A Study in Professional Power: Why Do the Big 4 Accountants Survive?

Yves here. While many people go into “my eyes glaze over” mode when the topic of accountants comes up, you ignore them at your peril. In the US, boards and executives escape liability if they can say they were acting on the advice of professionals. Lawyers are the main liability shields for corporate bigwigs, but pliant accountants are also very helpful.

And why don’t shareholders who’ve been hurt due to professionals signing off on crooked corporate conduct sue? They can’t. As we wrote in ECONNED:

Legislators also need to restore secondary liability. Attentive readers may recall that a Supreme Court decision in 1994 disallowed suits against advisors like accountants and lawyers for aiding and abetting frauds. In other words, a plaintiff could only file a claim against the party that had fleeced him; he could not seek recourse against those who had made the fraud possible, say, accounting firms that prepared misleading financial statements. That 1994 decision flew in the face of sixty years of court decisions, practices in criminal law (the guy who drives the car for a bank robber is an accessory), and common sense. Reinstituting secondary liability would make it more difficult to engage in shoddy practices.

In other words, the only party that can sue an accounting firm for engaging in fraudulent conduct is his immediate client….who almost certainly is in on the con. Lovely.

By Richard Murphy, a chartered accountant and a political economist. He has been described by the Guardian newspaper as an “anti-poverty campaigner and tax expert”. He is Professor of Practice in International Political Economy at City University, London and Director of Tax Research UK. He is a non-executive director of Cambridge Econometrics. He is a member of the Progressive Economy Forum. Originally published at Tax Research UK

I was asked very recently why it was that the big 4 firms of accountants survive. This is an issue I have been considering with Len Seabrooke and Saila Stausholm at Copenhagen Business School. The academic paper on the subject is in progress. Let me offer a plain English perspective for now.

Like much of political economy, this is a story of power. In the first instance this was professional power. The big firms did, as professional institutes developed, have the means to dominate them. They were in the capital cities where those institutes were usually based. They had the means to release partner time to manage those institutes’ affairs. They had the motive to do so. That was ring-fencing their profit. The big firms, then, used their power to set the rules for their professions.

Leading the way at a technical level as well, in a profession lead from these firms and not by either government or academia, these firms also innovated in ways that ring fenced their market. I suspect that this may have provided the strongest incentive for the creation of consolidated accounts – which were not a universal requirement for group companies until the 1940s. When consolidated accounts required that multinational groups be treated as single entities their auditors, who I strongly suspect sold its benefit to governments who then made it a legal requirement, could in turn demand that they were the sole group auditor. The global spread of a select few firms was guaranteed. The rise of the global firm was the consequence.

These firms succeeded. The firms then sold consultancy advising other companies to copy the success of their global company clients by also becoming global using a structure that guaranteed market growth in auditing for the big accountants. The market for the big audit firms was reinforced.

As this was happening in the 50s and 60s another phenomena was growing, which was the tax haven. Slowly at first, but steadily as the British empire (in particular) receded, the opportunity to hide nefarious activity, as well as profits and so tax bills in such places, grew. Did the big firms go there before their clients? Or did they have to go because some clients had already gone? It’s a question to be answered. But if the firms were to maintain their demand that they must be sole auditor, worldwide, at least in name, then if the global entities they were helping spawn moved to tax havens then they too had to go there.

And they did not miss the opportunity. Already used to lobbying and forming opinion on legislation in the countries from which they originated, and well aware of the coercive power this gave them over their clients, the governments of new tax havens must have seemed easy pickings to the big accountants of the day. And so they were. Whole rafts of legislation were influenced by such firms as they peddled in tax havens the secrecy that opposed the transparency they sold elsewhere. The opportunities must have seemed unlimited.

But the timeline has now reached the 70s, and life was not so good for accountants. Airlines failed back then, with people noticing that their accounts gave no hint that they owned or used planes. In contrast, aeroplane engine makers were claiming that they had value when the products they were developing at enormous cost for the time were unlikely to push anything into the sky. Accounts were not providing a true and fair view.

In the face of significant threats to the profession from an outraged public (well, at least those parts losing money as a result of these failings) the big firms reclaimed the initiative. Accounting standards – supposedly written in the public interest and for the benefit of all stakeholders – were created and governments that were too trusting by half gave them the force of law. The power of the big accountants was reinforced, rather than diminished, by the accounting debacles of that era. Now they could write the rules; say they had the power of law; force them onto their clients and the rest of the profession; and in the process pull themselves ahead of the competing pack. They could do that by advising on the very rules they had created; by claiming to be the only people who could audit them; and by making sure that because some only applied to larger enterprises the knowledge of their use did not trickle down into the profession as a whole.

