Accountants PwC, Deloitte, KPMG and EY face taming moves; Are the Big Four accounting leviathans about to be tamed?

February 12, 2014 6:32 pm

Accountants PwC, Deloitte, KPMG and EY face taming moves

By Sam Fleming

Are the Big Four accounting leviathans about to be tamed?

Even as their revenues ascend to fresh records, PwC, Deloitte, KPMG and EY are struggling to navigate new legal and regulatory pitfalls in two of their most important markets – China and the European Union.


On Wednesday the four networks’ Chinese affiliates were preparing to appeal a US decision to bar them from working for any US-listed Chinese companies for six months. The spat between the two countries threatened to check progress for the accountancies in one of their fastest-growing regions, as well as souring broader commercial relations between the nations.

Separately, this spring the European Union will push through its boldest attempt to shake up the industry, with a package that claims to rip apart cosy relationships between audit firms and clients and prise the market open to fresh competition. The new rules come despite ferocious lobbying by industry advocates, who complain the reforms will pile as much as €16bn of extra costs on major companies by forcing them to regularly switch auditors.

“We are seeing for the first time the professions’ control of the policy debate has slipped,” said Iain Richards, head of governance and responsible investment at Threadneedle Investments in London. “The financial crisis has really given impetus to some of the longstanding concerns there have been about audit quality and the audit market.”

Judged by their financial performance, the Big Four seem pretty unruffled. Last year the collective global revenues of the four networks rose to $113.8bn from $110.2bn in 2012, while their worldwide workforce approached three-quarters of a million people. They hung on to a 67 per cent share of the global accountancy market according to theInternational Accounting Bulletin – unchanged from half a decade earlier.

The so-called mid-tier players, including Grant Thornton and BDO, had a market share of 33 per cent, also unchanged on 2008.

The China-US ruckus risks fouling the pitch in one of the most promising markets for accountancy, however. The Big Four’s Chinese joint ventures have refused to turn over audit working papers requested by the US Securities and Exchange Commission in several fraud investigations, saying such a move would violate Chinese law. The SEC administrative judge who heard the dispute opted to bar the affiliates from working for US-listed Chinese companies for half a year.

Jim Doty, the chair of the Public Company Accounting Oversight Board, America’s top audit watchdog, this month expressed optimism that the US and China can hammer out a deal allowing Washington to inspect audit work of China firms. But the Chinese affiliates still were expected to file an appeal of the decision on Wednesday.

Paul Gillis, an accounting expert and professor at Peking University, says the firms have ended up at the centre of an ideological dispute between how laws should apply between the US and China. “It is quite serious,” he says, predicting the firms will face increasingly competitive conditions in the years to come. “They are already under attack in China in terms of China looking to favour local accounting firms.”

The EU proposals, which are likely to pass a vote in the European Parliament in April, are also significant. They will force listed EU companies and large financial services groups to rotate auditors every 10 years – with a 10-year extension if they put the services out to tender. Countries with tougher rotation rules will be allowed to keep those in force, meaning some multinationals could face a patchwork of requirements affecting their different subsidiaries across the Continent.

The rules will also further clamp down on firms’ scope to offer consultancy services to audit clients, limiting the fees they charge for non-audit services to 70 per cent of the audit charge and sharply constricting their ability to offer services such as tax advice.

The restrictions on consultancy touch on a particularly important part of the Big Four’s business. While combined audit revenues have fallen by $5bn over the past five years, advisory has jumped by $16.1bn. Last year PwC said it was swallowing upconsultant Booz & Co, which makes revenues of $1.4bn, while Deloitte announced a string of deals, purchasing firms specialising in strategy, investment banking, software and social media. Among EY’s purchases was Greenwich Consulting, a European management consultancy.

With companies in Europe switching auditors much more regularly, the Big Four will find it trickier to juggle client relationships and avoid tripping over restrictions on offering non-audit services. They will face the costly and time-consuming process of tendering for big audit contracts much more often. EY, one of the big four, has described the legislation as “a bad deal for investors, a bad deal for business and for jobs, and a bad deal for the European and global economy”.

Yet close observers caution against assuming this all adds up to a dramatic reversal of fortune for the big accounting firms. After all, the accountants have navigated serious legal and regulatory threats in the past. When the 2002 Enron scandal claimed the fifth big firm, Arthur Andersen, the rest carried on growing regardless.

The EU’s reforms are softer than original proposals by European Internal Market Commissioner Michel Barnier in 2011 and some experts doubt they will curb the Big Four’s market dominance. The complexity of auditing the biggest multinational companies – especially financial services businesses – means second tier accountancies struggle to compete with the dominant players.

Joseph Gerakos, an associate professor of accounting at University of Chicago Booth School of Business, said: “Rotation will not in itself reverse the concentration of the market – – practically speaking it just means a client is faced with a choice of three firms rather than four” the next time it goes out to bid.

That argument is echoed by the Big Four themselves. Ian Powell, Chairman and Senior Partner of the UK firm of PwC, said one of the consequences of mandatory rotation was “you take out the incumbent from any tendering process. You immediately reduce competition.”

Tom Rodenhauser, managing director at Kennedy Consulting Research & Advisory, says that the Big Four’s businesses are growing ever more complex and difficult to manage. But he doesn’t see any prospect of a forced break-up of the industry – an idea Mr Barnier initially floated and then dropped.

Radical change is more likely to be voluntarily initiated within the Big Four firms’ own ranks, he argues, predicting that consultancy partners may eventually be tempted to go their separate ways from auditors.

“Every now and then they know they are going to get hit with something,” said Mr Rodenhauser. “They take the blow, dust themselves off and carry on.”


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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