big 4 accounting firms

big 4 accounting firms

The Importance of Big 4 Accounting Firms

1. The Role of Big 4 Accounting Firms

Whining complaints and cynical disgust commonly voiced by public accountancy’s hypocrites are, indeed, valid – to a point. Indeed, it seems abundantly clear that the time is at hand when there will be a need for at least a serious consideration of radically different approaches to accountancy pedagogy, practices, regulation, and professionalism – and potentially even what it means to be a CPA. Requirements that seem to protect everyone have, in reality, tended to subvert the well-being of everyone. A tendency toward doing that which is right rather than doing that which is best is the well-intentioned policy that has put accounting professionals in their present malaise. It seems, of all the professions, that accountants have a unique tendency to keep repeating the mistakes of history.

To start, it is first necessary to state that there is much more to these firms than merely executing audits. With the Sarbanes-Oxley Act and recent cases such as Enron and WorldCom, the various services typically offered by these firms have received considerable attention and have been repeatedly criticized. Indeed, the firms’ non-audit revenue dwarfs the revenue received from their audit responsibilities. For example, in 2007, the Big 4 audit revenue was $20.795 billion, of which non-audit fees were $33.8 billion. Financial experts and policymakers alike suggest that non-audit services may bias audits, impair independence, or present even more insidious problems. With earnings seemingly omnipotent, the consensus seems to be one of professional dread. Nevertheless, it is our contention that the fatuous regulations and prohibitions that have arisen are as likely to harm the public interest as are the critical practices that spawned them.

Audit firms have suffered intense scrutiny and criticism as of late. The top four – PricewaterhouseCoopers, Ernst & Young, KPMG Peat Marwick, and Deloitte & Touche – frequently known as the “Big 4”, have received particular attention due to their sheer size and reach. Given the importance of reliable financial statements and the inordinate attention paid to these large firms, it seemed wise to explore these rather specialized entities and offer an explanation of their roles.

2. Services Offered by Big 4 Accounting Firms

B) Taxation and Regulatory Services: The Big 4 firms have a very strong tax advisory and regulatory compliance practice for businesses operating worldwide. Whether it is overseeing the sensitivities in different countries where their clients operate, or complex issues such as tax arbitrage manipulation, treasury management, customs duty planning, international tax structuring, transfer pricing, etc., or tax litigation, dispute resolution, providing expert evidence before courts, or work related to IGST, GST, HSNC codes, Customs disputes and litigation, special economic zones (SEZ), customs duty and foreign trade policy (FTP); the Big 4 firms do a multitude of various advisory and litigation projects for various domestic and international clients. Banks, fund houses also utilize the professional services of these firms for complex matters such as FEMA advisory, financial and regulatory laws, etc.

A) Audit and Assurance Services: This is the traditional service offered by all four firms. Any business entity, in most cases, is required to undergo an examination of its books of account by an independent body at least once a year. This is an assurance service that we call statutory audit. All big companies, banks, and financial institutions are required to undergo such an audit. The Big 4 accounting firms enjoy the rights to undertake such audits anywhere in the world. The other firms are not permitted to do such an audit in many jurisdictions. This gives the Big 4 firm an unbeatable advantage which is hard to copy or compete. The statutory auditing services are not just compliance-driven services. These firms also provide their clients with value-added advisory services on matters such as corporate governance, risk management, fraud detection & control, business compliance advisory services, etc. The auditors also prepare letters regarding the internal control systems in order to enable the management to discharge their duty of publishing an opinion on the internal control structure and systems as per the Sarbanes Oxley Act (SOX) requirements for companies registered in the US.

Below are the key services offered by the Big 4 firms:

3. Benefits of Hiring a Big 4 Accounting Firm

The fourth advantage of a Big Four accounting firm is that they are the most staffed and provide the highest potential for continued communication with the client. This is because a large number of advisors are available at any given time to assist in helping clients. Their work is widespread and they have connections to important information, including the tax laws and changes that customers can use at any time. Companies that use the service have a great opportunity to talk to the most prestigious persons from across the world. Such communication increases a client’s trust and adds to the corporate world. Besides, clients can expect high-performance services and think about globalization of the current economy and its impact on the client’s success and company’s growth.

Big Four accounting firms provide a variety of services that aim at increasing customers’ financial performance and productivity. They provide expert marketing and financial advice to clients, possess the required knowledge and skills capable of producing high-quality professional advice. Lack of mistakes and misleading information contributes to achieving high levels of professionalism. Reputation and high capital position are strategies that aim at keeping a company as one of the best, be it in the accounting or auditing field. They have the required power to be bank lenders and, due to their expertise and qualifications, they provide clients with unlimited connections targeted at helping clients with different financial challenges. This offers financial advice to clients and increases their profitability, making the company the best in the field.

4. Challenges Faced by Big 4 Accounting Firms

With the intention of restoring public trust, the American Congress has threatened to prohibit any non-auditing service provided by an economic association of controlled audit entities. In Europe, some member states have already adopted or are considering such measures. Many of them have imposed a mandatory rotation of auditors. The main purpose of this last policy is to increase the perception of independence of the audit firms. In the past, mandatory audits have not helped increase the perception of quality, have stalled advances in audit service quality, and have been associated with a high degree of joint stock concentration, which has led to penalties that exclude small and medium-sized auditors firms of audits of large trading companies, reducing competition and increasing prices by creating significant barriers to entry and access to the public auditing market. This result is clearly inconsistent with the arguments of some regulators and academic experts in favor of mandatory rotation of an auditor in order to improve the service.

The four giants of the Big 4 accounting firms are facing serious challenges that affect the future of the business. Government legislation, legal claims, scandals in which financial statements or audits are seriously flawed or included fraud, and events of a real or perceived conflict of interest in the role of other services, such as tax consulting and consulting services, seriously affect the reliability of the information they provide to users of financial statements and the auditing services. Clients of these firms. The most important concern for the Big 4 accounting firms and the accounting profession is the resistance to non-audit services, for both the public and their clients. Many regulators, standard-setters, some corporate executives, and others believe that the Big 4 accounting firms and their members have lost public trust as a result of consultation or other non-auditing engagements. Even before recent accounting and auditing scandals, government legislation and academic research led to a sharp decrease in audit services relative to their total revenue for the Big 5 accounting firms, from 33% of the total income in 1999, to 19% in 2003.

5. The Future of Big 4 Accounting Firms

The future of the Big 4 accounting firms is at the mercy of the increasing demand for greater regulation and the ability of these firms to execute on such rulings. Although the consulting market is more favorable from a regulatory perspective and potentially represents higher margins, there is more opportunity for adverse selection, the likes of which E&Y and PwC have already experienced. There is also the potential for more significant threat to reputation risk for consultancies rather than auditors. There are also regulatory uncertainties that recent events, such as those detailing higher capital requirements for non-bank financial institutions, in fact present opportunities for lobbying in areas not previously accessible.

The profession that they thrive in is growing at a rapid pace – securities regulation, while only in its infancy now, will likely only become more intricate and demanding as time goes on. The Big 4 accounting firms are global giants, Deloitte, E&Y, and KPMG have revenues that exceed $20B annually, and Pricewaterhouse Coopers has over $35B in annual revenues, ranking 4th in the world. Simply the scope of these firms is unmatched in any other service industry and they employ more people than some countries have in population. Given their size and importance globally, it is easy to see how necessary it is for there to be strong competition that forces each of the firms to continually evolve.