After the avalanche: The future of the Big Four

Perhaps with unexpected foresight, EY’s project was named ‘Everest’, for the once-unclimbable Himalayan mountain. It was EY’s plan to split the accounting giant’s burgeoning consulting arm off from its more traditional accounting business. EY’s global chief, Carmine Di Sibio, had championed it. It would likely be a permanent change beyond the walls of EY, even the end of accounting’s Big Four as we know them – PwC, Deloitte, EY and KPMG.

Why split? Di Sibio reportedly agreed with the longstanding critique of the Big Four: that they are vulnerable to conflicts of interest between their audit and consulting arms, and that the regulation of their audit work holds back their consulting arms.

The Big Four’s two-headed business model has their audit arms being asked to challenge clients while their consulting arms try to woo those same clients for consulting, tax and deal-advice work.

In 2020, the United Kingdom’s Financial Reporting Council actually told the Big Four to put their UK auditing and consulting practices in separate business units by 2024 – a move one step away from a full split.

With Everest’s break-up plan, long-time consultant Di Sibio hoped that he could free EY’s consulting and audit businesses to both work for the same clients without regulators forever asking questions.

But on 11 April, the ascent of Everest was cancelled. Di Sibio and his EY leadership team told partners the split might still eventually happen, but that it would take “more time and investment”.

While The Economist insisted soon after that “the commercial logic of the split is in many ways getting more compelling”, few seemed to think it was any longer on the agenda. The Wall Street Journal reported at the start of May that EY Americas Vice Chair – Tax Kevin Flynn told his staff Everest is “behind us” in a webcast.

Why the turnaround? Pressure had come from critics inside the group, especially in the United States EY arm headed by Julie Boland. Flynn told the Wall Street Journal that the splitting of the tax practice caused particular division.

Another clue to the concerns: A few days after the split’s cancellation, EY’s US arm announced it would lay off 5% of its staff, around 3,000 people. It blamed the layoffs in part on a slowing economy and in part on strong staff retention, creating “overcapacity”. In late April 2023, Deloitte also announced plans to lay off 1,200 US staff.

Of course, in the mere weeks since all of this, PwC Australia may have inadvertently picked up Di Sibio’s dropped baton. Having been sanctioned for leaking details of tax changes that would combat tax avoidance by large multinationals to other partners and staff within PwC, the firm has now lost its CEO as well as several partners.

PwC’s actions may speak louder than EY’s words.

What next?

For the moment, the Big Four will remain both auditors and consultants, all over the world. And business is still booming, just as it has done for years now. Even EY’s 2022 results showed global revenues of $45.4 billion USD, an increase of 16.4%.

Like PwC, Deloitte and KPMG, EY’s revenue is being particularly boosted by one business: consulting. EY’s consulting revenues rose an eye-catching 27% to $13.9 billion USD. Its Big Four rivals grew the same way.

Even a decade ago, many top staff at McKinsey, Bain and Boston Consulting Group (BCG) regarded the Big Four’s consultants as mostly fit for the dull slog of implementing ideas that the specialised consultancy firms came up with. Now, as the Big Four’s combined annual revenues close in on $190 billion USD, one study suggests consulting supplies half of that.

In contrast, McKinsey, Bain and BCG’s combined annual revenues don’t reach $30 billion USD. The Big Four of accounting are now the Big Four of consulting as well – and still growing their consulting teams.

And with that business going so well, many in those businesses would rather not disrupt anything. While EY looks for a path forward, the three other firms reject the case for any split of their own.

“It’s not even a close call,” declared Deloitte global CEO Joe Ucuzoglu in a feisty video statement on the firm’s website in March 2023. He called a split “a solution in search of a problem”, said regulators had never encouraged Deloitte in that direction, and recalled the earlier problems of splits such as that of Arthur Andersen – that once-mighty accounting firm succumbed to Enron-related reputational damage a few years on from its own break-up.

So does anything stand in the way of the Big Four’s continued rise?

The Big Four’s big six problems

Professor of Accounting and director of the Melbourne Centre for Corporate Governance and Regulation at the University of Melbourne Ian Gow is, with Stuart Kells, the author of 2018’s authoritative The Big Four: The Curious History and Perilous Future of the Global Accounting Monopoly. That book detailed the Big Four’s conflict-of-interest problem, and many others.

