Why 2020 Could Be a Turning Point for…
Why are UK Landlords Leaving the Rental Market?
The Boris Bounce – Just 'Hype' or A…
Hong Kong-China Unrest and the Implications for China's…
An Introduction to Family Offices
Consumer Privacy; Corporate Responsibility?
Star Wars 2.0
Looming Tech War and Factors that Will Determine…
How Asia is Leading the Way for Fingerprint…
How to Communicate with Customers During and After…
All Chief Compliance Officer (CCO) Chief Executive Officer (CEO) Chief Financial Officer (CFO) Chief Green Officer (CGO) Chief Human Resources Manager (CHRM) Chief Information Officer (CIO) Chief Marketing Officer (CMO) Chief Operating Officer (COO) Chief Security Officer (CSO)
International Women's Day – An Industry Reflection
Chief Compliance Officer (CCO)
Can Excessive Reliance on Statistics Undermine Managerial Decision-making…
New Transfer-Pricing Guidelines Insist on Arm's Length Principles…
Still Heavy Impacts from the Panama Papers on…
A Revolution Started in Reporting Standards
Tactics for Keeping your Top Team Happy
Don't Pass the Buck: Why Finance Needs to…
The Changing Role of The CFO
Technology and the Evolving Role of the CFO
Will Algorithms Replace Financial Advisors?
Chief Green Officer (CGO)
Nonrenewable-Energy Power Production: Here to Stay
Why the Transportation Sector Holds the Key to…
Climate Change's Impact on the Financial Sector Goes…
Is Energy Derived from Coal-Power Stations Cheaper than…
Chief Human Resources Manager (CHRM)
Why it's Important to Take Regular Breaks at…
How to Foster a Healthy Workforce as Sick…
Informal Communication as a Source of Organizational Agility
Injecting Happiness in the Workplace: What C-Suites Can…
Social and Collaborative Working Practices Are Putting Human…
Digital Strategies Are Likely to Sustain the Merger…
New Collaborative Tools Are Transforming Companies' Systems and…
Digital Transformation Strategies Not Ready Yet
How Psychology Can Power Your Marketing Program
10 Years of Data Science: The Biggest Breakthroughs…
How Customers Feel About Self-Service
Going Social: Should Your C-Suite Be on Social…
Derailed by Success: What companies Should Do After…
As Macri's Reforms Inch Toward Success, Investors Are…
Operational-Risk Costs High for Banks and Challenging the…
The London/Deutsche Stock Exchange Merger Could Spell European…
The Case for Collaboration in the Battle Against…
Strengthening Enterprise Security Posture with Real-Time Visibility into…
The Death of the PIN
The Cyber-security Sector Can See Only More Growth
All CSR
Knowledge Management as the Source of Competitive Advantage
Save Green by Going Green: Sustainability and the…
Are Performance Reviews Obsolete?
Human Resources in Private Banks Are Highly Challenged
Steel and Whiskey Together in G20 Discussions
Rise of the Fallen: Reconstruction Options in War-Torn…
Good Plan, Bad Execution: Power-Sector Regulation in Developing…
Post-LIBOR World: What's Next?
All Attire Cars Gadgets Travel
Tech Showcase: New Audi A6 As a Scaled…
2018 Mercedes-Benz A-Class Redefines the Entire Compact Segment
2019 Cupra Ateca Is a SUV Trying to…
2019 Volkswagen Touareg Is a Proper Flagship with…
Does Workplace Attire Affect Employees' Productivity?
Mobile Money and the Future of Global Finance
Nintendo: The Pokémon Effect
Will New Resorts Help Macau Bounce Back?
Walt Disney: Kissing the Dragon
Kenya: The African Hot Potato
Why 2020 Could Be a Turning Point for...
Hong Kong-China Unrest and the Implications for China's...
Home Editor's Pick	The Big Four and Their Breakup: Is It a Fix or a Witch Hunt?
The Big Four and Their Breakup: Is It a Fix or a Witch Hunt?
by internationaldirector June 12, 2019
The big four (B4) companies have been mired in a number of scandals that have tarnished their previously unscathed reputations. As a result, regulatory and political bodies want to place the big four on the chopping board. The proposed breakup will have advantages and disadvantages. The following discussion will allow the reader to see that the adverse effects of a breakup will overshadow the benefits.
Big events for the big four
The big four companies consist of KPMG (Klynveld Peat Marwick Goerdeler), Ernst & Young (EY), PricewaterhouseCoopers (PwC) and Deloitte. These companies provide a wide range of consultancy and tax services to the economic elite (Fortune 500, FTSE 100, FTSE 250). A non-exhaustive list of their services includes audit, taxation, corporate finance, management consulting, actuarial and legal services. Between the B4, all but one of the United Kingdom's top 100 firms used their services for audit businesses. These companies have been known for their quality of service and trust. However, lately, that trust has been eroded by a number of scandals. In particular, two scandals can be taken as samples of what is wrong with the industry.