And they exploited this to the full. The era of capital market liberalisation and globalisation simply provided greater opportunity to do this, whilst the new and more relaxed ethics of this period promoted the use of tax havens in ways previously unforeseen, and the firms jumped with both feet into this market as well, producing tax avoidance schemes by the bucket load.

And things only got better. Although the accountants failed miserably to deliver what they promised when accounting standards were first developed, because they entirely ignored the needs of almost all users of accounts, their capture of the process was so complete that when the European Union was looking for a set of single accounting standards they adopted the Big 4 created International Financial Reporting Standards as quasi law, which has now led to their adoption in more than a hundred countries worldwide, with a parallel process taking place in the USA, Japan and other influential markets. The ability of these firms to control the world’s view of capitalism appeared complete, and they reaped the rewards.

And then some cracks appeared. There was a global financial crisis, which accounts had not anticipated. And there was a global loss of tax revenue, which accountants appear to have facilitated through tax havens. And rather annoying people pointed out both failings. You would have thought that the fundamental failure of their product, in the form of accounting standards, and the fundamental failure of their ethics, evidenced by their use of tax havens and sale of tax avoidance products, would have done for these firms. Nothing, however, could be further from the truth, hence the question I was asked. How are they surviving?

Let me reiterate how we got here, because the clue is in the process.

They captured the profession, long ago.

Then they captured government, and used it to create laws that suited their purposes in influential countries like the USA and UK.

They used this law to reinforce their own audit market.

And as a result they also created the image of the modern firm, which they then sold to aspiring rivals, who were required to replicate it, and so provide yet more fee income to these firms.

In the process they captured the tax havens and their legislatures, and used them for their own purposes.

So complete was the capture that their accounting standards became de facto law. And when the EU wanted to extend that right to create de facto law with regard to accounting standards, the big accountants were again given the chance to write the rules.

The result is that the big four are now integral to company law, auditing law, accounting law, the law of many tax havens, the structure of the accounting profession and the structure of many of its clients. Their desire to protect their ability to make supernormal profit has created a situation where the entire process of law surrounding companies has been captured for their benefit, and the behaviour of whole markets has been distorted in their favour as a result.

But what they did to achieve this result was display an ability to innovate. Whenever under criticism, they delivered an alternative. When their ethics were questioned, they produced a supposed new standard. When the market demand that they change, for example post Enron, that’s what they appeared to do, enough to keep people at bay. And all the time, chameleon like, they emerged from each threat with their power reinforced because they are so integral to the process of corporate regulation that government has effectively abandoned to them.

That is how they have survived.

But that also suggests how the process is changed.

Government has to reclaim this process.

It has to audit.

It has to create company law.

It has to say for whose benefit company law is created, and that is not the accountants any more.

And it has to determine who will write the alternatives.

None of that will be easy. But with adequate investment it is entirely possible.

These firms have captured significant parts of the processes of capitalism for their own ends.

If we are to still have mixed economies, and I think we should, then this process of capture has to be disrupted, in the public interest.

It is only by doing so that the power of the Big 4 will be challenged. Nothing else will change it.

That’s the issue we face. And since there is no challenge right now the Big 4 will go on. And on. Which is right now just as they want it.

Print Friendly, PDF & Email


  1. timotheus

    Have been reading The Billion-Dollar Whale about the 1MDB mega-heist, facilitated by auditors and bank compliance officers at every step as the Malaysian people were fleeced of billions to pay for sickening rounds of parties, yachts, champagne baths, jewelry, gambling, and garish mansions. “Odious debt” if ever there were.

  2. Colonel Smithers

    Thank you, Yves.

    “In the process they captured the tax havens and their legislatures, and used them for their own purposes.” That is certainly the case in Mauritius where the former deputy PM and finance minister, Xavier-Luc Duval, worked for KPMG in London and Port-Louis. In the UK, Patricia Hewitt left the cabinet and Commons to head public policy and affairs for one of the Big Four.

    It’s not just the legislatures, the former CFO to the royal family, Sir Michael Peat,was senior partner at KPMG. So was his great grandfather, a scion of the Barclay banking family and founder of Peat Marwick. Former KPMG employees hold and have held senior regulatory positions in the UK. KPMG seems to be the go to firm.

    1. Thuto

      Thank You Colonel Smithers.

