Big Four accounting firms

Big Eight

The firms were called the Big Eight for most of the 20th century, reflecting the international dominance of the eight largest firms (presented here in alphabetical order):

• Arthur Andersen (until its closure in 2002 for a conviction related to the Enron scandal which was later overturned by the US Supreme Court)^[7]
• Arthur Young
• Coopers and Lybrand (until 1973 Cooper Brothers in the UK and Lybrand, Ross Bros., & Montgomery in the United States)^[8]
• Ernst & Whinney (until 1979 Ernst & Ernst in the United States and Whinney Murray in the UK)
• Deloitte Haskins & Sells (until 1978 Haskins & Sells in the United States and Deloitte & Co. in the UK)
• Peat Marwick Mitchell (later Peat Marwick, then KPMG)
• Price Waterhouse
• Touche Ross

Most of the Big Eight originated in an alliance formed between British and U.S. audit firms in the 19th or early 20th centuries. Price Waterhouse was a UK firm which opened a U.S. office in 1890 and subsequently established a separate U.S. partnership. The UK and U.S. Peat Marwick Mitchell firms adopted a common name in 1925. Other firms used separate names for domestic business, and did not adopt common names until much later: Touche Ross in 1960, Arthur Young (at first Arthur Young, McLelland Moores) in 1968, Coopers & Lybrand in 1973, Deloitte Haskins & Sells in 1978 and Ernst & Whinney in 1979.^[9]

The firms' initial international expansion was driven by the needs of British and U.S.-based multinationals for worldwide service. They expanded by forming local partnerships or by forming alliances with local firms.

Arthur Andersen had a different history. The firm originated in the United States, and expanded internationally by establishing its own offices in other markets, including the United Kingdom.

In the 1980s the Big 8, each now with global branding, adopted modern marketing and grew rapidly. They merged with many smaller firms. One of the largest of these mergers was in 1987, when Peat Marwick merged with the Klynveld Main Goerdeler (KMG) group to become KPMG Peat Marwick, later known simply as KPMG.

Big Six

Competition among these firms intensified and the Big 8 became the Big Six in 1989 when Ernst & Whinney merged with Arthur Young to form Ernst & Young (EY) in June, and Deloitte, Haskins & Sells merged with Touche Ross to form Deloitte & Touche in August.

Confusingly, in the United Kingdom the local firm of Deloitte, Haskins & Sells merged instead with Coopers & Lybrand. For some years after the merger, the merged firm was called Coopers & Lybrand Deloitte and the local firm of Touche Ross kept its original name. In the mid 1990s however, both UK firms changed their names to match those of their respective international organizations. On the other hand, in Australia the local firm of Touche Ross merged instead with KPMG.^[10][11] It is for these reasons that the Deloitte & Touche international organization was known as DRT International (later DTT International), to avoid use of names which would have been ambiguous (as well as contested) in certain markets.

Big Five

The Big 6 became the Big Five in July 1998 when Price Waterhouse merged with Coopers & Lybrand to form PricewaterhouseCoopers.

The Big 5 Accounting Firms were:^[12]

1. Ernst & Young (EY)
2. Deloitte & Touche
3. Arthur Andersen
4. KPMG
5. PricewaterhouseCoopers (PwC)

Big Four

1. Ernst & Young (EY)
2. Deloitte & Touche
3. KPMG
4. PricewaterhouseCoopers (PwC)

The Enron collapse and ensuing investigation prompted scrutiny of their financial reporting, which was audited by Arthur Andersen. Arthur Andersen was eventually indicted for obstruction of justice for shredding documents related to the audit in the 2001 Enron scandal. The resulting conviction, though later overturned, still effectively meant the end for Arthur Andersen. Most of its country practices around the world have been sold to members of what is now the Big Four—notably Ernst & Young globally; Deloitte & Touche in the UK, Canada, Spain, and Brazil; and PricewaterhouseCoopers (now known as PwC) in China and Hong Kong.

In 2010 Deloitte with its 1.8% growth was able to beat PricewaterhouseCoopers with its 1.5% growth to gain first place and become the largest firm in the industry. In 2011, PwC re-gained the first place with 10% revenue growth. In 2013, these two firms still claim the top two spots with only $200 million or 0.5% revenue difference. However, Deloitte has seen faster growth than PwC over the last few years (largely due to acquisitions) and reclaimed the title of largest of the Big Four in Fiscal Year 2016.

It was estimated that the Big Four had about 67 per cent share of the global accountancy market in 2012 while the rest were divided amongst so-called mid-tier players, including Grant Thornton and BDO.^[13]

Branding list

A year at the end indicates year of formation through merger or adoption of single brand name.

