The end of the Big 4

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A source I think reliable suggested to me today that the UK partners in one of the Big 4 firms are ‚Äòreadying themselves for liquidation’.

That doesn’t of course mean that liquidation is happening in the next few days. Indeed, it may be averted. But at the very least, the suggestion is they’re actively preparing for the possibility.

Now, given those doubts I think it would be wrong to reveal which one it is as yet, although the source was specific as to which firm it was he was referring to. And the reasons given all made complete sense to me. And this speculation is not new: my friends and blogging colleagues Dennis Howlett and Francine McKenna have had a bet on for a while as to whether it will be PWC or E & Y that will go first. Both have their reasons: frankly you can add the liability risk the other two and next biggest firms of Grant Thornton and BDO face and all of them have doubtful futures.

And that is why, to be candid, I don’t think I need prejudice my source by naming a firm as yet. The reality is it may be the partners in all these firms should be preparing for liquidation, and if one goes there is a strong chance all might tumble after it: like the banks the existence of each of these firms may depend on the existence of the others. There is no chance of the pretence of an audit market surviving if one of the Big 4 goes: once advice has been sought from other firms on special issues, tax, and so on, the chance to choose auditors, let alone change them, would be gone forever if the number of firms was reduced to three. And that therefore will mean game over for all three, and like it or not Grant Thornton and BDO cannot replace them.

So what this means is this: if even one of the Big 4 thinks the game may be up soon (and I stress, this is I think something Dennis, Francine and I agree that it is rational for them to think, and prepare for) then the ramifications are enormous. Our models of governance are entirely dependent upon the existence of audit firms. Without them the balance and controls inherent in our systems fail. Markets regulation fail with it. Assurance has gone. So too, candidly go the largest consultancies we have – much as I doubt the value of much of the advice they provide – especially when sold to their favourite clients (governments). And tax havens will change too: these firms underpin the secrecy jurisdiction world.

But is their any sign that this risk is being properly managed by those who have responsibility for ensuring market systems work? No, none at all.

That’s the scary bit. Now is the time for a contingency plan for the failure of one of these firms to be developed. Our markets, our tax system, a significant part of regulation will all be in trouble if these firms topple. That need not happen of course – they’re not that important, it’s just we’ve constructed a narrative that makes them so.

We could change that narrative. We could change it now. We could reduce the dependency we have on them. That would be wise, whatever happens. But it seems Francine, Dennis, Prem Sikka, just a few others and I are the very few who are willing to take on this issue. I guess it provides us with a market opportunity, but right now I’d rather a few more were taking this issue seriously, the partners in the Big 4 apart that is.

And let’s close with one final thought – putting them back on their pedestals after they’ve gone bust is one option that really should not be on anyone’s agenda.