Critical Analysis of the Arguments for Breaking Up Big Four Firms

This essay provides a critical analysis of the arguments for and against breaking up the Big Four audit firms: Deloitte, EY, KPMG, and PwC. The introduction highlights the importance of audit quality, regulatory compliance, and the recent controversies surrounding these firms. The main body explores arguments supporting the break-up, such as the need for increased competition, reduced conflicts of interest, and improved audit quality due to specialized focus. It also discusses arguments against the break-up, including the benefits of large firm size, access to resources, and the value of integrated consulting services. The essay references various research papers and reports to support its arguments, considering the impact of firm size, consulting revenue, and technological advancements on audit quality. The conclusion summarizes the key points, suggesting that separating audit practices from other operations could avoid potential conflicts and improve service quality, possibly through AI-driven audit tools. The essay aims to offer a comprehensive understanding of the complex issues surrounding the structure and practices of the Big Four accounting firms.

Critical Analysis on
Breaking up of Big
Four Audit Firms

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY...................................................................................................................................3
Arguments to support break-up of audit firms.......................................................................3
Arguments against the break-up of audit firms......................................................................5
CONCLUSION................................................................................................................................7
REFERENCES................................................................................................................................8

INTRODUCTION
In order to ensure compliance with relevant professional standards, regulatory
requirements, and legal requirements, and that reports issued by the firm are appropriate in the
circumstances, every audit firm is required to establish a quality control system. 'Quality means
doing it right when no one is looking.' Henry Ford. The first expectation from an audit is
probably to receive a report that has not been modified. The audit provides stakeholders with this
primary value. It is important to communicate timely reporting to maximise the value of the audit
as many stakeholders request the audit to be completed by a specific date each year. The auditor
during the process of an audit is expected to provide documentation of their understanding of
internal control environment in their audit planning, communicating any significant deficiencies
they identify and recommendations for improvement. In the recent period none of the Big Four -
Deloitte, EY, KPMG, and PwC managed to surpass the 90% target of their audits. These
accounting firms are in news for not so good reasons, highlighting issues such as failure of
Unified Health Infrastructure Project by Deloitte, Major financial and accounting irregularities in
listed companies audited by KPMG in Oman, Inspection report of EY by PCAOB indicating its
worst deficiency rate (21 Scandals, Settlements and Corporate Crimes of Big 4 Accounting
Firms in 2019).
MAIN BODY
Arguments to support break-up of audit firms
Britain’s Big Four accountancy firms need to face a full break-up of their audit practices
from rest of the opposite operations to avoid ability struggle and weaken their “stranglehold” on
an audit market discredited with the aid of corporate failures including Carillion and BHS.
However, the running battle between government and such audit firms is whether the dimensions
of the audit company has an effect on audit quality. Public accounting firms have extremely good
duty and requiring expert concerns to fulfil their duty to the users of audit report. They also
provide other services for their clients, which includes special audit, tax offerings, other
attestations, accounting services and management consulting (Why the Big Four provide higher
quality audits, 2020). Public accountant firms that are famous along with Big Four's are

considered to be auditors that will produce high quality audit exceeding minimum professional
requirements in comparison to the ones which aren't.
Based on above statement, there are circumstances/arguments that factors out causes for
effective relation of the scale of public accountant companies and audit quality. The first
argument is that a large public accountant firm has larger incentive to audit more accurately
because they've more client-precise rents as a way to be misplaced in the event that they deliver
inaccurate reports. Secondly, the massive size of the public accountant firm contributes larger
sources and wealth compared to the small ones. This argument explains that the size of public
accountant firms is inseparable from quality achievement. The big firms will give better audit
quality than the small ones. It is because they have better economic sources which permit them
to take advantage of technological traits, do essential researches and recruit more experienced
auditors. Additionally, they have larger and greater whole information sources on customers’
portfolio to effectively come across activities with a view to affect clients’ business existence
sustainability (Sori and Karbhari, 2006). Then again, in a review of influence of the audit firm
size toward audit quality in USA in 2000-2005, the end result suggests that it has an
advantageous impact toward audit quality because big firms have extra possibilities to proportion
studies, know-how and capabilities among personnels on both client’s business development and
internal control system (Choi, 2010). Furthermore, (Sirois and Simunic’s research, 2011)
supports this by explaining that big firms have the potential to apply technological based audit
which is extra accurate and quicker than it is from the small ones.
The greater choice rather than greater competition is the solution. Stated that, this
argument contemplates the general public feature of auditing. Unless the general public feature
of auditing is restored, auditing will preserve to regularly fail, and therefore, this calls for
selection of greater choice rather than existing greater competition. Because of current
accounting scandals have raised worries about the auditing and its ancillary activities. The
attention of auditing within the hands of Big Four is a first-rate motive of terrible auditing. The
answer is to break up big auditing firms to create more competition and consequently rendering
higher offerings.
Currently the industry faces problem and this happens because of the belied that certain
services can only be rendered by certain firms. The audited individual or organization have to
pay for the desirable quality of audits conducted. For auditing firms, the fundamental strategy

