How not to run a business: Lessons from the big four firms

There has been a gradual erosion of trust in the big four professional services firms as a result of their behaviour over several years, says Dr Samar Gad, Associate Professor and Course Director BSc Accounting and Finance at the Kingston Business School.

Some events, such as the current drama surrounding PwC in Australia, stemming from the sharing of highly confidential information around multinational tax laws, and the 2018 accusations of complicity when KPMG UK approved inflated financial figures for outsourcer Carillion shortly before its £7bn collapse, undoubtedly damage the organisations’ brands.

They also erode trust in the big four professional services firms in general.

“Deloitte was fined £15 million by the Financial Reporting Council for a failure to apply professional scepticism during the audit of software company Autonomy's financial statements,” Gad says.

“Ernst & Young’s auditing practices came under scrutiny following the collapse of Wirecard, as they failed to detect a significant shortfall in cash reserves.”

But that brand damage and those trust issues don’t trickle down to smaller operators, Gad says.

“I don’t believe this will damage trust in the accounting profession,” she says. “The erosion of trust in the big four accounting firms stems from a range of concerning characteristics they share that have attracted intense scrutiny from regulators and the public.”

“These factors include their market dominance, which leaves little room for competition. A 2019 report by the Capital Market Authority revealed that the big four firms still hold an astonishing 97 per cent share of audit clients in the FTSE 350, along with 99 per cent of audit fees.”

Dr Chris Higson, a Professor of Accounting Practice and Academic Director, Graduate Masters at London Business School, agrees that a large part of the problem stems from a lack of competition.

“We have these big four accounting firms and I think there’s broad agreement that that’s not enough,” Higson says. “There were once eight big accounting firms. Some merged and Arthur Andersen disappeared. We’re now left with four, and all four of them run into trouble regularly.

“If you look back over the past few years, you see the big four has been on the naughty step almost everywhere. But should any of their competitors get excited about it? I don’t think so. They have an iron grip.”

Some have argued that with all of their audit failures, one or two of the companies should be disqualified.

“But four is too few already, so it will never happen,” Higson says. “There is already not enough choice.”

So where is the opportunity?

For smaller practices, Gad says, opportunity lies in the lessons the big four are teaching us about how not to run a business.

“The big four often provide a variety of services to clients, including audit, consulting, tax and advisory roles,” she says. “While this breadth of services may offer advantages, it raises concerns about conflicts of interest and compromises in objectivity and independence.”

Smaller firms can learn from this. Rather than trying to be a jack of all trades, they can instead carve out a niche in which they specialise, thereby positioning themselves as business advisers to clients who value industry-specific knowledge and experience.

“In addition to offering traditional accounting services, they can provide proactive guidance and help clients navigate complex business challenges,” Gad says. “These firms can establish themselves as reliable and valuable partners.”

Smaller firms can also provide personalised attention and tailored services to their clients far better than a corporate behemoth can, Gad says. With a smaller client base, they can build strong relationships and foster a deep understanding of their clients' specific needs and goals.

“Furthermore, medium-sized and local accounting firms have the flexibility to adapt quickly to changes in the industry and respond promptly to clients’ evolving requirements,” she says.
“They can offer competitive pricing, agile decision-making and a more localised approach, which may resonate well with businesses seeking personalised and attentive service.”

Higson does see some opportunity for medium-sized firms, such as BDO and Grant Thornton, to begin the process of joining the big four.

“There’s no sign of it happening and it’s still a big cost,” he says. “But there is active discussion around how we can get the next half dozen businesses, in terms of size, to step up. Another option is to force the big four to partner on large audits with a mid-tier firm, to teach them how to do it.”

Such a move may also provide useful checks and balances.

Be small, act big

The big four professional services firms have power because they offer a great range of exactly that – professional services.

Even the smallest players in the accounting market can develop alliances that offer a similar breadth of expertise to their clients.

“It would benefit them greatly to collaborate with other professional service providers, such as legal firms or technology consultants,” Gad says.

“This can expand the range of services offered by SME accounting businesses. By forming strategic alliances, smaller firms can access broader expertise, enhance their service offerings, and cater to a wider client base.

“These partnerships can help provide clients with a more comprehensive and integrated solution, while also fostering business growth and differentiation.”

Offering services within an alliance drawn between independent smaller businesses, rather than in a large organisation, also mitigates risk.

“When a firm provides various services to a client, there is a heightened potential for conflicts of interest to arise,” Gad says. “For example, if an auditing firm is also engaged in consulting services for the same client, there may be pressure to downplay or overlook issues that could impact the consulting relationship.”

This is less likely in an alliance of smaller businesses. A collaboration of smaller practitioners can bring the benefits of bigger business without the potential financial, legal and reputational risks created by damaging behaviours that have been so clearly demonstrated by the big four.

Finally, Gad says, smaller businesses can also move more quickly with technology, bringing to their typically smaller clients the power of technological transformation.

For example, “[small businesses] can capitalise on the personalised relationships they have with their clients and maximise the potential of blockchain technology,” Gad says.

Using blockchain, for example in automating the verification of financial transactions and data as well as in contracting, can increase the accuracy of financial reporting and build trust in data integrity.

The good news for small accounting businesses is that there is no bad news as a result of bad behaviour by the big four. There are instead powerful lessons to learn, and comfort in the knowledge that trust in accounting does not depend on the big end of town.