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European Audit Situation Is 'Timebomb', Says EU Official

by Ulrika Lomas, for, Brussels

20 December 2004

Speaking last Thursday at a meeting of the European Federation of Accountants (Fédération des Experts Comptables Européens, or FEE), the European Commission's director general of internal markets, Alexander Schaub described the high concentration of European companies using the audit services of the big four accountancy firms as a "dangerous timebomb".

Explaining that in the United States the trend has been reversed, with more US businesses seeking the services of smaller accounting firms, Mr Schaub cited the example of Britain, in which all of the top 100 firms are audited by either PricewaterhouseCoopers, KPMG, Ernst & Young, or Deloitte and Touche.

"Can independence be preserved? It is difficult to answer this question but regulators and legislators will have to closely follow the development of concentration in the audit industry," he stated, continuing:

"Market forces here are not working so companies are not worried about living dangerously - and that means you can't exclude another Enron-type scandal."

European finance ministers expressed strong support at the recent ECOFIN meeting for proposals which would end the self-regulation of auditors in the EU.

Under the proposals, supported by all EU members except for France (which abstained from the vote) and Finland and Estonia (which voted against them), the groundwork would be laid for the creation of national bodies to oversee auditors, in a similar vein to the Public Company Accounting Oversight Board (PCAOB) in the United States.

However, the legislation also paves the way for the possibility of preventing accounting firms from providing non-audit services to their audit clients, a provision deemed likely to cause a split in the European Parliament by some commentators. Stringent audit-firm rotation requirements are also expected to create a divide between MEPs.

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