should be directed towards provision of maximum satisfaction to there clients. However, the
existing situation is that the auditing fees is paid by the client for the preparer of the audit report
and not the quality of the financial reports. Separation of the Big four firms will lead to
aggressive race to please the clients. This will remove the monopolistic role of Big Four and
work in public interest as in current scenario, the financial statements and accompanying reports
are pulled up for concentrating on very specific shareholder group. The accounts will not only
be prepared with the shareholders in mind but with a broader number of stakeholders in mind. A
firm reputation is an inseparable thing from its audit quality so a firm’s efforts to produce quality
audit is an indication of it building its reputation (Neate, 2019). The quality of the audit is
implied as the deciding factor for determination of how sustainable the firm is. Thus, we can
generate two hypothesis based on above arguments:
1. Size of an audit firm will influence the quality of audit.
2. Quality of audit will impact the firm's reputation.
Arguments against the break-up of audit firms
Audited financial statements are important for decision making for internal and external
stakeholders. The audited information is more reliable when taking capital markets and capital
allocation decisions. The 'Big Four Effect' documented the higher quality of audit services
rendered by Big Four firms than Non-Big Four firms (Bhaskar, Flower, and Sellers, 2019). Their
performance is measured on various quality measures being used and are associated with: less
earning management, fewer restatements, lower cost of capital, better analysis and forecast
accuracy. Overall, this resulted in a point where the services rendered by Big Four firms are
being more reliable and accurate than the services of other public accounting firms. However,
Some researchers believe that the Big four serves as the epicentre for audit services caused a
stagnation growth effect causing non-development of methodologies for performing audit
(Antunes Ferreira de Souza, 2020). Further, it can be presented in a sense that with lack of
counter forces by other public accounting firms, they failed to keep Big Four's feet on the
ground.
Few intermediaries related to audit quality, which holds competence on client’s industry,
are amenable to the demands of clients, oversee due professional care, undertake field work
standards and possess sceptical attitude. Referring to aforesaid definition, it is concluded that

quality of audit is defined as the evaluation, confirmation and verification of economic activities
by the auditor, which pertains to accuracy reported. The Big Four audit firms does something
very differently than Non-Big Four such as better Internal controls over audit process and better
audit methodologies. The focus is on the enhancement of quality of both staff and auditees
(Peterson, 2017). Hence, the argument that Big Four is responsible for fall in quality of audit is
not entirely correct.
Whether provision of consulting services to non-audit clients, debilitates the quality of
audit, has been a topic for intensified debate since many years. Fischer and Huddart (2008)
developed a theoretical model which suggests that, an increase in the consulting revenues
disintegrates the misconceptions made towards audit firms with high professional standards. On
one hand, the Big Four accounting firms imply that valuable insights are often provided by
consulting staffs to audit staff as they often play the role of audit engagement specialists. For
instance, Deloitte and Pricewaterhouse Coopers (PwC) both stresses on the fact that they employ
their consulting staff as audit engagement specialists, hence audit quality is improved. From this
perspective the, expansion of consulting services will improve quality of audit. Regulators and
academics often argue that Big Four accounting firms has led to massive focus on provision of
consulting services, which will eventually erode professionalism in other accounting firms. A
2008 report proposed to U.S. Department of the Treasury, the Advisory Committee on the
Auditing Profession expressed concerns that due to expansion of consulting services provided to
non-audit clients, an auditor's independence is challenged and it merely substituted concerns
regarding resource diversion. Overall, the view is that the higher proportion of firms revenue
which is earned from consulting business does not impair the quality of audit performed and it is
in fact associated with improved audit quality on some measures. Talking specifically about the
U.S. Markets, accounting firms with a greater proportion of consulting revenues are less
probable to make Type II going concern reporting errors (wherein the client announces financial
ruin within a year following a clean audit opinion). Moreover, some results advise that the
knowledge of consulting professionals, likely obtained from presenting consulting services to
non-audit clients, can improve audit quality. This can be understood from the audit quality report
of Pricewaterhouse Coopers (PwC) which explains that by using the knowledge of their
consultants as specialists, audit teams have been able to better examine complex transactions,
assess accounting treatments, and identify areas in which additional professional skepticism can

be warranted. The PwC report goes on to identify information technology (IT) specialists as a set
that notably improves audit quality due to the fact that they help audit teams in know-how
complicated IT internal control systems. In fact, consulting specialists play a vast role on audit
engagement teams and their work contains approximately 10 percent of PwC’s total engagement
hours in 2013. Consequently, it is able to be sufficiently pointed out that reduction of firm size
will have both bad and high quality view point, but, considering the positive impact of consulting
operations over audit programme, the Big Four should now not de-size via breaking up their
consulting and audit services (Why the Big Four breakup won't be easy, 2020).
CONCLUSION
In the future, the Big Four firms separating their accounting practices from rest of the
operations would avoid potential conflicts and improve quality of services delivered. This will be
achieved by medium of more scrutinized audits powered by AI-Driven audit tools. The decision
to fence off auditing practices from rest of operations in public accounting firms has been in talk
from several years, and with recent scandals, settlements and corporate crimes in Big Four
accounting firms, it has gained significant momentum. For the part of Big Four, they themselves
supported the decision which can radically reshape the Big Four.

REFERENCES
Books and Journals
21 Scandals, Settlements and Corporate Crimes of Big 4 Accounting Firms in 2019 [online]
available through <https://facelesscompliance.com/7604/21-scandals-settlements-and-
corporate-crimes-of-big-4-accounting-firms-in-2019>
Antunes Ferreira de Souza, P., 2020. The Structural Break-up of the Big Four Accountancy
Firms to Restore Market Confidence in Audit Services (Doctoral dissertation, Griffith
College.).
Bhaskar, K., Flower, J. and Sellers, R., 2019. Disruption in the audit market: The future of the
big four. Routledge.
Choi, J.H., Kim, J.B., Zang, Y. Do Abnormally High Audit Fees Impair Audit Quality?.
Auditing: Journal of Practice & Theory 29: 115-140. (2010)
Neate, R., 2019. Big four accountancy firms should break up, say MPs, 2019 [online] available
through <https://www.theguardian.com/business/2019/apr/02/big-four-accountancy-
firms-should-break-up-say-mps>
Peterson, J., 2017. Count Down: The Past, Present and Uncertain Future of the Big Four
Accounting Firms. Emerald Group Publishing.
Sirois, .L.P. dan Simunic, D.A. Auditor Size and Audit Quality Revisited: The Importance of
Audit Technology. University of British Columbia. (2011)
Sori, Z.M., Mohamad, S., Karbhari, Y. Auditor Reputation and Auditor Independence: Evidence
from An Emerging Market. Retrieved from http://www.econ.upm.edu.my/zms/
[20/09/2011] (2006).
Why the Big Four breakup won't be easy, 2020 [online] available through
<https://cfo.economictimes.indiatimes.com/news/why-the-big-four-breakup-wont-be-
easy/65958231>
Why the Big Four provide higher quality audits, 2020 [online] available through
<https://www.bi.edu/research/business-review/articles/2020/08/why-the-big-four-
provide-higher-quality-audits/>