Ruling the World, Have the ''Big Four'' Gone too Far?


Since the Enron-induced extinction of Arthur Andersen in 2002, the four largest accounting firms in the world (Deloitte, EY, KPMG, and PwC) have become internationally recognized as the “Big Four.” In terms of overall scale; however, the moniker is more an injustice than an accurate one. In 2016, Big Four firms audited more than eighty percent of all US public companies and raked in over $125 billion in global revenue. If you added the collective U.S. revenue of the next 296 firms on the Inside Public Accounting’s report of the top 300 public accounting firms in the U.S, it still wouldn’t add up to the Big Four’s domestic total.

In terms of global employment, the numbers are even more staggering. The Big Four firms employed 887,382 people globally in 2016—nearly double the total of the four largest biotech and pharmaceutical companies in the world. KPMG even houses a 1,600 person capacity Luxembourg office—in a country with just 550,000 people. Such voluminous statistics have erased any doubt of their supremacy over the accounting world, but many are left to wonder, has it all gone too far? 

Financial Statement Misstatement Scandals

Ernst and Young has Toshiba. KPMG has FIFA. PwC has Colonial Bank. Deloitte has Adelphia. All of the Big Four accounting firms have failed to detect million, or billion dollar financial statement misstatements throughout their history. In 2005, then-Deloitte CEO James Quigley, said in response to the scandal with Adelphia, “These cases raise a larger issue facing the auditing profession. Among our most significant challenges is the early detection of fraud, particularly when the client, its management, and others collude specifically to deceive a company’s auditors.” He certainly wasn’t wrong, but is that really the full story? Could it be the rapid turnover rate within public accounting companies has led to more inexperienced auditors taking on more important roles within the audit process? Have audits become beta tests for companies to more lucrative advisory services? Could it be that the Big Four have simply grown too big?  Those are all questions that the accounting giants will eventually have to answer.

Return of Consulting

Michael Izza, chief executive of the Institute of Chartered Accountants for England and Whales said this at the end of 2015: “We all know that the fastest growing parts of the Big Four’s businesses are not the audit streams that they build their reputations on, but consulting. That brings tensions.” With plateauing growth in the auditing and tax services areas, the Big Four have targeted consulting as a specific industry segment to derive future revenue expansion. Just over a decade ago that proposition would have seemed unimaginable, with most accounting firms closing their consulting doors indefinitely. In fact, Deloitte remained the lone “Big Four” survivor in the consulting arena amid global criticism that companies concurrently performing audits and offering consulting services was an inherent conflict of interest. In 2014 the issue appears to have come full circle. According to analyst firm Garner, the Big Four held forty percent of the global consulting market in terms of revenue, and if Izza is correct in his assessment, we can only expect that figure to grow from here.

Academic Push for Big Four

In an industry with a continual supply shortage, why do the Big Four accounting firms seem to have a pipeline of talent that never runs dry? The answer lies in the obscure influence of university professors and program career counselors. Speak with any recent graduates from an accounting program in the United States and you’ll hear similarly narrated stories. The unrelenting academic push to send graduates to the Big Four isn’t just real; it’s growing at an alarming rate.

University programs not only advertise what percentage of their students are offered full time positions out of college, but also what firm job offers their students accept. In addition to the prestige of sending higher volumes of graduates, universities know their students will have a larger pool of job opportunities later in their careers with Big Four experience. The vicious cycle of universities pitching these firms, and then industry employers later recruiting talent exclusively from them is in diametric opposition to the industry as a whole. The result: wages have stagnated for Big Four positions and the remainder of accounting firms have experienced historic levels of labor shortages, forcing firms with the lowest cash flow levels to pay the highest wages. It’s no surprise that the Big Four have amassed an impressive array of talent, but should we be asking ourselves the question: at what cost?

By: Todd Cheney, CPA, Accounting Policy and Practice Editor

 

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