The role that auditing plays in the operations of businesses cannot be overstated. Through auditing, these firms are able to gain insights into their financial health. Furthermore, auditing secures shareholder confidence by assuring them that the financial position of a company is solid. In the UK and across the globe, there are four dominant accounting firms that are contracted by thousands of firms to perform auditing functions. These firms are Deloitte, PriceWaterhouseCoopers (PwC), Ernst and Young (EY) and KPMG. Concerns have been raised that these firms that the dominance that the firms enjoy threatens healthy competition and creates an environment where corruption and fraud thrive. Calls have therefore been raised for the firms to be broken up. Should the Big Four accounting firms be broken up? Yes. By splitting these firms into their auditing and advisory components, smaller auditing companies will be able to gain a foothold and higher levels of accountability will be achieved.
Given the sensitivity of their assignment, it is fair to demand that the big four accounting firms should demonstrate the highest levels of accountability. Unfortunately, a scrutiny of the operations of these firms reveals that they have failed to honor this expectation. Writing for the Guardian, Makortoff (2018) accuses these companies of serious violations that breach the trust that the public has placed in them. For example, these companies have colluded with the regulator that is supposed to police them to flout auditing and accounting regulations. Essentially, Makortoff, a journalist working for a credible news organization laments that the four firms have become so large that it is nearly impossible to regulate them and ensure that they comply with all relevant laws, policies and guidelines. Breaking up these firms promises to limit their influence and challenge them to respect the rules that are supposed to govern their operations. The UK government should implement a framework through which it separates that auditing functions from the advisory operations of the four companies. By taking this action, the government will create an environment where the regulator is actually able to properly police the firms.
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The need to break up KPMG, PwC, Deloitte and EY extend beyond the importance of restoring accountability in the industry. Another reason why these firms should be split lies in the fact that they have been responsible for the collapse of companies that they audited. This is according to Kinder (2019). In an article that was featured in the Sunday Times, Kinder blames the four companies for a number of corporate disasters that led to the collapse of firms which had contracted the four companies to perform auditing work: “the Big Four audit firms (to blame for) a string of accounting scandals and corporate collapses” (par. 1). KPMG is one of the firms that have been plagued with scandals that have had disastrous effects and underscored the need for tighter policies and regulations. For example, it audited Carillion, a firm that later collapsed. The case of Carillion involved KPMG providing misleading audit reports on which shareholders and top management of this company based their decisions (Plender, 2018). For example, the audit report was the basis of the company’s decision to issue grossly generous bonuses to its executives. The report did not reveal that the company was in a shaky financial position and should have been more austere in its spending. In other markets, KPMG faces accusations of involvement in questionable operations. For instance, the authorities in South Africa have alleged that the firm has worked with the Gupta family which has been linked to corrupt activities (“KPMG is Caught”, 2018). It is clear that the actions of KPMG and the other Big Four firms are the result of the lack of adequate checks and balances and the fact that these firms are too powerful. By splitting them, order and discipline will be injected into the industry. Additionally, breaking up the companies will protect the firms whose accounts these firms audit.
This far, it is clear that the case for the breaking up of the Big Four companies rests on the argument that they have amassed tremendous power and influence that shields them against consequences for their failure to display accountability. Another factor that underlies the calls for the splitting of the Big Four companies is the fact that they have been involved in operations that threaten the health of economies. For example, in a report that appeared in the digital edition of the Financial Times, John Plender (2018) exposes how these companies are involved in helping firms avoid tax. Governments lose huge amounts when firms fail to pay taxes. It is unforgivable that the Big Four companies are complicit in tax-avoidance schemes. They use their networks and expertise to rob governments across the globe of much-needed tax revenue. These firms are able to act with impunity because of their large sizes. It follows that by breaking them up, governments will be able to effectively crack down on tax evasion and other forms of fraud. Therefore, the authorities in the UK should be relentless in making the Big Four smaller.
