Dominance of the Big 4 Under Attack – Really?

An interesting story below by FT accountancy reporter Barney Jopson. It lays out the popular discussion, in the UK at least, of the “problem” of Big 4 market dominance. However, you don’t see that type of discussion, either by the regulators or by many others here in the US. Instead we have the new lobbying group, Center for Audit Quality, and the SEC/PCAOB rolling back Sarbanes-Oxley, and the New York study claiming New York is losing ground as a financial center to London because London is more “flexible.”

It seems that the media is much better controlled here, with few stories that are critical or even investigative in their tone. Much of what is written comes directly from the firms’ PR machines. Try to find a story in the US media about PwC Japan or about their losing their #1 ranking on the UK for most audited firms. That’s why I liked this one from Slate, Can We Trust PwC to Count the Oscar Ballots? It was a rare summary in a US publication, albeit in an online non-business one, of all of their litigation and other woes.

FT REPORT – INTERNATIONAL ACCOUNTANCY: Dominance of the big four under attack

An ominous rumble. The weight of expectation. A pregnant silence. What now? That is the question being asked of the UK accounting regulator and its drawn-out efforts to address the dominance of the big four audit firms.

The Financial Reporting Council is promising long-awaited news on its ruminations in April. But whether there will be an earth-shaking policy eruption, or a disappointing damp squib, remains in doubt…For a start, its options can be divided into three areas. First, trying to bring more firms into the blue-chip audit market. Second, reducing the risk of a big firm failing as a result of costly litigation, criminal indictments or disciplinary penalties. Third, minimising the disruption caused if one does go under.

The first area contains the most eye-catching potential measures – the most extreme would be to nationalise the entire audit profession. But conversations with people close to the FRC, and with other national regulators, leave a sense that any concrete action is not likely to focus on this.

That is not to say there will not be softly-softly work to burnish market “perceptions” of mid-tier auditors, but the uncertain impact of real ground-shaking action will prove too much to justify the attendant controversy.

Option three, containing the impact of disaster, sounds eminently sensible, but also eminently impracticable.

Forward-thinking companies can make contingency plans to switch audit contracts should their accounting firm go into meltdown, ensuring the flow of audited information from themselves to the market is not disrupted.

But if everyone decides – or is told – to do this, the firms will realise pretty soon that such a massive shift of work would create as many problems as it solves. Potential conflicts of interest stemming from other work will limit everyone’s room for manoeuvre. The disaggregation of Arthur Andersen following the Enron scandal was a messy experience that few people involved would like to go through again.

Which leads us back to option two – reducing the risk of a big firm failing – as the most likely area for tangible action. Unsurprisingly, that would suit the big four just fine…

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  1. […] The auditors were under siege in the UK, at least, and by Barnier for sure, long before they gave a revealing performance in front of the House of Lords Committee investigating their actions during the finacial crisis. The pain of failures like Northern Rock, Royal Bank of Scotland and, in Ireland, Anglo Irish, are felt more acutely than the large failures have been in the U.S. […]

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