For two decades, the “big four” – Deloitte, PwC, KPMG and EY – have been ubiquitous in capitalism. They audit and advise the biggest companies and help them reduce their taxes. Operating in almost every country, they collectively employ over one million people.
All four firms have their origins in 19th century London, but in their modern form they are largely a product of the 1980s. Each of the four firms offers a diverse portfolio of services: audit, management consultancy, tax and various other functions such as real estate, workforce planning, corporate finance, legal and IT services.
The respective professions are differentiated by their glamour, profitability and respectability. Auditing, for example, is not very profitable and is not very attractive for young accountants as a career path, but it is commendable in its objectives of probity and transparency. Tax advice, on the other hand, is much more sleazy and still profitable.
Multiple imperatives have led the big four to diversify into this range of services. At the most mundane level, the combination of audit and advisory services has allowed the Big Four to better manage the peaks and troughs of annual financial reporting by moving employees between service lines. In addition to improving the utilization of personnel, this movement has created more interesting career paths.
Diversification has also helped the big four win work: the aura of high integrity audit work has been very helpful in lower integrity areas such as advice on tax minimization.
All of these forces have brought the big four to a sweet spot in their structures and revenue mix. They have made the bare minimum of investment in audit quality, to minimize their investment in low return audit services. And they reaped far more profits in other lines of business.
But today, the big four companies are seriously considering big changes in their structure and service mix. (EY’s restructuring plan would be codenamed “Project Everest.”)
In principle, there are many different options for structural change. The firms could, for example, spin off their tax advisory practices, or the four firms could split into two to create eight diversified “big guys”.
But the most realistic option, and the one that is most justified, is to separate the audit from the advisory and tax services.
Various push-and-pull factors have led companies to consider such a split.
Conflicts between auditing and consulting services are the main push factor. If a large firm is auditing a large company, there are strict limits on the extent to which the firm can also advise that company. Therefore, the more audit clients there are, the less consultancy work is available.
There are also other costs associated with diversification. The staff of the big four advisory teams still have to comply with certain types of audit-related regulations. This imposes significant overhead costs on business areas other than auditing.
Another cost of diversification: secretly advising companies on how to minimize taxes tends to undermine the audit discourse on transparency and good corporate citizenship.
These causes have existed for several years, but new factors have emerged that make the talk of a split more urgent.
Capital markets have witnessed the emergence of a private equity market for professional services firms and business units. This means that in the event of a large spin-off from a large company, there would be active markets for both large and small fragments of the dismantled company.
Another driver of change: the pandemic has transformed the way people work, so much so that large companies must now redouble their efforts to attract, motivate and retain staff. At the same time, regulators are pushing the Big Four harder to improve audit quality and mitigate conflicts of interest.
In the face of more assertive regulators, the big ones have taken proactive steps such as creating new boards of directors, with outside directors, to sit at the top of their audit divisions, and thus to provide an element of independence .
But this second best did not work, in part because it placed the independent directors in an impossible position: their presence did not resolve the underlying audit quality and audit conflict issues, and yet it forced them to bear the associated risks.
One more factor that makes the discourse of separation more immediate: the logic of the first mover.
The first major company to break away will create the first post-big-four pure-play auditor and the first post-big-four adviser, with substantial market position and market share.
A demerger would also be an opportunity to adopt a new form of organization, for example by becoming a joint-stock company. The current multi-stakeholder model has passed its expiry date. Just one example: none of the big four companies has a global headquarters with sufficient authority to impose consistent service standards across all of the constituent international partnerships.
A new corporate structure would support efforts to improve service quality globally and allow resulting companies to raise capital to fund innovation (like audit bots) and invest in new ways of working for the next generation of young and demanding consultants. .
Although there are strong forces behind the split, there are also big obstacles.
The brands of the four companies are among their main assets (even if they have periodically been hit by audit scandals and tax scandals – think Carillion, Wirecard, Akai, TBW, the Panama Papers…). Trademarks help firms win contracts and clearly differentiate them from other competitors in the accounting industry.
In this light, the idea of a split raises some tricky questions for subsequent branding.
In an audit-consulting split, for example, does the current brand go to the resulting consulting firm or to the auditor? Another option is to share the brand, for example by creating “KPMG Audit” and KPMG Advisory”, but such solutions could never work in the long term.
Yet another branding option: remove the old branding completely and give the two successors entirely new names. It might be convenient, but it would involve a brave loss of brand equity. (There are other risks here, too. Previous attempts at innovation by the Big Four have produced noises like “Monday” and “strategy.”)
EY is perhaps the easiest of the four big brands to split – and therefore the easiest “big” to split. In an EY split, “Ernst” could go one way and “Young” could go the other; and perhaps the company’s successors could also revive some of the names from EY’s past – such as Whinney, McClelland and Moore – and tap into the brand’s historic value even further.
Likewise, other spin-off Big Four companies could revive previously abandoned names such as Touche, Tohmatsu, Lybrand, Garnsey, Goerdeler, Kettle and (possibly) Sneath.
Like Mount Everest, the challenges of a split are not insurmountable. Far from there. First-mover logic, plus capital market appetite for another Accenture or two, or three or four, means a split from the big four in the near term is inevitable.
So we are left with three big questions: which “big” will move first? How generously will the market reward the first to arrive? And what will the demerged offspring be called?
Stuart Kells is an assistant professor at La Trobe Business School. He has written ‘Ashurst: The Story of a Progressive Global Law Firm’ and (with Ian Gow) ‘The Big Four: The Curious Past and Perilous Future of the Global Accounting Monopoly’.
There’s no better time to review audit and regulatory structures