Big Four Accounting Firms Risk Conflict of Interest

Over the past decade, the so-called “Big Four” Networks of the Accounting Industry – PwC, Deloitte, EY, and KPMG – have transformed from handling the  majority of audits of publicly listed companies to specialising in consulting and advisory as well.

The four largest international professional services firms have taken advantage of the big opportunity for accounting firms to fulfill the roles of trusted advisors. Now, these non-audit services are the fastest-growing divisions of these four accounting giants. They have been offering everything from legal services and insolvency procedures to capital markets advisory work and advice on cyber security.

But as the big four accounting firms have slowly become a “one-stop shop,” they are also running the risk of conflict of interest. Critics claim the shifting balance of activities could threaten auditor quality and independence, and fundamentally change the culture and tone at the top of the firms. Each of the Big 4 firms recently had its share of sanctions for this matter.

Last year, PwC was fined $25 million and barred from doing consulting work for two years to settle allegations that it improperly altered an anti-money laundering report for a Japanese bank’s compliance.

Deloitte was also recently charged with violating auditor independence rules when its consulting affiliate maintained a business relationship with a trustee serving on the boards and audit committees of three funds it audited. Deloitte agreed to pay more than $1 million to settle the charges.

Likewise, EY was fined 250,000 pounds ($390,850) for failing to handle a conflict of interest properly at now defunct Hellas Telecommunications. Moreover, the Institute of Chartered Accountants in England and Wales (ICAEW), an accounting body that also regulates insolvency practitioners, had given the firm a severe reprimand and ordered it to pay costs of 95,000 pounds.

On the other hand, KPMG recently stressed how accounting services today only plays a small part of what the professional services giant do as advisory services now account for 49 percent of its income. Growth in the firm’s advisory services increased sales to 8 percent ($1.2 billion), for the 12 months to June 30.

According to Mike Rake, president of the Confederation of British Industry (CBI) and former chairman of KPMG International, “There are dangers in being all things to all people.” The risks included tighter regulation, or firms leaving the auditing business altogether. “If this were to lead to the splitting up of the firms and the loss of multidisciplinary capabilities to large global, sophisticated companies, it would not be conducive to [audit] quality,” he added.

As technology evolves and client demands shift, the world of the accounting industry continues to adapt. This may be the reason the Big 4 firms are evolving, but so long as quality is not being compromised, tapping this area will add value to their clients and that is what this industry should be all about.

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