      Meanwhile, down in SA:

      1. VBS Mutual Bank looted into curatorship.

      2. Cape Town HQD and dual listed in Frankfurt and Joburg, retailer Steinhoff International has shed over 90% of its market value due to an “accounting scandal” (with ordinary pensioners losing billions in the process).

      3. The Guptas, through their companies and aided by their man Jacob Zuma as state president, brazenly looted state coffers on a massive scale.

      As the enablers-in-chief, KPMG is woven into the common thread running across all these scandals. Not to worry though, they’ve thrown a few executives under the bus and are currently on a charm offensive reminding the public just how ethical a bunch they all are in spite of providing cover for these nefarious activities and will surely emerge from this with their “power reinforced”.

      PS: Steinhoff has set up an “ethics hotline” run by who? KPMG, wonders truly never cease…

      1. Colonel Smithers

        Thank you, Thuto.

        I know Steinhoff well from my time at HSBC in Johannesburg and London, 2003 – 6. It had yet to become the plaything of Wiese.

        KPMG is similar woven into UK scandals.

        You are right to use the term “enabler in chief”. It’s the entire professional services industry. Law firms, too. The UK Big Four are now setting up legal, advertising and corporate finance practices.

        I was at the Blue Eagle, soon to be ABSA red in the rest of Africa, from 2014 – 6. A friend was fired from the nest after querying why one of the Big Four was hired to manage its client on boarding remediation at a higher cost and on a longer timescale than her team could do. The management wanted the Big Four as a firewall. Ironically, she joined one of the Big Four a few months later. Her settlement, which included a gagging order, precluded her from working for six months.

  3. vlade

    This is a topic that gets raised now and them (more often recently) in the UK – that auditors/accountants should bear responsibility for fraud etc., and should not be just mindless box tickers.

  4. The Rev Kev

    A question for those of us not in the know. With Neoliberalism you can say that it has an intellectual back-office with places like the Chicago school of economics. Is there an intellectual back-office of sorts for accountancy that enable these Big Four to justify their accountancy rules as well? Or do they get to make it up as they go along?

  5. Independent Accountant

    Having the government do audits will make things worse. In the US, the PCAOB is the Big Four’s cartel enforcer. The PCAOB should be dissolved and the law changed to facilitate suits against CPAs. Let the plaintiff’s bar discipline the CPA profession.
    Uncle Sam had the FED create stress tests. Why? To convince the public the FED had things under control and the banking system is sound. Why would government audits be better than the stress tests?
    Uncle Sam could break up the Big Four into the not so sweet 16. Will it? Or does the Big Four do exactly what Uncle Sam wants? Are the “problems” we see, feature or bug?

    1. whine country

      Yes, the plaintiffs bar worked very well in my early days as a CPA. Particularly because CPAs, like other professionals, had PERSONAL liability and could not hide behind the corporate wall. This is one of those things that worked very well in real life but someone (if it wasn’t economists it was persons of the same ilk) proved it was theoretically impossible. Hence, all professionals are now corporations where before they weren’t even allowed to be called a business. From the perspective of a professional accountant with years of watching how the system works we are, ironically, failing because of accountability. We have a smoothly functioning form of capitalism that manifests in “Heads I win, tails you lose”. That fundamental principal has been ignored from the late ’70s to today at our extreme peril culminating in the GFC where it was taken to the extreme of “Heads I win, tails I win more and you lose more.

  6. johnnygl

    Good topic to cover. The accounting firms are right up there with the ratings agencies as ‘high priests’ of capital whose blessing is required if your are to be welcome into the halls of power.

    1. whine country

      Yet they’re no better than Moody’s or Fitch’s ratings – bought and paid for. We know that they are, we’re just haggling about the price.

  7. whine country

    For anyone interested, NN Taleb writes eloquently about two subjects which are germane: experts and skin in the game, for the same reasons as the author of this piece. The Big Four are so-called experts and they have no skin in the game. This as Taleb, makes us all fools who have been hoodwinked because failure to understand that abuses of these two issues is what has ruined capitalism in our lifetimes. Like the frog put in a pot of water which is slowly heated, I watched this happen over my career. It is our formerly functioning capitalist system that is the frog in the water.

  8. lyman alpha blob

    Thanks for this. There have always been some accounting practices that were supposedly “Generally Accepted” that made me scratch my head as they didn’t seem to lead to any greater transparency, and in fact often quite the opposite.

    Now I know why.

Comments are closed.