Post #796 – September 15, 2018

For A Truly Different Perspective on The Big 4

There is a lot of buzz throughout the legal profession as of recent, regarding the threat coming from the large accounting firms.  However, it should be noted that the Big Four accounting and audit firms – KPMG, Deloitte, EY and PwC – are in trouble like never before.  They face a multitude of existential pressures all at once.  First, traditional accounting has been hit with a series of major (and expensive) auditing scandals, such as TBW-Colonial and Lehman Brothers in the US; Carillion in the UK; and the Guptas in South Africa.

One result is widespread concern that the current style of auditing has become a hollow ritual that provides little assurance for investors, lenders and employees.  Regulators are talking about forcibly breaking up the Big Four in the UK, taking antitrust action in Italy, and pulling back from relying on the firms to advise the government in Australia.  In China, the government is creating new firms to take on the Big Four in the marketplace.

Changing times are bringing a range of disruptions: Technologies — such as digital analytics, cognitive AI, big data and blockchain — are rapidly making old forms of auditing obsolete. A new era of transparency (including a culture of hair-trigger leaking) is undermining services that depend on secrecy, such as Big Four tax avoidance services; think Lux Leaks, Paradise Papers and Panama Papers.

Within the Big Four sphere, tensions have been mounting, including increasing conflicts between advisory services and auditing as firms enter new fields, such as marketing, law, real estate and IT.  And the #Metoo movement has exposed a darker underside within the firms’ cultures.  Finally, the limitations of the Big Four’s thinly capitalized international franchise structures make it difficult to change direction, or to make large investments in IT and IP. Without conventional corporate structures, the firms can’t raise capital easily.

That’s not to suggest that they are not a threat to the legal profession only to cite some of the external changes that the Big 4 are having to contend with.  For more on this subject, check out the writings of Professor Ian Gow at the University of Melbourne.

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