The credibility and integrity of audits can only be secured when the auditing firm has no conflict of interest. It has been noted with concern that there is conflict of interest in the operations and conduct of the Big Four audit companies (Browning, 2018). As noted earlier, all the four firms have two divisions. While one division handles consulting work, the other is involved in audit operations. Instead of ensuring that the two divisions operate independently, the firms have eliminated the lines that should separate the divisions. As a result, conflicts of interest can arise. For example, through its consulting work, a firm can secure a contract to perform audit on a company’s accounts. In an effort to protect its relationship with companies whose audits they audit, the four firms may fail to disclose certain information. Essentially, the four firms pursue contracts at the expense of the integrity of audits. Consequently, the accuracy of the audit reports that these firms issue can be questioned. The conflicts of interest and the damaging effect that they have on the auditing process can be blamed on the sizes of the four companies. It is as though these firms have become ‘too big to fail’ and regulators are afraid of confronting them over their questionable practices. There is no doubt that order and full compliance with relevant guidelines can only be restored when the companies are broken up.
The authorities in the UK are already mulling implementing a number of initiatives which they hope will challenge the Big Four to exercise higher levels of accountability and respect for the principles that guide accounting and auditing functions. One of the solutions that have been implemented involves placing a limit on the market share of the companies (Marriage, 2018). These companies are simply too large and dominant that it is nearly impossible for smaller companies to gain a presence or significant market share. Consequently, the four companies establish a status quo that is difficult to dismantle. For the smaller auditing and accounting companies to gain more relevance and a greater market share, interventions from government authorities are needed. As proposed above, the UK government should move with speed and break up the companies. In particular, they should impose a cap on the level of market share that these firms can claim. In addition to propelling smaller firms to greater visibility, this intervention also promises to enhance competition and to challenge the Big Four to be more accountable lest they lose business to their smaller competitors.
It is indeed encouraging that legislators and government officials in the UK are already issuing proposals whose implementation will help to clean up the UK and the global auditing and accounting industries. As would be expected, the Big Four who stand to lose if the proposals being advanced are implemented have responded with anger and fierce resistance. They contend that the implementation of the proposals will hurt their businesses (Marriage, 2018). The cries and complaints from these companies should incentivize government officials and regulators to take stern action against these companies. They should be reminded that conflicts of interest, facilitating tax evasion and involvement in fraud will not go unpunished.
In conclusion, auditing firms continue to play a vital role. By scrutinizing financial reports, they enable shareholders to make decisions with confidence. Furthermore, the work that these companies perform allows the public to gain a proper understanding of the financial health and operations of companies. However, the conduct of the Big Four accounting firms has raised questions about their integrity, competence and commitment to accurate auditing. These firms have been involved in various illegalities and unethical operations that range from aiding tax evasion to working with corrupt entities. Their failure to comply with auditing standards, principles and guidelines has led to the collapse of some firms. To re-introduce sanity and respect for the rule of law in the auditing and accounting industries, the Big Four need to be broken up.
References
Browning, J. (2018). Not quite a breakup: Big Four auditors avoid ‘drastic’ steps. Bloomberg. Retrieved April 14, 2019 from https://www.bloomberg.com/news/articles/2018-12-18/not-quite-a-breakup-big-four-auditors-avoid-drastic-measures
Kinder, T. (2019). Break up the Big Four audit firms, public tells regulator. Sunday Times. Retrieved April 14, 2019 from https://www.thetimes.co.uk/article/break-up-the-big-four-audit-firms-public-tells-regulator-8h8rzhf5p
KPMG is caught up in scandals but its woes are not existential. (2018). The Economist. Retrieved April 14, 2019 from https://www.economist.com/finance-and-economics/2018/08/30/kpmg-is-caught-up-in-scandals-but-its-woes-are-not-existential
Makortoff, K. (2018). Big four accounting groups escape breakup threat from CMA. The Guardian. Retrieved April 14, 2019 from https://www.theguardian.com/business/2018/dec/18/big-four-accounting-groups-escape-breakup-threat-from-cma
Marriage, M. (2018). Big Four warn against breaking up UK audit firms. Financial Times. Retrieved April 14, 2019 from https://www.ft.com/content/37e0c2e4-e64c-11e8-8a85-04b8afea6ea3
Plender, J. (2018). Big Four scandals highlight a lack of social utility. Financial Times. Retrieved April 14, 2019 from https://www.ft.com/content/dd2f4686-9961-11e8-ab77-f854c65a4465
