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Consulting Industry

A Fuller Picture of Special Services: A Critique of the Big Four

When career entrants and university graduates discuss the Big Four accountancy firms, EY, PwC, KPMG and Deloitte, they are most often portrayed as some of the most highly regarded employment opportunities. The recognition is definitely not baseless. PwC held the No. 1 position in The Times Magazine’s Top 100 Graduate Employers list for 15 consecutive years up until 2018, and all of the Big Four are ranked among the 12 best employers according to the latest issue. Despite this rosy picture, it is apparent that the opulence and prestige of this distinguished group of firms derives both from their overly privileged market position and conflicts of interest embedded deep within the industry.

In order to make a fair evaluation of these companies as future career opportunities, we need to bear in mind that there are two big reasons that law-makers could force the special services sector to transform radically.

1. Oligopoly

A long-term overview of the special services and accountancy sector shows that the concentration of capital is a natural outcome of market competition. Starting in the early 20th century, as accountancy became a global market, the auditing stage was dominated by 8 major firms. The original Big 8 was already the outcome of several transatlantic mergers of smaller auditing firms incorporated in the UK and the US. Similarly, the Big Four we know today came about via mergers in the 1980s and ‘90s following deregulation of the financial sector under the influence of neoliberal economic creeds of the time.

Today, the Big Four exemplify oligopoly. They dominate the upper echelons of the industry, which tends to undermine auditor independence.  In 2019, the Big Four accounted for over 75% of the global accounting market share, audited 495 of the companies in the S&P 500 and all the FTSE 100.  Competition authorities put a time-cap on how long an auditing firm can work with a corporation to make sure that auditors don’t become too cosy with clients.  However, with only four firms to choose from, competition turns into a cooperative process where members of the Big Four simply take turns one after the other.  Fat and happy auditors have the potential to put investors at risk, reduce trust in the financial markets, and lead to a build-up hidden systemic risks.

2. Conflicts of interest

Although lack of competition is problematic, it is just the tip of the iceberg.

A more significant underlying issue, which we learned about the hard way during the 2008 Great Recession with regards to credit rating agencies, is that we cannot reasonably expect auditors to disclose truly problematic discrepancies in bookkeeping against their own paying clientele. A senior executive interested in selling-off an overvalued company with a hazy performance record would have an incentive to hire a reliable auditing-firm. That is, an auditing firm who could be relied upon not to burst the bubble by giving the game away.

When it comes to past cases of major accounting fraud, it was typically not the commissioned auditing firms that uncovered them. According to the 2018 report of the Association of Certified Fraud Examiners, occupational fraud was detected in 40% of cases via tip-offs through whistle-blower hotlines, while external audits accounted for less than 5% of detections.  The most glaring examples for this are major accounting scandals, like the 2001 bankruptcy of Enron, the United States’ 6th largest publicly listed company, which also brought about the collapse of accountancy-firm Arthur Andersen, the precursor of Accenture.

Taking a closer look at other fraud cases which slipped under the radar of the Big Four, such as the scandals of WorldCom or Lehman Brothers, one discovers another major issue in the business model of these special services companies. The majority of the Big Four’s revenue no longer comes from auditing, but from complementary services like management consulting, tax, market research, and legal advisory services.  Although special services firms are not allowed to conduct audits and offer consultancy work at the same time, they can do so with only a one-year intermission. This situation obviously creates a further conflict of interest. Auditing firms are incentivised not to call out their major clients on ambivalent bookkeeping, otherwise they risk losing a valuable revenue stream from future consulting services.

Final thoughts

Bearing in mind the issues plaguing the special services sector, we need to keep an eye on governmental attitudes towards the Big Four. Anti-trust laws could easily loosen their grip on the market, and significantly diminish career prospects at these overly privileged institutions. In addition, transitioning into consultancy from the auditing sectors of these firms is likely to become increasingly difficult as law makers require the firms to erect firewalls around the two services to reduce perceptions of impropriety. The UK’s Financial Reporting Council has set 2024 as a deadline for the Big Four to separate their auditing and consulting services.

Bence Borbély is a Hungarian first-year History and Politics student at the University of Cambridge whose professional fields of interest are management consultancy, public policy-making, politics and international relations.

Image: Pexels

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