Five years on, the Big Four now face, on Gow’s count, at least six new or developing issues.

1 Consulting rises

The business that has caused the Big Four so much joy and angst – consulting – will continue to grow in importance, says Gow. Whether it’s management issues, strategy, operations, finance, technology or HR, companies and other large organisations keep spending more to ask the Big Four for advice. But that probably means problems elsewhere.

2 Conflict-of-interest issues

As consulting increases, claims of conflict-of-interest between firms’ consulting and auditing seem set to continue. Indeed, the end of EY’s proposal will likely mean a new round of discussions – and intermittent battles – with regulators concerned by conflicts of interest between the two halves of their businesses.

Calls continue for legal bans on combining auditing and consulting. In 2020 the UK had a plan for operational separation of audit and consulting at the Big Four; more recently, it has been considering a different scheme which would require the largest UK companies that use Big Four auditors to also engage smaller firms for at least 30% of their auditing work.

The head of the UK’s Financial Reporting Council underlined the strength of regulatory concern in early 2023 when he reportedly said auditors opposed to tough regulation deserve “the world’s smallest violin”.

3 Sustainability reporting will also grow

The Big Four have been collaborating on the development of sustainability practices, the regulation of which would require reporting against sustainability metrics, Gow says.

Together with the International Accounting Standards Board, he says, they are “really pushing hard” to create accounting standards.

“Once you have accounting standards and have an obligation to report then, voila, you have more stuff to audit … it’s payday for the Big Four.”

But Gow worries that the sustainability metrics lack a firm footing.

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4 China threatens the Big Four

China’s top four accounting firms are still the Big Four – in order: PwC, EY, KPMG and Deloitte. But after three decades building up their Chinese businesses, the Big Four may be reined in by the Chinese government.

In March, Bloomberg reported that China’s Ministry of Finance had suggested Chinese state-owned enterprises (SOEs) should phase out their use of the Big Four’s auditing services to protect their own data security.

In May, the same ministry warned Chinese companies to step up data checks on auditors. The Big Four’s Chinese future may be much dimmer than just a few months ago.

5 The challenge of AI

The new generation of artificial intelligence is also the biggest new technology to spring up since Gow and Kells published their book in 2018. So far, ChatGPT and its ilk are not about to replace human accountants. Gow does not expect that to last, even though it may help parts of the Big Four. We are seeing rumblings of workforce disruption that may reach accounting, with enterprises trimming their ‘back office’ functions as they anticipate greater augmentation by AI technologies.

“This is going to be very disruptive, I think, for accounting in particular – because I think it probably drives the wedge between the consulting and auditing side of the businesses even further.”

6 Continuing auditing failures

Just how many auditing failures we should expect is a controversial topic. Many audit experts argue the audit system is not set up to deal with a carefully thought-out attempt at fraud.

But EY is under particular pressure in Europe over its audits of a string of collapsed companies that includes high-end UK furniture retailer Made.com, and German fintech champion Wirecard.

Wirecard was briefly valued at more than €20 billion ($32.8 billion AUD) – but appears to have used fake profits to pump up its accounts. EY, its long-time auditor, investigated its operations in 2018, did not uncover the collusive fraud at the company, and kept on defending the company even against another investigation by KPMG. German audit watchdog Apas last month banned EY from taking on any new large German audit client for two years.

KPMG ‘s own reputation is also under renewed scrutiny due to problems on another continent. It was the auditor of all three big US banks to fail in early 2023: Silicon Valley Bank, First Republic Bank and Signature Bank.

A business puzzle remains

As Gow and Kells observed in their book, the Big Four’s success remains a business puzzle. Critics call the Big Four overly bureaucratic and unimaginative. Yet they not only dominate accounting; they continue to slowly yet seemingly inexorably edge out the very firms that were supposed to have mastered the techniques of business dominance, led by McKinsey, Bain and BCG.

They have huge incentives to go on growing those businesses and dealing with the regulators as best they can. Deloitte global CEO Ucuzoglu underlined in his March statement just how much money the Big Four were likely to make if things went on unchanged. “We already have such a lucrative model,” he noted.

EY has shown how fraught is the course of a split. However, the risks and consequences of the status quo have now become very real, perhaps tipping the scales once more.

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