I was in conversation with a perceptive reader, long concerned as I have been about the viability of the Big Four model of audit services for global-scale companies. Our context was the October 3, 2013 announcement that Deloitte had, for an undisclosed sum, settled out of court the life-threatening $ 7.5 billion claims by the trustee of the criminally-driven bankruptcy of mortgage lender Taylor Bean & Whitaker.
That news – along with the size of the number, when it eventually surfaces -- should trouble all those not evading the reality that “Black Swan” litigation could trigger the catastrophically viral collapse of the Big Four – a possibility beyond denial given the death spiral of Arthur Andersen in 2002.
The only sure alternative, I have believed, is the resolution, on a pre-collapse basis, of the seemingly intractable impediments to a sustainable audit function for the future – including the Big Four’s persistent performance quality challenges, litigation liability, financial fragility, uninsurability, and independence-based constraints on their scope of services.
My friend had a new take, however, based on the rapid growth of the Big Four consulting practices. Despite widespread prohibitions on consulting for audit clients, they are reporting[1] robustly increasing consulting revenues. Their growth rates year-on-year range from 8 % to 18 %, representing steadily increasing percentages of their overall revenue while three of the Big Four report audit revenues that are flat to diminishing.
Consulting by the Big Four has reached levels not seen since the large firms’ various exits from the business – the bitter divorce between Arthur Andersen and Andersen Consulting commenced in 1998 and finalized with the launch of Accenture on January 1, 2001; EY’s sale to CapGemini in February 2000; KPMG’s 2001 spin-off to create what became BearingPoint, and PriceWaterhouse’s sale of its practice to IBM in July 2002.
My friend’s hypothesis is that, running at such levels, Big Four consulting underpins the next logical step in a survival strategy, namely to firewall and close down their audit practices altogether – in effect taking the Big Four out of “Big Audit.”
This I briefly found a tantalizing idea, one I’d never before considered: that Big Four leadership would be so visionary and creative – because the profession has not shown that level of positive self-interest since successfully lobbying to capture the assurance service business upon passage of the American securities laws in the 1930’s.
But on reflection, I conclude that my friend is wrong. Not because separation of audit from consulting cannot be done – as shown by Accenture’s growth since birth to a prosperous $ 29 billion enterprise today. Plainly, it can.
Nor because of the reaction of another commentator to whom I exposed this idea – that Big Four “flight to consulting” was unlikely, since the firms would keep at least minimal audit capacity for the sake of credentials and credibility. But that point is readily answered by experience: Accenture not only did not need an on-going relationship with its erstwhile accounting bedmate -- it could scarcely wait for the ink to dry on the divorce decree before scrubbing itself of prior history and maximizing the distance between the two.
It’s because Big Four withdrawal from their audit practices would not of itself mark the immediate end of “big audit.”
Closing the Big Four audit practices would not resemble a company simply firing its workers as it exits a geographic market or shelves a product or shuts down a factory or a division. Big Four audit practices may be fatally flawed and unsustainable in their business models – an adverse jury verdict in Taylor Bean would have proved that – but they still generate annual revenues in the multiple billions, and globally employ several hundred thousand professionals – revenue and jobs that a consulting-oriented leadership could neither fold up into the surviving practice nor isolate and hand-cuff under non-compete or “garden leave” restrictions.
Instead, what would happen is that newly-redundant and jettisoned audit partners would, through some form of spin-off or “management buy-out,” create four (or more) firms that would be pure “audit only” – perhaps hauling along an ancillary tax division or two.
If so, the outcome would not be the disappearance of “big audit” – at least not yet – but transfer of this poisoned chalice to “slightly-less-big” audit -- narrow in practice scope and financially even weaker and more exposed to the existential threats in their litigation portfolios.
Which in turn means that my friend’s analysis is in the end not really wrong, but only incomplete. The eventual day of final reckoning for private audit would not be upon the withdrawal of the Big Four into the prosperity of consulting, but when one of their offspring should suffer the fate that only recently threatened Deloitte.
And if that is true, the real debate about survivability retains its vitality, and should retain its hold on our attention and concern.
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