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Break up the Big Four to tame the elephant in the room

Published

17 May 2018

Author

Jack Mehigan

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The trend we’re seeing

Consulting teams of the leading accountancy firms are striving for more access points to their clients’ CEOs and that is, among other effects, raising the importance of clients’ marketing functions.

M&A is an increasingly popular route for those firms to make that step change by acquiring new creative or digital capabilities – look at Deloitte’s acquisition of Market Gravity last year. This acquisition play makes sense; these firms’ roots are in less-creative disciplines like audit, after all.

This all leads to a much more rounded and, frankly, better offer for the consulting teams of these firms. So, what’s the problem?

 

Problems not solutions

Well, the problem is that with every additional service tacked on by a Big Four consulting or advisory team, it is harder for their audit colleagues to claim complete independence of a client. As a partner in one of these firms, how do you avoid being conflicted on a statutory audit when you participate in profits, directly and indirectly, arising from advisory or consulting work? For example, Regester Larkin, a strategic risk consultant, is now owned by Deloitte, an auditor.

This conundrum is of course prominent at the moment  looking at recent thoughts of the head of the FRC and the WSJ – and that’s not even considering the competition concerns and accounting scandals that we’ve seen like the current Carillion furore.

 

Solutions for problems

The obvious solution is a coordinated break-up of the gigantic firms: In essence, splitting the firms by the teams that are engaged by clients to be their ‘Advocate’ (management consultancy and corporate finance; to name a couple) and the teams that are engaged for ‘Compliance’ purposes (statutory audit, tax and regs compliance, etc). For me, a crude audit / non-audit split slightly misses the mark.

A break-up is easier than it sounds. Most of these firms operate as separate national ‘silos’ and I know from first-hand experience most departments are pretty self-sufficient. Of course, incumbents like the status quo but their arguments are running pretty thin – the standard response is that the non-audit teams enable auditors to “understand business risk” better. Really? It’s a pretty weak argument and MPs seem to be turning their noses up at it.

 

Opportunity not obstacle

This proposal is not a negative result for either side, though. It’s an opportunity for both:

Advocate firms would be able to build out their own offer to ensure they have the CEO access points they desire as the chains are off with no concern for conflicts of interest. M&A would see an up-tick as those that are yet to acquire cutting-edge capabilities follow that route. Creative destruction at its finest.

Compliance firms can become what they are ostensibly meant to be: Profit-generating and privately-held de-facto functionaries of the state that can make sure that companies are behaving.

And so, it lands with the accountancy firms (unless the powers-that-be get there first) to improve audit quality. Divide yourselves and separately conquer your respective fields.