France prompts audit outrage
Legislation currently passing through the French parliament aimed at reducing the risk of financial scandals has caused uproar among global audit firms and is forcing them to reconsider how they run their operations.
The proposals will severely limit the amount of potentially lucrative non-audit work that an accounting firm can do for its audit clients. Areas such as tax planning, corporate finance, insolvency and even legal work will be severely affected if the proposals find their way into law.
The move is aimed at strengthening the quality of financial reporting and increasing the independence of the auditor in what is being seen as some of the toughest measures being proposed in reaction to the disasters at Enron and WorldCom. The legislation has caused an angry reaction among the Big Four with some claiming that the measures are too extreme and may also have extra-territorial effects.
‘The French proposals are anti-competitive,’ said Neil Lerner, UK head of risk management at KPMG.
‘They will restrict the choice of firms available to global companies operating in France to those that do not have any international divisions or associated firms undertaking any audit work for that company anywhere in the world,’ he added.
KPMG has now said that its audit business is to break links with associated firms, such as sister law firm Fidal, which will leave its international network by the end of June. PricewaterhouseCoopers and Deloitte & Touche have also said that they are considering a restructuring of their French operations.
Only Ernst & Young has said that it doesn’t want to sever ties with its associated firms in France. PwC global chief executive Samuel DiPiazza has gone on record saying that the new rules could reduce audit quality in the country. He claims that where non-audit work is carried out by firms they gain extra knowledge of the company and how it operates, increasing the ability to produce a high quality audit.
‘The potential restrictions in France go a long way past what we think is a good idea for creating high quality audits,’ said DiPiazza.
Despite the objections few expect the French government to back down over the proposals and are reluctantly going along with them.
Once passed, the legislation will result in a new supervisory body for auditors called the Haut Conseil du Commissary aux Comptes, which is expected to mandate the country’s accountancy body to draw up a new set of rules on auditor independence.