The first scandalis related to the collapse of the United Kingdom's premier outsourcing giant Carillion. Its collapse made loud splashes in the UK's domestic politics because of its involvement with the government and because of its status as an employer of almost 20,000 workers. After clearing the rubble left by the outsourcing mammoth, it was found that the B4 had billed Carillion a total of £71.6 million between 2008 and its collapse in 2018. The oligopolistic nature of the industry was further betrayed by the fact that only PwC was cleared for liquidating the assets of Carillion, because the other three were wrapped up in conflicts of interest. Furthermore, the lack of warning by KPMG (auditor for Carillion) was a further source of anger for the B4. The chair of the House of Commons' Business, Energy and Industrial Strategy Committee, Rachel Reeves, pointed to "cozy relationships" between the Carillion management and the auditors as the reason for the lack of forewarning from the formerly respected auditor.
The second scandalwas related to another British giant, British Home Stores (BHS).The company collapsed with a £1.3-billion debt and £570-million pension deficit. As a result, more than 11,000 jobs were placed at risk. In addition, more than 20,000 pensioners were also exposed to the company's failure. This collapse was the result of a series of bookkeeping robberies by the top management that were cleared by the company's auditor, PwC. As a result, PwC was fined a whopping £6.5 million in addition to a separate fine of £500,000 to the individual auditor, Steve Denison.
Unfortunately, these are not the only scandals, and the UK is not alone in its reservations about the trustworthiness of the B4. The following discussion will use the debate within the UK to represent global business qualms—repeating the issues for each country would be redundant because of the similarities of the issues. As such, the reactions of UK authorities can also be taken to be the similar potential responses of other governments all over the world.
The proposed theory
Such claims have only sharpened the knives of the Competition and Markets Authority (CMA), the regulator for the UK services industry, which has proposed breaking up the B4 on the basis of a number of justifications. The CMA has not been alone in its formal criticism. The Business, Energy and Industrial Strategy Committee has proposed the softer measures of market caps for the giants. Some other soft measures could see the B4 publishing their financial documentsto assure the public as well as the regulator that non-audit functions are not subsidizing audit functions. Government representatives essentially believe that the market has become an oligopoly, in which conflicts of interest and market power are compromising the quality of the information received by investors and managers. Their recommendations can be compared to that of an anti-trust body. These actions are justified on a number of arguments that are discussed below.
The first argumentis that the B4 have conflicts of interestwhen they are allowed to keep both audit and non-audit businesses under the same body. According to these allegations, the audit services are used as a gateway to enter the market for other services. Non-audit services provide the majority of the B4's income. The image below summarizes the distribution of income from audit and non-audit services.
Such a conflict of interest can be removed if the audit and non-audit departments of the businesses are separated and operate as individual bodies. They can still share some resources, such as information technology (IT).
The second argument for the breakup of the big four relates to increasing competition in the industry. The following image shows the market share of the big four as compared to the next five industries for the years 2013-17.
The above image clearly shows that the B4 have consistently maintained their dominance in the industry. Such dominant power can lead to possibilities of collusion and monopsony. Collusion could see the companies in a possible price-fixing scenario, while monopsony could lead to sub-optimal wages for the workers employed by the B4. A breakup would reduce the probability of such welfare-damaging agreements.
The third argumentrests on specializationin terms of work culture. An audit work culture approaches the customer with an eye of suspicion, while a non-audit culture has to approach the customer with an attitude of service and empathy. Therefore, it is argued that separating the two types of teams would make it easier for both of these businesses to perform their desired functions. Although these arguments sound convincing, they have to be weighed against the possible repercussions of breaking up the B4.
Potential shrapnel from a forced breakup of the big four
There is a reason why the B4 are given the respect and market share that they hold. That is because their size gives them some unique advantages that will be reduced if the B4 are forcefully broken.
First, the breakup will reduce the economies of scale in services that are sine quanon to providing high-quality services. According to Deloitte, being a single firm allows it to employ more than 2,000 tax specialists, which permits a big firm to deliver specialized services. Employing the same 2,000 specialists can become burdensome if it is forced to break up its operations.
Second, it might compromise the quality of auditing services. This is because the experience gained in servicing one firm is often transferrable to the servicing of another company. Therefore, it stands to reason that reducing the variety of customers will have an adverse effect on the quality of services given to all of the other customers. One can liken it to network effects for customers.
Third, such a move does not prepare the audit as well as non-audit industries for the future of the services sector. The future will see a lot of functions being taken over by artificial intelligence (AI). AI has to be trained on datasets, and the bigger the dataset, the better the AI. Breaking up the B4 would reduce these datasets. This automation would also weaken the work-culture argument for the breakup of the B4, since humans are expected to specialize in empathy-dependent jobs.
