big four accounting firms

big four accounting firms

The Importance of the Big Four Accounting Firms

1. The Role of the Big Four Accounting Firms

The accounting industry is too focused on historical costs and forward earnings, instead of underlying economics. Just Faster principal, and former KPMG auditor, Donald Pitts says, “The primary job of an auditor is to provide shareholders with accurate financial reports.” But even Zico Sheng Tham, Ph.D., MBA (finance), MS (computer information systems), B.S. (electrical engineering), says this statement is flawed. “Financial statements are really snapshots of a company’s performance over the period it takes to execute an audit,” he says. “They don’t provide the whole story, but they’re the preferred way to evaluate the performance of a company.” While auditors hide behind their limited scope and blame market risk for not doing the jobs that they should be, the CEOs of these corporations have made public statements that they tolerate material misstatements as long as the auditor gives the financial statement the “clean bill of health” required by the Sarbanes-Oxley Act.

With a combined revenue of $131 billion in 2013, the Big Four accounting firms (Deloitte Touche Tohmatsu, PricewaterhouseCoopers, Ernst & Young, KPMG) are a force to be reckoned with. These firms were the dominant auditing forces in America before Enron, responsible for 99 percent of the audits of U.S. public companies. Since then, international revenue at the Big Four accounting firms has been growing at more than 12.9% annually for the past decade to $73.4 billion in 2013, in order to keep pace with their multinational clientele. A common argument is that another Enron disaster needs to be avoided, and that the doubling of auditing fees due to the implementation of SOX restraints in 2002 were a small price to pay.

2. Services Offered by the Big Four Accounting Firms

The services are frequently divided into the following categories: Audit and Assurance. PricewaterhouseCoopers, Deloitte Touche Tohmatsu, and Ernst & Young; and the tax and legal services of KPMG, as a European entity, operate as separate legal entities, with separate management and the majority of rights reserved to the member firms. This is not the case for most other business entities. These firms are members of the global accounting associations Fiduciaire International, HLB International, Praxity, and Russell Bedford International. Since the Big Eight split up, the global accounting firms have been: Deloitte Touche Tohmatsu, PricewaterhouseCoopers, Ernst & Young, and KPMG. Currently, the largest share of this market is held by PricewaterhouseCoopers with 31%. Only a few decades ago, “The Big Eight” dominated the accounting/auditing side of the business services market. Remember, this is in view of the entire global market.

The Big Four are the four largest professional services networks in the world, offering audit, assurance services, taxation, management consulting, advisory, actuarial, corporate finance, and legal services. They handle the vast majority of audits for publicly traded companies as well as many private companies, creating an oligopoly in auditing large companies. The Big Four also offer major management and information technology consulting services, although their revenues are not broken out separately. Other firms also offer auditing and consulting services, such as BDO and RSM International. The partner, or partner equivalent, has broad responsibility for management of many aspects of the member firm. He or she also has personal responsibility for the quality of all services provided by the member firm, as well as maintaining a public image that is in line with the values of the firm.

3. The Global Reach of the Big Four Accounting Firms

For the last three decades, the Big Four have faced both rising and consistent factors that have impacted the growth and stability of the firms. This includes pressure from public animal publishing, the loss of publicly traded clients due to corporate financial failures through fraud, technology has greatly impacted the time necessary to prepare a company’s tax return, and regulatory changes as it pertains to audit and assurance services provided by financial accounting.

KPMG operates in 153 countries and has over 207,000 professionals working together to deliver value in the sectors of audit and assurance, consulting, financial advisory, risk management, and tax services. The Big Four accounting firms provide a range of accounting and auditing services, including external auditing, taxation, management and business consulting, and risk assessment and control.

Ernst & Young has been ranked as the third largest professional services firm in the world and is part of the Big Four accounting firms. EY operates in 174 countries, employs over 190,000 professionals, and provides assurance (including financial audits), consulting, strategy, transactions, tax, and legal services.

Deloitte has been recognized as the largest independent professional services firm in the world. Deloitte serves clients in more than 150 countries and provides professional services in the sectors of audit and assurance, consulting, financial advisory, risk advisory, tax, and legal. Deloitte employs over 233,000 professionals at member firms worldwide.

PricewaterhouseCoopers has been ranked as the second largest professional services firm in the world and is considered one of the Big Four accounting firms. PwC operates in 157 countries, employs over 195,000 people, and provides professional services in the sectors of consulting, assurance, tax, and advisory.

The Big Four accounting firms originated after one of the world’s first multinational non-financial companies, the East India Company, took control of operations in India in 1661. They further expanded with the advent of limited liability partnerships in the United Kingdom in the 1850s.

The term “Big Four” refers to the four largest public accounting firms: PricewaterhouseCoopers, Deloitte Touche Tohmatsu, Ernst & Young, and KPMG. These firms provide an extensive range of accounting and auditing services, including external auditing, taxation, management and business consulting, and risk assessment and control.

4. The Impact of the Big Four Accounting Firms on the Economy

The population for a big city will represent many companies with big business and more high complexity of the financial statement than a company in a less populated area. The study of Austin, Hoitash, & Weiner (2019) confirmed the hypothesis that higher competition leads to better performing accounting firms. And it can also be applied to higher population city areas with more economic growth. A future study of the business of the Big Four Accounting will demonstrate what has been a positive impact on the economy and raise the level and quality of service and professionalism arising from the competition that occurs between these big public accounting firms with more investment in this industry.

In researching the work of the Big Four accounting firms in public accounting, this researcher found clear and consistent evidence of the dominance of the Big Four in the industry. In 2017, there was a demand for their services by companies in the US as the SEC Public Company Auditor Report presents information on the proportion of public companies whose audits were inspected by the PCAOB in 42 cities across the U.S. There were 479 companies whose auditors were from different cities. The New York City and Jersey City dominate with a 19% share of 452 companies’ auditors, and then the other cities only represent a 4.5% share of dominance of company’s auditors. Houston, TX was the only city which had more than 10 public companies audited by the same auditors from 2 different firms, which is a 50% share compared to other cities that had auditors from 3 or 4 firms.

5. The Future of the Big Four Accounting Firms

In conclusion, the role of the Big Four in a globalized economy today and in the very near future is still crucial, especially if one considers cross-border operations and the adoption of accounting standards. At the same time, these firms need to be able to manage better the problems and risks highlighted by specialized literature. This will then weaken the current objectives of governments and their need to rely excessively on the Big Four accounting firms. For this reason, it is important to develop an effective competitive strategy for smaller and less exposed entities in order to survive in an unequal environment. It is also important to work on an entrance strategy for new competitors in the audit market. Previous initiatives have been non-effective in this respect. Governmental initiatives need to be launched; otherwise, financial intermediation and corporate governance can only benefit from a greater number of highly experienced and independently representative in the last opinion and in the last need of negotiation branches.

In the near future, the Big Four accounting firms will have to handle automation and artificial intelligence with great care in order to ensure that the age of compliance with regulations and standards is over. This will ultimately transform the subjectivity of non-structured judgment. Therefore, audit, financial subjectivity, and analytics need to go hand in hand. Finally, enterprise valuers need to stop certifying figures that belong to the radar of accounting standards (i.e. book value) as if they were different from the actual figures.

In the future, KPMG, Deloitte, PwC and EY will have to change in order to steer clear of the accounting regulations in place. Only by marking a border between the provision of auditing services and consultancy/advisory services will it be possible to avoid the major conflict of interest faced by the Big Four. As a matter of fact, it was exactly this wrong kind of involvement that was one of the main causes of the recent financial crisis.