• Big 4

    Labeling Big 4 as Systemically Important Would Only Confuse Their Sense of Importance

    By | January 17, 2017

    Ed. note: Today we welcome back Adrienne Gonzalez a contributor to Going Concern. She is the founder of  GoFraudMe, a GoFundMe watchdog site. You can follow her on Twitter and the hiking trails of Richmond, VA (but keep your distance, stalkers).

    Way back in 2008, a small hiccup in the United States financial system brought upon by an even smaller hiccup in the U.S. housing market led to the mild threat of the collapse of the world economy. No worries, all that was avoided thanks to the quick thinking of the Federal Reserve, U.S. Treasury, lawmakers, and other assorted wonks working overtime in New York City bunkers to save the planet from total financial ruin. The implications of such unprecedented action were to be worked out later by other assorted wonks, and here we are all these years later having practically forgotten about the whole thing. Thanks, wonks.

    If you haven’t put the experience of nearly being downgraded to Second World status out of your mind, you’ll remember the buzzphrase du jour of those dark times in late 2008: Too Big to Fail. The long and short of TBTF is that big banks, given free reign by regulators to grow bigger and more (buzzphrase alert) systemically important to the global financial system years before, had grown so large that letting them fail despite the fact that they were the reason everything was failing would flush us all down the toilet.

    With all that drama behind us, professional pedant (and sometimes GC contributor) Jim Peterson and aspiring PhD William Kring batted around a crazy idea in American Banker the other day: when regulators consider Systemically Important Financial Institutions (hereby referred to as SIFI), they should turn their attention to the "Big Four" auditors.

    “But why?” I hear you asking. Of the 6,835 total public companies in the US, 3,067 are audited by Big 4 firms. Their dominant stranglehold on capital markets percent of market share is even more significant when you consider that 90.9% of Large Accelerated Filers are audited by Big 4 firms.

    The biggest problem with this, say Peterson and Kring, is that were — God forbid — a Big 4 firm to fail, it’s unlikely the other three could legally pick up the slack:

    [S]ystemic-risk concerns with the Big Four extend to how they audit already-designated SIFIs. Should just one of the Big Four collapse, the whole audit model for the SIFIs would collapse too, due to conflicts of interest and scope-of-practice limitations.

    A SIFI is required be audited by a firm that does not already provide ancillary services to the company, such as tax advocacy, valuation, M&A advice or systems consulting. Because of consolidation in the accounting industry, a SIFI likely has connections to all of the Big Four. Should one of the big accountants fail, a SIFI would have no auditor replacement options among the resulting Big Three.

    So why couldn’t the remaining six Big Ten auditors step up to the plate? The answer should be pretty clear but let’s go over it for the audience in the back anyway. “Middle-tier accounting firms would be unable to fill the void left by the collapse of one of the Big Four, because of the demands of scale, geographic coverage and depth of sector expertise required of a realistic alternative,” say Peterson and Kring. Additionally, there’s no way a Marcum or RSM would voluntarily sign up for potential legacy lawsuit liability in the wake of a sudden Big 4 firm collapse because that would just be stupid. It’s one thing for PwC to settle billion dollar lawsuits, it’s quite another to expect Anton & Chia to do it. Might as well expect H&R Block to figure out GE’s tax liability while we’re at it.

    But wait, there’s more! As Francine McKenna points out, categorizing Big 4 firms as systemically important could mean that the rest of us get to systemically dig into their financial data.

    No doubt Big 4 is adamantly opposed to the mere thought of a financial colonoscopy in the event they are deemed critical to the function of already categorized SIFIs. Opening up that can of worms means going from self-reporting revenues to — gasp — a more thorough outside analysis of their financial well-being. Were it to come down to taking down the global financial system or revealing the skeletons in their respective closets, it’s not like Big 4 would have a choice.

    Lucky for them, wonks like Jim Peterson are pundits, not politicians.

    • N.E.R.D.
    • Treadway

      For a moment I thought that Colin ran out of material to post and reached into the vault for something from two or three years ago.

    • PwC Guy

      AG, welcome back! This site has just never been as good since you left.

    • Big4Veteran

      Going Concern is back!!! And not a moment too soon. I was fearing that this site was as at the edge of the cliff.

      The next move for Colin should be to fire all the other hacks he’s been using (except Kyte) and allocate their fees to HG.

      • N.E.R.D.

        HG.

        I almost forgot. Thanks.

    • Big4Veteran

      Counterpoint to Jim Peterson:

      Donald Trump is gonna be president soon, which makes Jim Peterson’s views on this issue less relevant than ever before…and that’s saying something.

      Sorry, Jim, I don’t mean to offend you.

      • No offense taken. Whatever the likelihood of the regulatory establishment giving these ideas a warm embrace might have been before the election, the odds have dropped considerably since. And that is not good news.

        • Big4Veteran

          I think there’s a decent chance there won’t be an SEC six months from now. Or it will just be outsourced to Goldman Sachs.

    • Chipman69

      Welcome back to the DYNAMIC one, AG, to Going Concern!!!!!! I hope you continue to penetrate GC with your WHOLE SELF as your CHOSEN MARKET for writing articles!!!!! Maybe your INSTINCT FOR GROWTH will help GC become a DYNAMIC website once again!!!!!

    • Murphy

      The problem with this argument is that you’re assuming whichever Big 4 goes down, all of the experts from that company would just disappear. Of course the mid tier firms couldn’t handle a Big 4 load right now, but they would get a huge talent infusion from the collapsed Big 4.

      • cpanum31

        Well, if they had an organic growth plan, and a couple of people with management talent, I would guess they COULD do it pretty quickly.

        But from the “management talent” I’ve observed over the decades, I would say the odds are pretty slim. One of those “Doable, but the people with the particular abilities just are not in place.”

    • Accounts Playable

      Good write up. Welcome back!!