All in all, the breakup of the B4 might sound like an attractive option in a vindictive environment. However, careful analysis, done with cooler minds, reveals that the costs of such a move might outstrip the benefits. On the other hand, it would be foolish to consider that there isn't an elephant in the room. The B4 have repeatedly failed the trust of the public as well as that of the government, and transparency could be a good step on the long road towards recovering that trust.
https://www.theguardian.com/business/2019/apr/02/big-four-accountancy-firms-should-break-up-say-mps
https://www.theguardian.com/business/carillion
https://www.theguardian.com/business/2018/feb/13/carillion-accountants-accused-of-feasting-on-company
https://www.theguardian.com/business/2018/jun/12/senior-pwc-auditor-of-bhs-accounts-faces-15-year-ban-and-hefty-fine
https://www.ft.com/content/e0cdfc4c-57b6-11e9-a3db-1fe89bedc16e
https://assets.publishing.service.gov.uk/media/5c59bde540f0b676b6f54037/deloitte_response_to_update_paper.pdf
https://assets.publishing.service.gov.uk/media/5c5afdbeed915d046ca281f4/ernst-young-response_to_update_paper.pdf
https://hbr.org/2017/02/the-rise-of-ai-makes-emotional-intelligence-more-important
AuditCarillionCorporate FinanceDeloitteErnst & Young (EY)FinanceFortune 500FTSE 100FTSE 250KPMG (Klynveld Peat Marwick Goerdeler)Management ConsultingPricewaterhouseCoopers (PwC)Taxation
The Need for Carbon Capture and Its Possible Solutions
Housing Costs: How They Undermine Western Prosperity and How to Fix the Problem
The Boris Bounce – Just 'Hype' or A...
Middle Eastern Heat
The Promising Potential of Tax-Efficient Schemes in the...
The Rise of Libra and Potential Challenges
India's and Pakistan's Entry into the SCO: Trojan...
Sign up for the International Director monthly newsletter.
By subscribing I accept the privacy rules of this site
Twitter Google + Linkedin Youtube Email
Most Recent Contributors
Kedge Martin, CEO, Rutbusters
Alex Fielding, iCEO, Ripcord
Lewis Miller, Chief Financial Officer, Frank Recruitment Group
Laura Hutton, Chief Product Officer, Quantexa
Omar Janabi, Senior Director, EMEA, Merrill Corporation
Alpa Bhakta, CEO, Butterfield Mortgages Limited
Jerald Solis, Business Development Director, Experience Invest
David Silbert, Director, Seal Software
Salvatore Minetti, CEO and Co-Founder, Prospex.ai
David Swanson, Head of Lending, ArchOver
Ben Goodman, VP of Global Strategy and Innovation, ForgeRock
Ed Molyneux, CEO FreeAgent
Karen Holden, Founder, A City Law Firm
Rusty Carter, VP Product Management, Arxan Technologies
Nick Evans, Marketing Practice Director, Jaywing
Justin Cooper, Chief Executive, Link Market Services
Dave Orme, SVP, IDEX Biometric
Matt Weston, Managing Director, Robert Half UK
Simon Bittlestone, CEO, Metapraxis
Alan Platt, COO, CyberHive
Paresh Raja, CEO, Market Financial Solutions
International Women's Day – An Industry Reflection By Tiba Raja, Director, Market Financial Solutions https://t.co/Fqfq9uCJoP
Consumer Privacy; Corporate Responsibility? By Jonathan Rouach and Ruben Arnold, Co-Founders, QEDIT https://t.co/Eih6MSZjeX
Why 2020 Could Be a Turning Point for the UK's Construction Industry By Jerald Solis, CEO, Experience Invest https://t.co/PSdor2EpUc
Why are UK Landlords Leaving the Rental Market? By Paul Howells, CEO, Accumulate Capital https://t.co/JCA19zRS1W
The Boris Bounce – Just 'Hype' or A Sign of Things to Come? By Jamie Johnson, CEO, FJP Investment https://t.co/AO6PZ2iZJT
Recents Comments
Cpr on Injecting Happiness in the Workplace: What C-Suites Can Do
Louis on Silicon Valley under Pressure: Will Technology Remain the Leading Sector over the Long-Term?
Alex on Why it's Important to Take Regular Breaks at Work
Hussein Habashenh on Reviewing the Current State of the UK Lending Market
Matthew Hagen on The Tangible Problem of Measuring Intangible Assets
Copyright © International Director 2021 | All Rights Reserved | About us | Contact us | Advertise | Subscribe | Careers | Editors & Columnist | Editorial Guidelines
Copyright | Privacy Policy | Terms & Conditions
Finance Publishing | International Banker | Forex Focus