Predicting the end of the Big Four

by admin on July 20, 2007

in General

Paul Murphy comes up with an interesting theory about how the Big Four might implode. His thesis suggests that the way they have developed since the 1980s with an emphasis on sales success as the route to partnership coupled to moribund IT systems leaves them exposed:

In a revenue driven environment only the truly visionary will make the right choices more often than the wrong ones – and the promotion criteria currently in force winnow down the number of visionaries remaining in the firms. As a result their technology deployment choices have left them in danger of becoming hollow men – emptied of exactly the characteristics investors around the world depend on them for: the independence, integrity, and business judgement of experienced accounting professionals.

I’m not sure Paul is entirely correct. The Big Four are heavily entrenched in the Global 2000. And despite the continuing stream of lawsuits and bad PR, they have successfully persuaded regulators that a further reduction in the the number of firms at the top would have a destabilizing effect on industry.

If you consider what happened in the recent KPMG partners’ fraud trial, you could argue that at one level, they skillfully manipulated a way of ensuring that a potential embarrassment became an acquittal. In that, KPMG has avoided what would almost inevitably been a fresh round of speculation about just how rotten the firm really is.

KPMG is not alone. PwC recently dodged a bullet in the Refco case but caught a $225 million bill in the Tyco case. Francine McKenna notes this still leaves the possibility that Ernst & Young and Grant Thornton could face expensive lawsuits.

And on and on.

Even if the Big Four implode, does that mean the profession would be in any better position and, crucially, that clients would be better served? The major flaw in Paul’s argument is that an implosion would bring forward firms that are implicitly better placed as innovators and visionaries. If that were true then logic dictates they would be making headway against the Big Four. That’s not happening.

And in any event, as we saw after the Anderson collapse, the firm’s partners quickly ‘sold’ their portfolios into what we know see as the Big Four in a New York minute.

Nevertheless, there is no doubting that the Big Four have made precious little headway in their ability to conduct reliable audits and one has to wonder how long it will be before there is a genuine crisis of confidence.

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Francine McKenna July 21, 2007 at 3:29 am

If you like Murphy's post about the lack of sophistication of the Big 4 with regard to technology, you'll like my recent discussion about how they're missing the boat regarding blogs and their websites. My blog should not be the one to come up first when someone Googles Auditing Standard 5…

They're having to make big investments in technology now to respond to the demands of being a regulated industry. The amount of data that the PCAOB inspectors (and the lawyers that are suing the firms) are requesting and the level of reporting the regulators expect them to have for their "franchises" is something new. They're playing catch up and not very well. Remember, three out of four sold their consulting firms and anyone with any current systems development/implementation expertise went to Cap Gemini, IBM and BearingPoint at that time. And they loathe to spend any of their profits on "common goods".

fm

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