The Threatened Collapse of the Last Large Accounting Firms and What that Means for the World of Financial Information
A basic re-ordering of the relationship between large global companies and their accounting firms is inevitable -- evolution can be postponed, but it cannot be stopped. But the need is neither well recognized nor openly discussed -- the very reason for this site.
The standard one-page auditor’s report has long been viewed as an important element in the operation of the world’s capital markets. By consensus and tradition, assurance on the financial information of global companies has been provided to regulators, investors and other users by networks of private partnerships.
Since the disintegration of Arthur Andersen in the spring of 2002, following its Enron-related indictment, four large networks now survive from what was once the “Big Eight” -- a tetrapoly that for practical purposes has complete dominance over audit services in the large-company market.
Events now suggest that the Big Four firms’ business model may be unsustainable, their core product obsolete and of significantly diminished value, and the traditional assurance-delivery structure fundamentally flawed.
Threats to the viability of the large accounting firms are receiving increased attention from politicians, regulators and academic and media commentators. But the search for evolution onward from the model put in place with the passage of the American securities laws in the 1930’s has so far yielded neither a coherent debate nor achievable solutions.
The structural issues involve a complex inter-play among the major players, each having both self-interested vision and limited influence and authority: corporate issuers, investors and other financial statement users, the accounting firms themselves, securities and exchange regulators, politicians, agencies of law enforcement, and private litigants and their lawyers.
Among these players, complex pressures on the issuance and assurance of financial information are combined and inter-related:
• Societal expectations about the value and function of auditors are mismatched with the reality of corporate behavior.
• Evolution in the capital markets has rendered the traditional auditor’s report both obsolete and irrelevant.
• Accounting and reporting standards -- too complex for comparable implementation in their requirements of broad ranges of judgment and degrees of estimation -- are exploited by financial statement issuers to the point of overt manipulation.
• Built-in limitations on the realistically achievable level of professional auditor performance are unrecognized.
• The last four large accounting firms – along with their smaller counterparts -- suffer unbearable professional liability litigation exposure.
Under the inspiration and support of the editors of the business section of the International Herald Tribune, the financial and accountancy column –“Balance Sheet” – launched in April 2002 and ran bi-weekly through 2006. There and elsewhere, I have sought to address aspects of this complex and multi-faceted environment.
The purpose of this site is two-fold: to organize the central themes of the large-firm survivability discussion, in a way conducive to give-and-take among the participants, and also to stay current with interested readers as the already-shaky condition of the Big Four and their franchise looks ever more fragile.
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