Big Four (audit firms)

The Big Four are the four largest international professional services networks, offering audit, assurance, tax, consulting, advisory, actuarial, corporate finance, and legal services. They handle the vast majority of audits for publicly traded companies as well as many private companies. It is reported that the Big Four audit 99% of the companies in the FTSE 100, and 96% of the companies in the FTSE 250 Index, an index of the leading mid-cap listing companies.^[1] The Big Four firms are shown below, with their latest publicly available data.

This group was once known as the "Big Eight", and was reduced to the "Big Six" and then "Big Five" by a series of mergers. The Big Five became the Big Four after the demise of Arthur Andersen in 2002, following its involvement in the Enron scandal.

BDO and Grant Thornton are the fifth and sixth largest firms, respectively.

Legal structure

None of the Big Four firms is a single firm; rather, they are professional services networks. Each is a network of firms, owned and managed independently, which have entered into agreements with other member firms in the network to share a common name, brand and quality standards. Each network has established an entity to co-ordinate the activities of the network. In one case (KPMG), the co-ordinating entity is Swiss, and in three cases (Deloitte Touche Tohmatsu, PricewaterhouseCoopers and Ernst & Young) the co-ordinating entity is a UK limited company. Those entities do not themselves perform external professional services, and do not own or control the member firms. They are similar to law firm networks found in the legal profession.

In many cases each member firm practices in a single country, and is structured to comply with the regulatory environment in that country. In 2007, KPMG announced a merger of four member firms

Ernst & Young also includes separate legal entities which manage three of its four areas: Americas, EMEIA (Europe, The Middle East, India and Africa), and Asia-Pacific. (Note: the Japan area does not have a separate area management entity). These firms coordinate services performed by local firms within their respective areas but do not perform services or hold ownership in the local entities.^[6]

The figures in this article refer to the combined revenues of each network of firms.

Mergers and the big auditors

Since 1989, mergers and one major scandal involving Arthur Andersen have reduced the number of major professional-services firms from eight to four.

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]
• Coopers & Lybrand (until 1973 Cooper Brothers in the UK and Lybrand, Ross Bros., & Montgomery in the United States)
• 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
• Arthur Young

Most of the Big Eight originated in alliances 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.^[8]

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 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.^[9][10] 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.

Big Four

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.

2002 saw the passage of the Sarbanes–Oxley Act into law in the US. It aims to enforce strict compliance to rules for both businesses and their auditors.

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 indicating that they may reclaim the #1 spot in future years.^[11]

Branding List

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

• Arthur Andersen (1913-2001)
• EY (1989) (Ernst & Young until 2013)
  • Arthur Young (1906)
  • Ernst & Whinney (1979)
    • Ernst & Ernst (US) (1903)
    • Whinney, Smith & Whinney (UK) (1849)
• 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)
    • Haskins & Sells (US)
  • 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)

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.^[12] 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.^[13] 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.^[14] 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.^[15]

Global member firms

See also

• Luxembourg leaks

References

External links

• Official website Deloitte
• Official website Ernst & Young
• Official website PriceWaterhouseCoopers
• Official website KPMG
• International Consortium of Investigative Journalists, Big 4 Audit Firms Play Big Role in Offshore Murk,
• G8 And Tax Avoidance - Spinwatch Exclusive on the role of the Big Four in lawmaking