• Big 4

    Reminder: The Big 4 Are Big, an Accident Waiting to Happen

    By | September 7, 2016

    James Ulvog published an excellent post this morning that puts the size of the Big 4 firms into context.

    Some of these you've likely heard us mention before: 

    If the next three firms after KPMG merged, the[y] would be just over half the size of KPMG.

    To surpass KPMG at #4 revenue, the next 9 largest firms would have to merge.

    To surpass E&Y at #3 would require the next 18 firms after the Big 4 to merge.

    But he threw in a few intriguing extras, too:

    If the 74 largest firms after KPMG merged, the new mega firm would barely be larger than Deloitte.

    If the growth in each of the Big 4 were magically spun into separate companies, the new, imaginary firms would be the 8th, 9th, 10th, and 11th largest firms in the U.S. The Big 4 combined grew (4,713) more than the total revenue of the next three largest firms (4,691).

    If the growth in the 4th largest firm could magically be spun off into a new firm, the new firm would be the 8th largest in the country.

    As far as the Big 4 are concerned, this is not a problem. Look no further than Deloitte's smug press release announcing its FY 2016 revenues as evidence.

    The concentration of large accounting firms, particularly audit firms, is something that few people worry about. We'd be much better off, I think, if everyone who worried about non-GAAP accounting metrics worried about the dwindling number of audit firms instead.

    Luckily, the people who do worry about the BIG AUDIT oligopoly are persistent and Ulvog's blog post got them talking on Twitter: 

    FULL DISCLOSURE: Jim Peterson writes for Going Concern on occasion and Francine McKenna used to, so you're probably thinking, "We've heard this story before, Chicken Little." And yes, you have!

    But it's worth noting that the problem is only getting worse, as Ulvog's points about revenue growth illustrate. Even KPMG, a firm that is 4th among the Big 4 by a long shot, has revenue growth that outpaces the gains of the next three firms' combined. There's literally nothing that the second-tier firms can do about it.

    No, no one — not even a former CEO — is creating a new behemoth out of the legacy firms to compete with the Big 4. The only way we're getting a 5th mega firm is if Andersen Tax starts doing audits again and drops "Tax" to complete the resurrection. All the Andersen alums who bolted would return en masse. Public companies would crawl back, solely based on the nostalgia of getting an Andersen audit. The media would call it the "Comeback of the Century." Hollywood would come calling because, even in this imaginary world, they can't resist a shitty reboot. President Trump would invite the partners to the White House to congratulate them and then take all the credit.

    Meanwhile, back in this dimension, the Big 4 regularly survive embarrassing displays of professional malpractice, gross ethical misconduct and billion-dollar lawsuits. They're like Rasputin, these firms. And yet you'd be a fool to believe that they're not on the precipice of disaster. A comedy of errors will send one of these firms into a blazing dumpster and it will be tragic. The ruined careers. The disruption in the global business world. The think pieces. Oh, god, the think pieces.

    The only bright side is that the media will stop referring to Enron when reporting on subsequent accounting scandals. I have to confess that I’m looking forward to that.

    [Attestation Update]

    • sunnycoast

      There’s absolutely zero competition in the public company audit market. It’s less than 4 when you think about it given one or two firms typically drop out due to independence issues.

      We need some mechanism where the federal government chooses an auditing firm every x number of years for public companies in a pool of about 10 auditing firms. This will increase competition and give more freedom for firms to actually AUDIT/critique the accounting.

      Right now, there’s too much “we’re invincible” attitude at the big4 and this is spilling into social aspect where minorities (especially men) are treated like crap.

      • The big regulatory balls up was letting Price Waterhouse merge with Coopers & Lybrand. It should have never been allowed by the Regulators. Hey, but don’t let this minor blip spoil the party and everyones’ careers.

    • IndenturedServant

      Nobody gives a shit about having a Big4 instead of a Big 3 or a Big 5 instead of a Big 4 or whatever Francine Mckenna wants to circle-jerk over to ensure she stays relevant until the next financial crisis.

      • Reasonable Assurance

        Didn’t she work for PWC? Disgruntled ex much?

        • IndenturedServant

          I admire her. I bitch about the big4 for free on this website. She gets paid to do it

          • Reasonable Assurance

            Yeah, I can’t argue with that. I just think in general this profession sucks.

            • sunnycoast

              Then do something about it.

            • Reasonable Assurance

              Such as?

            • Steve Dave

              The whole profession should listen to the advice of @reasonable_assurance:disqus

            • Mose Schrute

              Tell ’em @SteveDave7999:disqus

            • sunnycoast

              Everybody can do more than they realize, I don’t have to tell them. I know what I’m doing.

            • Reasonable Assurance

              Be more vague.

            • sunnycoast

              What’s it to you?

            • Adam Hill

              Public accounting, right? The private side seems to be leaps and bounds more rewarding. And that is coming from a cynical bastard.

        • Steve Dave

          We need AaronBalake to chime in on all things PWC!

    • “A comedy of errors will send one of these firms into a blazing dumpster
      and it will be tragic. The ruined careers. The disruption in the global
      business world. The think pieces. Oh, god, the think pieces”.

      Is that an American attempt at humour or irony because it ain’t gonna happen.

      • HWSquared

        Cut them some slack, it’s the best they can do with a nasal East Coast accent.

    • The reason why these firms “survive displays of professional malpractice” is the average John Doe in the street has never heard of these firms, let alone used their services or come across any of the employees. The world of auditing and public accounting is a rarefied world which few wish to inhibit and often those that do wish to leave at the earliest opportunity!