David Prosser: A decade after Enron's collapse, the failures of the audit industry have still to be confronted

Outlook Ten years ago tomorrow, Enron, which back then was the US's seventh largest company, filed for bankruptcy following a shocking accounting scandal that appeared to have completely passed its auditor by. The auditor in question, Arthur Andersen, subsequently disbanded.

One might think the lesson from Enron is that any auditor which fails to spot a problem large enough to sink a company can expect big trouble of its own. Yet no audit firm has paid the price for the failure to warn about the potential black holes in the accounts of the banks prior to the credit crunch, or the extent to which so many of them were using off-balance sheet special purpose vehicles. Rather, the dominance of the big four firms remains absolute, with Deloitte, Ernst & Young, KPMG and PriceWaterhouseCoopers even enjoying a boost from the post-Enron disappearance of Arthur Andersen.

It is in this context that Michel Barnier, the European Union's internal market commissioner, yesterday published new rules for auditors that had the biggest firms spitting tacks. Assuming Mr Barnier gets his rules onto the statute book, firms will have to split their audit and consultancy operations, while companies will be required to change their auditors regularly – possibly as often as every six years.

The big four may be angry, but the case for reform is compelling. Between them, Deloitte, Ernst & Young, KPMG and PWC hold the audit contracts for 85 per cent of blue-chip EU companies. They enjoy profit margins that are 50 per cent higher than the next four largest auditors, Mr Barnier claims.

Improved competition and higher standards go hand-in-hand. The requirement to prevent auditors selling consultancy to companies they audit is important because of the conflicts of interest that arise when providing both services. But in a more diverse market, such conflicts would be less likely even without such a ban. Similarly, it might also be that had a bank's auditor, say, previously been prevented from spending decades with the account, it might not have got so comfortable that it failed to spot the financial crisis coming.

There is an inherent conflict ofinterest in the auditing sector – auditors are paid by the very people they are supposed to be keeping an eye on. Still, mandatory rotation of audit accounts should give firms less reason not to assert their independence.

The argument against Mr Barnier's reforms seems simply to be that companies' audit costs may rise as a result of them. Well, that doesn't seem logical – more competition should surely lead to lower fees, especially if Mr Barnier is right about those margins. But even if costs do rise, isn't that a price worth paying if we end up with more robust auditors that do a better job of holding their clients to account?

It's not just the largest firms that are upset with Mr Barnier's proposals by the way. Smaller firms are upset he has backed down from one of his earlier ideas, under which blue chips would have been forced to appoint two joint auditors – one large and one small.

But dropping that proposal was sensible. While smaller auditors would have picked up more work, lines of responsibility would have been blurred, with the potential for problems to slip between the cracks in a dual approach – and for both firms to blame each other in the event of a failure.

One final point: there was some anger in Britain yesterday about the imposition of EU standards in an area where our corporate governance codes have traditionally held sway. But it would be easier to sympathise with that argument if the "comply or explain" approach had produced better results.

Start your day with The Independent, sign up for daily news emails
Life and Style
Steve Shaw shows Kate how to get wet behind the ears and how to align her neck
healthSteven Shaw - the 'Buddha of Breaststroke' - applies Alexander Technique to the watery sport
Arts and Entertainment
The sight of a bucking bronco in the shape of a pink penis was too much for Hollywood actor and gay rights supporter Martin Sheen, prompting him to boycott a scene in the TV series Grace and Frankie
tv
Sport
footballShirt then goes on sale on Gumtree
Voices
Terry Sue-Patt as Benny in the BBC children’s soap ‘Grange Hill’
voicesGrace Dent on Grange Hill and Terry Sue-Patt
Arts and Entertainment
Performers drink tea at the Glastonbury festival in 2010
music
Arts and Entertainment
Twin Peaks stars Joan Chen, Michael Ontkean, Kyle Maclachlan and Piper Laurie
tvName confirmed for third series
Sport
Cameron Jerome
footballCanaries beat Boro to gain promotion to the Premier League
Arts and Entertainment
art
News
ebookA unique anthology of reporting and analysis of a crucial period of history
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Abuse - and the hell that came afterwards

Abuse - and the hell that follows

James Rhodes on the extraordinary legal battle to publish his memoir
Why we need a 'tranquility map' of England, according to campaigners

It's oh so quiet!

The case for a 'tranquility map' of England
'Timeless fashion': It may be a paradox, but the industry loves it

'Timeless fashion'

It may be a paradox, but the industry loves it
If the West needs a bridge to the 'moderates' inside Isis, maybe we could have done with Osama bin Laden staying alive after all

Could have done with Osama bin Laden staying alive?

Robert Fisk on the Fountainheads of World Evil in 2011 - and 2015
New exhibition celebrates the evolution of swimwear

Evolution of swimwear

From bathing dresses in the twenties to modern bikinis
Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine