Breaking up Big Four audit firms: Impact on competition and audit quality

This report critically evaluates the impact of breaking up the Big Four audit firms on competition and the quality of audits of large companies. It examines arguments for and against the Big Four companies and their role in providing accounting services. The report highlights the advantages of the Big Four companies such as brand value, compliance with accounting standards, and self-selection outcome. It also discusses negative impacts such as involvement in scandals, failure to comply with regulations, and tax evasion. The report concludes that the role of the Big Four companies is crucial in maintaining the quality and standards of financial records of different enterprises.

Critically evaluate
whether the breaking
up of the Big Four
audit firms would
improve competition
and the quality of
audits of large
companies

Table of Contents
INTRODUCTION...........................................................................................................................1
MAIN BODY...................................................................................................................................1
1. Explaining the arguments for and against in the context of big four companies ...................1
Arguments carried under explains negative impacts and negative effects taking place in
market..........................................................................................................................................3
CONCLUSION................................................................................................................................5
REFERENCES ...............................................................................................................................6

INTRODUCTION
Auditing is the process which involves inspection and verification of accounts of the
company. There are different kinds of audit such as process audit, product audit and system audit
(Bonsón and Bednárová, 2019)it planning and preparation, execution of audit, reporting and
follow up & closure of auditing. This report contains the brief information about big four
companies which are specialised in providing auditing, risk advisory and actuarial services. It
also encompasses the arguments in favour or against of the big four companies and its role in
providing various accounting services. The factors which contribute in the failure or success of
these big four companies are their quality of work, involvement in corporate scandals and
corporate failures.
MAIN BODY
1. Explaining the arguments for and against in the context of big four companies
The big four companies signifies the four biggest accounting firms. The names of accounting
firms are : Deloitte, Ernst& Young ( EY), pricewaterhousecoopers( PWC) and Klynveld Peat
Marwick Goerdeler (KPMG). It assists in auditing services, consulting, valuation, market
research and assurance.
Arguments in favour of the big four companies :
There are various factors provided by the big four companies which contributes to the
welfare of society by providing quality of work. The description of advantages of big four
companies can be described as given below:
 Brand value – The big four companies comprises various network firms which are
diversified in several countries of the world. The big four companies is a renowned brand
which provides audit, transaction advisory, taxation, risk advisors and actuarial
services(Horta Ribeiro and et.al., 2019)
 . There are various stages involved in the process of auditing such as aud. These four
companies are specialised in their operations such as Deloitte deals in real estate,
economic consulting and financial advisory. EY is specialised in corporate finance,
restructuring and business modelling. PWC provides legal vacation scheme and
technology. The employees of each firm makes it distinct from other normal firms. The
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staff of the big four companies are competent enough to deliver the best quality services.
They are having specialised certificate of company accountant and Masters in business
administration(Munoko, Brown-Liburd and Vasarhelyi, 2020)). They work with full
transparency which gains the trust of the public and results in improving the revenue of
the big four companies.
 Complying with accounting standards: The accounting standards defines the uniform
process of bookkeeping and other accounting functions across the time. The big four
companies are properly following the accounting standards maintained by the advisory
board committee. The accounting standards are rigid and contains the treatment of each
item such as lease accounting, provision for taxation and contingent liabilities. The
adoption of accounting standards maintained by the firms helps in increasing
profitability and maintaining solvency of the firm. The accounting standards helps to
prevent frauds and manipulation that occurred in the organisation. The big four
companies safeguard themselves from the ill practices by adopting accounting standards
and win the trust over the existing market which eventually creates a monopoly in the
industry of auditing (Weirich, Pearson and Churyk, 2020)
 Self-selection outcome: It might be that customer businesses with the most dependable
and precise economic statements willingly choose a Big Four firm. Therefore, the
superiority of their books are not exaggerated by the audit, but they need their financial
records to be agreed by a Big Four Business. Consequently, it looks as nevertheless Big
Four audit companies deliver higher audit superiority, but the inference is unacceptable.
 Acquisition effect: Big Four firms could have done better at fascinating personnel that are
more capable, better inspired and with advanced innate capacities. If these peoples
worked in non-Big Four companies, they would have carried audits of equally high
inspection quality is done in case of Big Four firms at its results are reflects the quality
delivered by the organization(Blakeley, 2021).
 . But since they work in Big Four firms, it looks as though it is the audit firm that delivers
higher quality, not the personnel.
 The big four audit is different and performs different functions than non big four firms. it
is been analysed that it has instance by having a better audit techniques and internal
control procedures and systems. This enhances is the better performance and quality of
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employees and audited. This is identified as right firm audit effect due to neither auditees
nor the stakeholders have been alone to conduct equally well if they were associated with
non- big four companies.
 In various countries it is very difficult to differentiate the audit firm effect from the hiring
effect. It is analysed that most of auditor switches are voluntary which means that it is
difficult to reduce or eliminate the self selection effect(Zhang and et.al., 2019.. The use of
the confidential and tight information from Norway, the organisation was able to isolate
the audit firm effect. This is been possible by keeping the pairs of customers and partners.
This is been analysed which partners have switched over which is very easy for the firm
in order to gain competitive advantage.
 While frequent studies article a Big Four effect among registered firms, the indication is
mixed in the private organisation segment of the examination market. That a firm is
private means it is not registered on a stock exchange. It consequently start by
challenging and authenticating a Big Four effect among remote firms. After customers
and companions switch to a Big Four firm, the files whose audit reports are modified for
going concern uncertainty more perfectly predict fiscal distress within the next 12
months; that less audit opinions are altered because auditee obedience increases, and that
there is less salaries organisation.
◦ Arguments carried under explains negative impacts and negative effects taking place
in market.
 KMPG Mexico data leak case: It was observed in past that there were no safety measures
taken by the KMPG company for safeguarding the confidential dara relating to pay scale
and payroll informations of clients engaged within the company. It was hence discovered
that the database taken into use was unauthorized and which resulted in a situation where
everybody had to the access towards the high security related information without even
applying a password(Bhaskar, Flower and Sellers, 2019) There were many employees
present in the organisation that were found guilty for such situation and the data related to
staff people were exposed that included unique code of population registration,
information related to salary, data related to bank account details such as number, debit
credit number etc. , social security numbers and federal taxpayer registry codes. It thus
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resulted in a situation that breached trust and employees lost interest in maintaining link
with the organisation.
In year 2019, KMPG found three executes responsible for misconduct with
reference to auditing of finance related records and statements. It was found that the persons
involved in the investigation carried by Taylor and Hulse didn't take any related actions which
led to actions such as fine implemented on partners viewing their audits.
 Involvement in scandal: There are various types of scandal which these firms are engaged
into that is related to failure in complying the norms related to organisation. There is
various issue with noncompliance with companies act 2013, other regulatory misconducts
also affect their working style which affects their goodwill and function in the market
completely. In order to maintain their goodwill and reputation the big four audit firms
must ensure that periodic review of their audit has been carried out so that audit quality
can be improved (McKenna, 2020).. Sometimes they provide advantage to their client by
manipulating their data by making the changes in books of accounts so that the clients’
accounts and their tax liability will be reduced accordingly.
Failure in paying tax liability: Due to tax norms in various country and their completely
different guidelines sometimes they evade taxed and also use various techniques to evade the
taxes so that they can reduce their tax liability in future. The funds they earned after evading
their tax liability can be used them in their other business so that their funds will be multiplied
accordingly.
Leading estimates show that profit shifting by multinational companies is responsible for
tax revenue losses globally of $500 billion or more each year. Various document leaks, including
the Paradise Papers and earlier Lux Leaks, have shown anecdotally the central role of the ‘big
four’ accounting firms – Deloitte, EY, KPMG and PwC. Now our research published today in a
top tier, peer-reviewed academic journal shows the systematic nature of the Big Four’s role. It is
estimated that multinationals that use a Big Four audit firm to audit their accounts make
significantly greater use of tax havens compared to a set of firms who choose not to use the Big
Four(Bhattacharya, 2019). Hence, we demonstrate a strong correlation between Big Four use
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and tax avoidance but also, and importantly, we offer evidence of causality. It would appear that
those multinationals that take on a Big Four firm become more tax aggressive(Kane, 2019).
The research shoes that that rather than leading the way in ensuring the public accountability and
transparency of their clients, the big four are key players in the promotion of financial secrecy
and complexity that underpins the massive revenue losses globally from profit shifting. Those
losses in turn impose enormous social costs through cuts in public spending.
CONCLUSION
From the above report, it can be concluded that auditing is a procedure which helps in
cross verification of financial statements of the organisation. The big four companies ease the
process of auditing and verification of assets and liabilities. The role of big four companies are
crucial because it carries monopoly in providing accounting services. It helps to maintain the
quality and standards of the financial records of the different enterprises.
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REFERENCES
Books and Journals
Derek Loosvelt, 2019 [Online available through]
<https://firsthand.co/blogs/job-search/pros-and-cons-of-working-for-the-big-4-and-other-top-
accounting-firms/>
Bonsón, E. and Bednárová, M., 2019. Blockchain and its implications for accounting and
auditing. Meditari Accountancy Research.
Horta Ribeiro, M. and et.al., 2019. Auditing radicalization pathways on YouTube. arXiv e-prints,
pp.arXiv-1908.
Munoko, I., Brown-Liburd, H.L. and Vasarhelyi, M., 2020. The ethical implications of using
artificial intelligence in auditing. Journal of Business Ethics, 167(2), pp.209-234.
Weirich, T.R., Pearson, T.C. and Churyk, N.T., 2020. Accounting and auditing research: Tools
and strategies. John Wiley & Sons.
Zhang, J. and et.al., 2019. Improved secure fuzzy auditing protocol for cloud data storage. Soft
Computing, 23(10), pp.3411-3422.
Blakeley, G., 2021. The big tech monopolies and the State. Socialist Register, 57.
Bhaskar, K., Flower, J. and Sellers, R., 2019. Disruption in the audit market: The future of the
big four. Routledge.
McKenna, M., 2020. The antibiotic paradox: why companies can't afford to create life-saving
drugs. Nature, 584(7821), pp.338-342.
Bhattacharya, C.B., 2019. Small actions, big difference: leveraging corporate sustainability to
drive business and societal value. Routledge.
Kane, G., 2019. The technology fallacy: people are the real key to digital
transformation. Research-Technology Management, 62(6), pp.44-49.
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