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February 27, 2014

Mid-tier get taste of EU bank audits via banking sector review

By Vincent Huck

As the European Central Bank (ECB) comprehensive assessment of the European banking sector progresses, the mid-tier firms told the International Accounting Bulletin of the sizeable opportunities to compete with the Big Four.

The ECB assessment was launched in October 2013 and will run until November 2014 when the ECB will assume its role as the European banking supervisor. The three step assessment will look at the 128 largest banks in Europe and will comprise of a supervisory risk assessment, an asset quality review (AQR) and a stress test.

The ECB and the national competent authorities (NCAs) from 18 different EU member states involved are being assisted by independent third parties, mainly accountancy firms, in the assessment process.

KPMG AQR taskforce leader Stephen Smith said that with this process the ECB wants to ensure that there is a level playing field across Europe and that every bank is looked at in a consistent fashion.

He explained to the International Accounting Bulletin that this review is of an "unprecedented scale" and describes it as an acquisition of the European banking sector by the ECB, "who is doing due diligence on all the institutions it is taking responsibility for".

"This is the first time that anyone has done due diligence at once for 85% of the European banking sector," he added.

Conflict of interest
As the Big Four firms already audit or provide non-audit services to most of Europe’s largest banks, applying for AQR work has meant increased opportunities for the mid-tier as the ECB made it clear that banks couldn’t be reviewed by their auditors or advisor.

Grant Thornton UK financial services partner Paul Garbutt explained: "If you look at the large banking group, it can be the case that one member of the Big Four is the auditor, another Big Four firm is the advisor on evaluation and another Big Four firm has gone through their credit risk system. So this gives an opportunity to mid-tier firms when it comes to the AQR."

According to Garbutt these assignments are also an opportunity to make a point about size and quality.

"We want to re-enforce the point that there are not simply four firms capable of doing this and I’m sure we already achieved this because we have won some of these engagements in direct competition with the Big Four," Garbutt said.

Mazars has also been successful in tendering for AQR work and the firm’s partner and banking specialist Emmanuel Dooseman said: "We pitched to NCAs in eight countries and have been appointed as preferred audit supplier for France, Germany, Belgium and Italy."

Dooseman also said that Mazars was helping the National Bank of Netherlands and banks in Spain to prepare their AQR.

But the Big Four are not out of the race, PwC head of financial services practice in EMEA Chris Jones said: "We are supporting [providing services] 40 of the 128 banks concerned, so for those we won’t be able to do the review. But we’ve already won about 20 mandates to perform AQR and we are still waiting for a number of the big responses."

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