For two decades, the ‘Big Four’ – Deloitte, PwC, KPMG and EY – have been ubiquitous in capitalism. They audit and advise the largest corporations, and help them reduce taxes. Working in almost every country, they collectively employ over a million people.
The four firms trace their origins to 19th-century London, but in their modern form, they are a product of the 1980s. Each of the four firms offers a diverse portfolio of services: auditing, management consulting, tax advice and miscellaneous other functions such as real estate, workforce planning, corporate finance, legal and IT-related services.
Related business lines differ in their glamour, profitability and prestige. For example, auditing is not very profitable, nor is it highly lucrative as a career path for young accountants, but it is admirable in its objectives of honesty and transparency. Tax advice, in contrast, is more shady and permanently profitable.
Several imperatives prompted the big four to diversify into this breadth of services. At the most mundane level, mixed auditing and advisory services allowed the big four to better manage the peaks and troughs of annual financial reporting by moving employees between service lines. Along with improving the use of employees, the movement created more interesting career paths.
Diversification also helped the big four win the job: Aura was very useful in low-integrity areas such as tax reduction advice from doing high-integrity audit work.
All of these forces put the big four at a sweet spot in their structure and revenue mix. They made minimal investment in audit quality, so as to minimize their investment in low-return audit services. And they made a lot of profit in other business areas.
But today, the big four are seriously considering major changes to their structure and mix of services. (EY’s restructuring plan has reportedly been named ‘Project Everest’.)
In principle, there are many different structural transformation options. For example, companies may tailor their own tax advice practices, or all four firms may split themselves down the middle to create eight miscellaneous ‘big’s.
But the most realistic option, and with the strongest argument, is to separate auditing from advisory and tax services.
A variety of push and pull factors have prompted firms to consider such divestments.
Conflicts between audit and advisory services are the main pushing factor. If a big four firm audits a major corporation, there are strict limits on the extent to which the firm can advise that corporation. Therefore, the more audit clients there are, the less advisory work is available.
There are other costs from diversification as well. Employees of the four large advisory teams still have to comply with some sort of audit-related rule. This imposes a large cost overhead on non-audited business lines.
Another diversification cost: Secretly advising corporations on how to reduce taxes undermines the audit narrative of transparency and good corporate citizenship.
These reasons have been around for many years, but new factors have emerged that are making the talk of partition all the more urgent.
The capital market has seen the rise of a private equity market for professional service firms and business units. This means, in the event of a major split of a Big Four firm, there will be active markets for both the larger and smaller pieces of the individual firm.
Another driver of change: The pandemic has changed the way we work, such that older people now have to work harder to attract, motivate and retain employees. Also, regulators are pushing to improve the quality of audits and remove conflicts of interest for the big four companies.
In the face of more vocal regulators, the big guys have taken proactive steps, such as setting up new boards with external directors, to sit at the top of their audit divisions, and therefore provide an element of independence.
But that temporary change didn’t work, because it put independent directors in an impossible position: Their presence didn’t address the underlying problems of audit quality and audit conflicts, and yet they were required to bear the associated risks.
Another factor making the point of division more immediate: the logic of the first mover.
The first big-four firm to be split will create the first big-four pure-play auditor and the first post-big-four advisor, resulting in market position and market share awards.
A division would also be an opportunity to adopt a new organizational form, such as by becoming a corporation. The current multi-partnership model has outlived its use to date. Just one example: One in the big four firms does not have a global head office that has sufficient authority to enforce consistent service standards across constituent international partnerships.
A new corporate structure will support efforts to improve service quality globally, and it will result in new ways for firms to raise capital for innovation (such as audit bots) and work for the next generation of young and in-demand consultants. will enable it to invest in ,
While there are strong forces behind partition, there are also great obstacles.
The brands of the four firms are among their biggest assets (even though they have been hit from time to time by audit scandals and tax scandals – Carillion, Wirecard, Akai, TBW, Panama Papers…). Brands help firms win jobs, and they rapidly differentiate Four from other accounting industry contenders.
In that light, the idea of splitting creates curly questions for subsequent branding.
For example, in the audit-consultant split, does the current brand pass to the resulting advisory firm or to the auditor? Another option is to share the brand, such as by creating ‘KPMG Audits’ and KPMG Advisory – but such solutions may never work in the long run.
Another branding option: ditch the old brand altogether, and give both successors completely new names. This may be practical, but it would involve a daring loss of brand value. (There are other risks here as well. Previous attempts at big four brand innovations produced clangers like ‘Mondays’ and ‘Strategy and’.)
Perhaps the easiest big four brands to split – and therefore the easiest ‘big’ to carve out – is EY. In the EY division, ‘Ernst’ can go to one side and ‘Young’ can go to the other; And perhaps even the successor parts of the firm could revive some of EY’s past names — like Whinney, McClelland and Moore — and so take even greater advantage of historical brand value.
Similarly the names that were discarded before the split of the other big four firms, such as Touche, Tohmatsu, Lybrand, Garnsey, Goerdeler, Keitel and (probably) Sneth, can be revived.
Like Mount Everest, the challenges of partition are not insurmountable. far from it. The first mover argument, as well as the capital market’s appetite for another Accenture or two, or three or four, means that a Big Four split is inevitable in the near term.
So we are left with three big questions: Which ‘big’ will run first? How generously will the market reward the first mover? And what will the merged progeny be called?
Stuart Kells is an assistant professor at La Trobe Business School. He wrote ‘Ashurst: The Story of a Progressive Global Law Firm’ and (with Ian Gow) ‘The Big Four: The Curious Past and Perilous Future of the Global Accounting Monopoly’.
There is no better time to review auditing and regulatory structures