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By Huw Jones
LONDON (Reuters) - Shareholders would have the final say on who checks their company's books under a proposal from a top European Union lawmaker seeking to end a deadlock over shaking up auditors.
Accounting firms face sweeping changes after criticism for giving banks a clean bill of health just months before they had to be rescued by taxpayers in the financial crisis.
A draft EU law seeks to improve the quality of audits by making accountants more sceptical of what clients tell them, and by beefing up competition in a sector dominated by just four big firms: KPMG, Deloitte, Ernst & Young and PwC.
EU states and the European Parliament have joint say on the law which proposes that companies should be forced to switch accountants regularly as many are kept on for decades.
Member states and lawmakers are divided over how tough the reform should be.
Parliament's legal affairs committee votes on April 25 and its German centre right chairman, Klaus-Heiner Lehne, has intervened with a face-saving proposal to end the deadlock.
In his paper circulated among MEPs, a copy of which was seen by Reuters, switching would be mandatory but the maximum period for keeping the same accountant would stretch to 14 years, much longer than the six to nine years proposed in the draft law.
Countries could also allow companies to keep the same accountant for longer if there had been a public retendering of the contract, if the company's audit committee had assessed the audit firm's performance thoroughly, or if the company had two auditors.
As a safeguard, shareholder approval would be needed at an annual meeting for an auditor to be kept on more than 14 years.
"The sense we are getting is that everyone thinks this compromise will get through," an official from one of the Big Four accounting firms said. "You will get a patchwork solution across the EU but at least you are getting a solution that each member state can live with."
Lehne's intervention highlights the urgent need to find a cross-party deal for parliament to be in a position of strength to start talks on a final text with EU states.
Lehne, who is widely respected and from parliament's biggest party, was not immediately available for comment.
Parliamentary sources said there was support among some parties though the Socialists wanted the proposal tightened up.
It would work in the EU's biggest countries such as France which has a system of joint audits already in place.
In Britain big companies have begun switching accountants because of a new requirement to change at least every decade or explain publicly why the auditor is being kept on.
Germany also has mixed feelings on mandatory rotation and has suggested it could be limited to banks.
"Lehne's effort is appreciated. Without a deal on Lehne's amendment there will be no deal," said one parliamentary source.
Sources familiar with the member state negotiations said there was a blocking minority including Britain, which opposed mandatory rotation, meaning a compromise was inevitable.
Britain's position however, as Europe's main accounting hub, may change once the UK Competition Commission comes out with its own recommendations on reforming the country's audit market.
It has proposed mandatory rotation and it would be hard for the UK government to stay opposed to mandatory switching if it formed part of the UK antitrust watchdog's final recommendations due by October.
EU states will look to parliament's vote this month to help break the impasse over auditor switching.
"If there is a clear parliamentary direction of travel, it might be enough to swing critical mass behind some of the key issues such as if they come out with a strong position on mandatory rotation," an EU member state official said.
Lehne is also proposing ways to boost the chances of smaller auditors like Grant Thornton, Mazars and BDO picking up more work from blue chip firms by allowing member states to insist on two auditors for a company.
"In order to facilitate the development of the capacity of smaller audit firms, member states may decide that at least one of the auditors or audit firms appointed should not be among the largest statutory auditors or audit firms in the concerned member state," his paper said.
(Reporting by Huw Jones; Editing by Helen Massy-Beresford)