• Arthur Andersen (1913–2002)
• Ernst & Young (EY) (1989) (Ernst & Young until 2013)
  • Arthur Young (1906)
  • Ernst & Whinney (EY) (1979)
    • Ernst & Ernst (US) (1903)
    • Whinney, Smith & Whinney (UK) (1849)
• PriceWaterhouseCoopers (PwC) (1998) (PricewaterhouseCoopers until 2010)
  • Coopers & Lybrand (1973)
    • Cooper Brothers (UK) (1854)
    • Lybrand, Ross Bros, Montgomery (US) (1898)
  • Price Waterhouse (US) (1849)
• Deloitte Touche Tohmatsu (1989) (Deloitte & Touche until 1993)
  • Deloitte Haskins & Sells (1978)
    • Deloitte & Co. (UK) (1845)
    • Haskins & Sells (US) (1895)
  • Touche Ross (1975)
    • Touche Ross (1960) (Touche, Ross, Bailey & Smart until 1969)
      • Ross (Canada)
      • George A. Touche (UK)
      • Touche, Niven, Bailey & Smart (US) (1947)
        • Touche Niven (1900)
        • Bailey & Smart (1947)
    • Tohmatsu & Co. (Japan) (1968)
• KPMG (1987) (KPMG Peat Marwick before 1995)
  • Peat Marwick (1925) (originally Peat Marwick Mitchell)
    • William Barclay Peat (UK) (1870)
    • Marwick Mitchell (US) (1897)
    • Edwin Gurthie (1875–1955)
    • Beevers & Adgie (1849–1967)
  • KMG (1979) (officially Klynveld Main Goerdeler)
    • Klynveld Kraayenhof (Netherlands) (1917)
    • McLintock Main Lafrentz (1964)
      • Thomson McLintock (UK) (1877)
        • Martin Farlow (1882–1968)
        • Grace Ryland (1967–1969)
          • Grace, Darbyshire, & Todd (1818)
          • CJ Ryland (1910)
      • Main Lafrentz (US) (c.1880)
    • Deutsche Treuhand-Gesellschaft (Germany) (1890)
  • Armitage & Norton (1869–1987)

Tax avoidance

According to Australian taxation expert George Rozvany, the Big Four are "the masterminds of multinational tax avoidance and the architects of tax schemes which cost governments and their taxpayers an estimated $US1 trillion a year". At the same time they are advising governments on tax reforms, they are advising their multinational clients how to avoid taxes.^[14][15]

Policy issues concerning industry concentration

In the wake of industry concentration and individual firm failure, the issue of a credible alternative industry structure has been raised.^[16] The limiting factor on the growth of additional firms is that although some of the firms in the next tier have become quite substantial, and have formed international networks, effectively all very large public companies insist on having a "Big Four" audit, so the smaller firms have no way to grow into the top end of the market.

Documents published in June 2010 show that some UK companies' banking covenants required them to use one of the Big Four. This approach from the lender prevents firms in the next tier from competing for audit work for such companies. The British Bankers' Association said that such clauses are rare.^[17] Current discussions in the UK consider outlawing such clauses.

In 2011,The UK House of Lords completed an inquiry into the financial crisis, and called for an Office of Fair Trading investigation into the dominance of the Big Four.^[18] It is reported that the Big Four audit all but one of the companies that constitute the FTSE 100, and 240 of the companies in the FTSE 250, an index of the leading mid-cap listing companies.^[1]

In Ireland, the Director of Corporate Enforcement, in February 2011 said, auditors "report surprisingly few types of company law offences to us", with the so-called "big four" auditing firms reporting the least often to his office, at just 5pc of all reports.^[19]

The January 2018 collapse of the UK construction and services company Carillion raised further questions about the Big Four, all of which had advised the company before its liquidation. On 13 February 2018, the Big Four were described by MP and chair of the Work and Pensions Select Committee Frank Field as "feasting on what was soon to become a carcass" after collecting fees of £72m for Carillion work during the years leading up to its collapse.^[20] The final report of a Parliamentary inquiry into the collapse of Carillion, published on 16 May 2018,^[21] accused the Big Four accounting firms of operating as a "cosy club", with KPMG singled out for its "complicity" in signing off Carillion’s "increasingly fantastical figures" and internal auditor Deloitte accused of failing to identify, or ignoring, "terminal failings". The report recommended the Government refer the statutory audit market to the Competition and Markets Authority, urging consideration of breaking up the Big Four.^[21] In September 2018, Business Secretary Greg Clark announced he had asked the CMA to conduct an inquiry into competition in the audit sector,^[22] and on 9 October 2018, the CMA announced it had launched a detailed study.^[23]

Big Four using AI tools

Currently, Big 4 accounting firms are trying to increase their use of AI tools. Some only acquire AI tools from a single vendor and the others acquire multiple functions from different vendors and integrate into their own systems. However, most of the AI tools used now do not have advanced capability and need human's operations. Besides Deloitte, EY worked on data science tools and PwC has a software called Halo to analyze journal entries. Some tasks have been replaced by machines, but most of the jobs need to be done by auditors. ^[49]