Legal structure
None of the "firms" within the Big Four is actually a single firm; rather, they are professional services networks. Each is a network of firms, owned and managed independently, which have entered into agreements with the other member firms in the network to share a common name, brand, intellectual property, and quality standards. Each network has established a global entity to co-ordinate the activities of the network.
Until 2020, KPMG was the only Big Four firm not registered as a UK private company, but rather the co-ordinating entity was a Swiss association (verein). However, KPMG International changed its legal structure from a verein to a co-operative under Swiss law in 2003, then to a UK limited company in 2020. For Deloitte, PwC and Ernst & Young, the co-ordinating entity is a UK limited company. Those entities do not themselves perform external professional services, nor do they own or control the member firms. Nevertheless, these networks colloquially are referred to as "firms" for the sake of simplicity and to reduce confusion with lay-people. These accounting and professional services networks are similar in nature to how law firm networks in the legal profession work.
In many cases, each member firm practises in a single country, and is structured to comply with the regulatory environment in that country.
Ernst & Young also includes separate legal entities which manage its three geographic areas: the Americas, Asia-Pacific, and EMEIA (Europe, the Middle East, India and Africa) groups. These entities coordinate services performed by local firms within their respective areas, but do not perform services or hold ownership in the local entities. There are rare exceptions to this convention; in 2007, KPMG announced a merger of four internationally distinct member firms (in the United Kingdom, Germany, Switzerland and Liechtenstein) to form a single firm, KPMG Europe LLP.
Criticism
Audit quality and ethics
A 2019 analysis by Public Company Accounting Oversight Board (PCAOB) in the United States observed that the big four accounting firms bungled almost 31% of their audits since 2009. In another project study on government oversight, it was seen that while the auditors colluded to present audit reports that pleased their clients, the times they did not resulted in a loss of business. Despite this large-scale collusion in audits, the PCAOB in its 16-year history has only made 18 enforcement cases against the "big four". Although these auditors have failed audits in 31% of cases (808 cases in total), they have only faced action by PCAOB in 6.6% of the cases. KPMG at that point had never been fined despite having the worst audit failure rate of 36.6%.
As per the Financial Reporting Council (FRC) none of the Big Four – Deloitte, EY, KPMG, and PwC managed to surpass the 90% target of its audits. The inefficiency in audit was resulting in a loss of investors' money, people's pension plans, stakeholders' livelihoods and was putting a question mark on the credibility of audited financial statements. "At a time when the future of the audit sector is under the microscope, the latest audit quality results are not acceptable," said Stephen Haddrill, the FRC's Chief executive. Multiple ethics scandals and questionable practices across the globe led to multi-million dollar fines and subsequent settlements by all the Big Four firms.
Read the full text
Despite repeated sanctions from regulators, the Big Four have seen continued challenges to audit quality and ethics as the 2020 decade comes to a close.
In May 2018, KPMG was accused of being "complicit" in signing off Carillion's "increasingly fantastical figures" before Carillion ultimately collapsed.
In January 2020, PwC faces allegations of potential conflict of interest in its audit of Sonangol, given its dual roles of both auditor and consultant.
In September 2020, Deloitte was fined £15 million (US$19.4 million) by the FRC for failing to apply sufficient professional skepticism in its audits of Autonomy's 2009 to 2011 financial statements prior to Autonomy's acquisition by Hewlett-Packard.
In June 2020, EY was accused of poor auditing for failing to discover that €1.9 billion in cash was missing at Wirecard AG, precipitating Wirecard's collapse and eventual sale to Santander Bank for €100 million in November 2020.
Tax avoidance
According to Australian taxation expert George Rozvany, the Big Four are "the masterminds of multinational tax avoidance and the architects of tax schemes which cost governments and their taxpayers an estimated US$1 trillion a year". At the same time they are advising governments on tax reforms, they are advising their multinational clients on how to avoid taxes.
The PwC tax scandal is one example where PwC sold advice to clients on tax avoidance, and did so using information obtained from PwC tax experts consulting for the Australian Tax Office and Department of Treasury.
Market concentration and alleged collusion amongst the Big Four
In the wake of industry concentration and the occasional firm failure, the issue of a credible alternative industry structure has been raised. The limiting factor on the expansion of the Big Four to include additional firms, is that although some of the firms in the next tier have become quite substantially large, or have formed international networks, effectively all large public companies insist on having an audit performed by a Big Four network. This creates the complication that smaller firms have no way to compete well enough to make it into the top end of the market.
Documents published in June 2010 show that some UK companies' banking covenants required them to use one of the Big Four. This approach from the lender prevents firms in the next tier from competing for audit work for such companies. The British Bankers' Association said that such clauses are rare. Current discussions in the UK consider outlawing such clauses.
In February 2011, the Irish Director of Corporate Enforcement Paul Appleby said that auditors "report surprisingly few types of company law offences to us", with the so-called "big four" auditing firms reporting the least often to his office, at just 5% of all reports.
In 2011, the House of Lords of United Kingdom completed an inquiry into the financial crisis, and called for an Office of Fair Trading investigation into the dominance of the Big Four. In September 2019, Bloomberg News reported that The Big Four controlled 95% of the FTSE 250 audit market by client numbers and 96% by market capitalization in August 2019, according to Adviser Rankings.
In 2018, an Australian parliamentary committee was told that the heads of the Big Four firms have met regularly for dinner. The revelation was among issues which led to an inquiry by the Australian Competition & Consumer Commission into possible collusion in the selling of audit and other services. However, Ernst & Young told the inquiry that the dinners, which were held once or twice a year, were to discuss industry trends and issues of corporate culture such as inclusion and diversity.
The January 2018 collapse of the UK construction and services company Carillion raised further questions about the Big Four, all of which had advised the company before its liquidation. On 13 February 2018, the Big Four were described by Member of Parliament (MP) and chair of the Work and Pensions Select Committee Frank Field as "feasting on what was soon to become a carcass" after collecting fees of £72m for Carillion work during the years leading up to its collapse. The final report of a Parliamentary inquiry into the collapse of Carillion, published on 16 May 2018, accused the Big Four accounting firms of being a "cosy club", with KPMG singled out for its "complicity" in signing off on Carillion's "increasingly fantastical figures" and internal auditor Deloitte accused of failing to identify, or ignoring, "terminal failings". The report recommended the Government refer the statutory audit market to the Competition and Markets Authority (CMA), urging consideration of breaking up the Big Four. In September 2018, Business Secretary Greg Clark announced he had asked the CMA to conduct an inquiry into competition in the audit sector, and on 9 October 2018, the CMA announced it had launched a detailed study. In July 2020, the UK Financial Reporting Council told the Big Four that they must submit plans by October 2020 to separate their audit and consultancy operations by 2024.
