the "big four" – so they get even better in the business of large companies. This is especially true for Germany. Here shared until recently a mere two Prüfkonzerne, KPMG and PwC, almost all the prestigious mandates in the German benchmark index DAX. Joint audits, examining a company by two companies instead of only one, as it wants the Commission, this country is the exception. Only the German Telekom (PwC and Ernst & Young) provides still a duo.

Accounting scandals: companies often find themselves in the criticism

The customers buzzing long since the business. Only the auditors are still struggling with the aftermath of the deepest downturn of the postwar period. And when it comes to the ideas of the EU Commission, after the crisis never be the same as before the crisis.

The industry is made for the collapse of banks with responsibility. For accounting scandals and bankruptcies had the auditors plug already for years with severe criticism.

The latest example: The UK regulator Financial Reporting Council (FRC) opened in June, a formal investigation against Ernst & Young (E & Y). You have to suspect the company, sloppy in checking the bankrupt bank Lehman Brothers. The British are responding to an investigative report from the U.S. that Lehman was already months before the bankruptcy on wobbly legs. Only accounting tricks with which the management of the bank disguised the true debt held, the Institute alive. The special auditor Anton Valukas accuses E & Y, to have ignored the inconsistencies in Lehman’s books too long.

Recently opened, the FRC is another case against E & Y: This involves the question of how the FSA financial examiner for the protection of customer funds have informed at Lehman. Are the UK authorities to the conclusion that E & Y had been guilty of something threatening heavy fines.

Even before Lehman there were enough cases of failure of auditors, regulatory advocates play into their hands. Criticism is always loud when companies need to sign shortly after issuance of an unqualified audit opinion on the financial statements for bankruptcy. A fortiori, the stocks are the auditors when they see the fraud by executives.

Spectacular cases undermine confidence in the profession

Shaken the confidence in the profession, especially when there are spectacular cases. Still fresh in memory are accounting scandals such as WorldCom, Parmalat, Comroad or Xerox.

In particular, the case of the American energy company Enron in 2001 accountants can now even flinch. The repeated, but not discovered accounting irregularities led to the accounting firm Arthur Andersen ultimately globally dissolved. In Germany, most of the company merged with E & Y.

A number of small, was no less spectacular, but the case of Baden Flowtex company. Again, the fraud long flourished in secret. The company sold in the 90’s drills at a price of over one million D-Mark. Most of them existed only on paper. When the air bookings were noted, the damage had already adds up to billions.

In 2003, the Italian food group Parmalat and its auditors were publicly pilloried. The Italians have masked some 14 billion euros of debt in the figures, the largest financial scandal in the country was perfect. Parmalat founder Calisto Tanzi-examined today to blame the banks – despite a fine and imprisonment.

In such crisis situations, the calls grow louder for greater regulation of Certified Public Accountants industry. The Green Paper of the EU Commission is primarily a basis for discussion. Remains to be seen how strong the inspectors are limited in their work will match

Authors: Ruth Bersch, Susan Butcher, Katrin Terpitz, Dieter Focke Brock, Michael Maisch