Regulators take aim at dominant auditors

The Bank of Israel and the Finance Ministry are concerned about the entrenched positions of the big firms in the financial sector.

The Bank of Israel and the Ministry of Finance are worried about the position of the big CPA firms - KMPG Israel Somekh Chaikin and Ernst & Young Israel Kost Forer Gabay and Kaiserer in - the dominant auditors for the banking and insurance industries, respectively. The regulators want to change the auditing in the two industries, and have asked for proposals to improve the problem of concentration.

Supervisor of Banks David Zaken and Supervisor of Capital Markets, Insurance and Savings Prof. Oded Sarig today published a draft for public comment on "A proposal for changing the external auditing structure of financial institutions." They propose four alternatives for "dealing with the problem of concentration among auditors."

The deadline for the public's response is June 25. "It is necessary to improve the quality of external auditing of the financial reports of supervised bodies", the regulators say, "and to strengthen the auditors status' and independence for the sake of their work," adding, "There is room to improve the current structure to strengthen the independence and professional skepticism of auditors and expand the involvement of other accountants."

The Bank of Israel and the Ministry of Finance say, "The over-concentration and lack of alternative auditors raise concern about long-term relations between the auditor and the company being audited, which is liable to harm the independence, auditing practice, and professional skepticism of the auditor. Additional, albeit lesser, fears relate to misleading practices which are liable to occur in the industry as the result of mistaken interpretations by a single accounting firm or from the collapse of a single accounting firm causing paralysis of the industry."

A Ministry of Finance source elaborated on the issue, saying, "There is concern today about the independence of auditors, but it should be remembered that these are very complicated fields. We're worried about the loss of professionalism if we open the sector to too much competition, so we must err on the side of caution. After all, the auditors are important gatekeepers. The issue is under review overseas as well."

The Bank of Israel and the Ministry of Finance say that in the current banking system, Israel's four big accounting firms audit all the banks. Somekh Chaikin audits 48% of the industry - four of the five big banks, jointly auditing three of them. Three firms audit the insurance companies: Ernst & Young Israel audits half the companies, and jointly audits two of them; Somekh Chaikin is also strong in the insurance industry.

There is no similar problem in the provident and pension fund sector, where there are more than ten auditors of the funds' management companies. The regulators add, "There is no real rotation between auditors of any particular audited entity."

The joint paper by the Bank of Israel and the Ministry of Finance states that the regulators are considering the following alternatives, or some combination of them: mandatory rotation between auditors; limiting the market share of auditors in the financial industry; restricting joint auditing; and further restrictions on the provision of related accounting services, such as valuations, due diligence, and risk management, by the auditors. For now, the Bank of Israel and the Ministry of Finance want to expand the list of alternatives, and they have not yet decided on the preferred one.

Regulatory intervention in the accountancy industry has caused an uproar in the sector. On one side are the firms, which for years worked with financial institutions, earning handsome fees, which are now under threat. "Such a thing should not be allowed," said a source at an accounting firm. "For years, we've invested in building complex systems for handling financial institutions. You cannot disparage the importance of expertise in the sector."

However, firms with few clients among financial institutions are quietly waiting in expectation of a change in the sector, in order to share in the pie, which is estimated at tens of millions of dollars a year.

Published by Globes [online], Israel business news - - on May 29, 2013

© Copyright of Globes Publisher Itonut (1983) Ltd. 2013

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