Several thousand companies in Europe will fall under the definition: Public Interest Entities (PIE). These companies must in future comply with the new EU audit rules - the so-called Green Paper - which include focuses on auditor independence and quality of audit. In particular countries, the PIE concept also applies to state-owned companies.

The purpose of these restrictions is to restore confidence in audit firms because the independent role of the statutory auditors is said to have been lost with the global credit and financial crisis. The EU Commission however leaves much of the final regulation to individual EU countries as this is the standard practice.

In addition to independence issues, compulsory or forced rotation, which consists of businesses to change auditors every ten years, is another issue that greatly concerns the large established accounting firms and consulting firms. For audit companies due to the costs involved in bidding for each assignment and the consultancy firms as the rotation, may provide the need for extra accounting and financial services

Relax approach to consulting services(1)
The possibilities for large corporations to utilize the advisory services of their statutory accountant will be limited in the future since the range of consulting services such as tax advice will be extremely limited. There will also be a limit on how much counseling fee the auditor may collect from the audit client.

In several European countries and elsewhere, the big audit companies traditionally have large consultancy and advisory departments, with high skills in several accounting, finance and tax areas. Therefore, it has been easy for companies to secure advice when the large audit firms have been rather active in ‘selling’ their consultancy and guidance to customers.

European auditors naturally live up to their ethical guidelines and the independence requirements of the independent standard of IESBAs "Code of Ethics." Therefore, the commission’s intention to tighten the services is probably more to open up the market, rather than blow the drums of auditor’s independence.

Not only a European problem
Recent studies show that the share of income from advisory and consultancy from the auditors in recent years has increased to 43% of their total turnover. In other words, consulting revenues in major accounting firms will soon be half of the total revenue.

EU rules on auditor independence and the advisory tasks auditor varies in each EU country. The determining factor is the degree of tight national rules on the auditor’s access to provide consultancy. For example, the share of revenue from other advisory services in France is only 5% as France has the most stringent and restrictive rules concerning auditor to assume the non-audit services. In other countries like in Scandinavia, the large audit companies offer a full range of services in tax, law, management, risk management, financial reporting, operations and strategic advice.

Proceeds from the auditing are no longer a significant amount for the large accounting firms. Based on the available 2012 figures(2) , the growth in consulting services and services other than audit continues to rise, with double-digit, while the audit share remains stagnant. Audit companies are hiring right now also counseling staff in twice the number than the audit staff. Still it is believed that in 2017, there may be more consultants than auditors in the large accounting firms.

Insight into company life
The global debate also highlights that the large accounting firms have a greater in-depth knowledge of current global trends and industry requirements. Therefore, they are better equipped to advise the global clients due to their audit experiences and practices.

The audit groups have pointed out that if companies choose auditors and advisers from different companies, it will give companies increased costs because the auditor obtains knowledge through his work and profound insight into the companies' financial conditions. Gathering this knowledge will take time, money and effort to get familiarized for the independent advisor. Other auditors argue that the lack of accounting consultancy will go beyond the quality of audit. Other auditors claim that crucial knowledge will be lost, and it will cost the company even more money when the new rules are entirely implemented.

Criticism from the consulting and advisory sector
Consulting industry on the other hand stresses that the auditors role and segregation of duties together with the arm's length principle must create more transparency and accountability in the company’s financial statement. There may also be a number of routine tasks that can be performed by junior consultants for a cheaper hourly rate. That speaks to the advantage of the consultancy business.

The criticism from the consulting industry has also been that the auditors use data from their studies/surveys on their customers, and present them in seminars to create fear of default and in order to sell more services.

Consolidation in the area
Obviously, it is the responsibility of individual company and its directors, audit committees’ and officers to decide where they get the best and the cheapest advice. It is their responsibility to ensure that the company, on their watch to create stakeholder value. Therefore how the business can be at the forefront and that the strategic, operational and financial risk management issues are adhered to, is their responsibility.

The general opinion from both sides is that they welcome the increased competition, and some believe that this competition is already there. Both parties expect, however that the consolidation will be a global mega trend in the area.


(1) EU-Commissioned a “Study on the effects of the implementation of the acquis on statutory audits of annual and consolidated accounts including the consequences on the audit market”.
(2)The Economist

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