Big Four accounting firms

The firms were called the Big Eight for most of the 20th century, reflecting the international dominance of the eight largest firms:

• Arthur Andersen
• Arthur Young
• Coopers & Lybrand
• Deloitte Haskins & Sells
• Ernst & Whinney
• Peat Marwick Mitchell
• 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. The firms' initial international expansion were driven by the needs of British and American based multinationals for worldwide service. They expanded by forming local partnerships, or by forming alliances with local firms. Arthur Andersen was the exception: the firm originated in the United States, and then expanded internationally by establishing its own offices in other markets, including the United Kingdom.

Price Waterhouse was a U.K. firm which opened a U.S. office in 1890, and later 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. For instance, Touche Ross was named such in 1960, Arthur Young, McLelland, Moores & Co in 1968, Coopers & Lybrand in 1973, Deloitte Haskins & Sells in 1978, and Ernst & Whinney in 1979.[7]

In the 1980s the Big 8, each with global branding, adopted modern marketing and grew rapidly. They merged with many smaller firms. KPMG was the result of one of the largest of these mergers. In 1987, Peat Marwick merged with the Klynveld Main Goerdeler group to become KPMG Peat Marwick, later known simply as KPMG. Note that this was not the result of a merger between any of the Big Eight.

Competition among these firms intensified, and the Big Eight became the Big Six in 1989. In that year, Ernst & Whinney merged with Arthur Young to form Ernst & Young in June, and Deloitte, Haskins & Sells merged with Touche Ross to form Deloitte & Touche in August.

The Big Six after both mergers occurred were:

• Arthur Andersen
• Coopers & Lybrand
• Deloitte & Touche
• Ernst & Young
• KPMG
• Price Waterhouse

There has been some merging of ancestor firms, in some localities, which would aggregate brands belonging to the Big Four today, but in different combinations than the present-day names would otherwise suggest. For example, the United Kingdom local firm of Deloitte, Haskins & Sells merged instead with the United Kingdom firm of Coopers & Lybrand. The resulting firm was called Coopers & Lybrand Deloitte, and the local firm of Touche Ross kept its original name. It wasn't until the mid-1990s that both UK firms changed their names to match those of their respective international organizations. Meanwhile, in Australia, the local firm of Touche Ross merged instead with KPMG.[8][9] 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.

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

The Big Five at this point in time were:[10]

• Arthur Andersen
• Deloitte & Touche
• Ernst & Young
• KPMG
• PricewaterhouseCoopers

Finally, the insolvency of Arthur Andersen stemming from their involvement in the 2001 Enron Scandal, produced the Big Four:

• Ernst & Young
• Deloitte & Touche
• KPMG
• PricewaterhouseCoopers

The Enron collapse and ensuing investigation prompted scrutiny of the company's financial reporting, which that year was audited by Arthur Andersen. Arthur Andersen was eventually indicted for obstruction of justice for shredding documents related to the audit in the Enron scandal. The resulting conviction, although it was later overturned, still effectively meant the end of Arthur Andersen, because the firm was not allowed to take on new clients while they were under investigation. Most of its country practices around the world were sold to members of what is now the Big Four -notably Ernst & Young (now known as EY) globally; Deloitte & Touche in the United Kingdom, Canada, Spain, and Brazil; and PricewaterhouseCoopers (now known as PwC) in China and Hong Kong.

In Australia, the heads of the big four firms have met regularly for dinner, a parliamentary committee was told in 2018. The revelation was among issues which led to an inquiry by the Australian Competition and Consumer Commission into possible collusion in the selling of audit and services. However, Ernst & Young told the inquiry that the dinners, which were held once or twice a year, were to discuss industry trends and issues of corporate culture such as inclusion and diversity.[12]

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.[13][14]

In the wake of industry concentration and the occasional firm failure, the issue of a credible alternative industry structure has been raised.[15] The limiting factor on the expansion of the Big Four to include additional firms, is that although some of the firms in the next tier have become quite substantially large, or have formed international networks, effectively all large public companies insist on having an audit performed by a Big Four network. This creates the complication that smaller firms have no way to compete well enough to make it into the top end of the market.

In 2011, the House of Lords of United Kingdom completed an inquiry into the financial crisis, and called for an Office of Fair Trading investigation into the dominance of the Big Four.[16] 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]

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 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 5% of all reports.[18]

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.[19] The final report of a Parliamentary inquiry into the collapse of Carillion, published on 16 May 2018,[20] accused the Big Four accounting firms of 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 (CMA), urging consideration of breaking up the Big Four.[20] In September 2018, Business Secretary Greg Clark announced he had asked the CMA to conduct an inquiry into competition in the audit sector,[21] and on 9 October 2018, the CMA announced it had launched a detailed study.[22] MPs have asked for the separation of the "Big Four" into multiple units after the collapse of Carillion and BHS as it would help in providing the professional skepticism required to furnish high quality audits.[23]

A 2019 analysis by PCAOB in the United States observed that the big four accounting firms bungled almost 31% of their audits since 2009. In another project study on government oversight, it was seen that while the auditors colluded to present audit reports that pleased their clients, the times when they didn't they lost business. Despite this large-scale collusion in audits, the PCAOB in its 16-year history has only made 18 enforcement cases against the "big four". Although these auditors have failed audits in 31% of cases (808 cases in total), they have only faced action by PCAOB in 6.6% of the cases. KPMG has never been fined despite having the worst audit failure rate of 36.6%.[24]