For two decades, the ‘big four’ — Deloitte, PwC, KPMG and EY — have been ubiquitous in capitalism. They audit and advise the largest corporations, and help them minimise tax. Operating in almost every country, they collectively employ more than a million people.
The four firms trace their origins back to 19th century London, but in their modern form, they are very much a product of the 1980s. Each of the four firms delivers a diversified portfolio of services: auditing, management consulting, tax advice and sundry other functions such as real estate, workforce planning, corporate finance, legal and IT-related services.
The respective business lines differ in their glamour, profitability and respectability. Auditing, for example, is not very profitable, and nor is it highly appealing to young accountants as a career path, but it is laudable in its aims of probity and transparency. Tax advice, in contrast, is much shadier, and perennially profitable.
Multiple imperatives led the big four to diversify into this breadth of services. On the most mundane level, mixing audit and advisory services allowed the big four to better manage the peaks and troughs of annual financial reporting by moving employees between service lines. As well as improving staff utilisation, this movement created more interesting career paths.
Diversification also helped the big four win work: the aura from doing high-integrity audit work was very useful in lower integrity fields such as tax minimisation advice.
All these forces led the big four to a sweet spot in their structures and revenue mix. They made the bare minimum investment in audit quality, so as to minimise their investment in low-return audit services. And they reaped much juicer profits in other business lines.
But today, the big four firms are seriously considering big changes to their structure and their mix of services. (EY’s restructure planning is reportedly code-named ‘Project Everest’.)
In principle, there are many different structural change options. The firms could carve out their tax advice practices, for example, or all four firms could split themselves down the middle to create eight diversified ‘bigs’.
But the most realistic option, and the one with the strongest rationale, is to split out auditing from advisory and tax services.
A variety of push and pull factors have led the firms to contemplate such a split.
Conflicts between auditing and advisory services are the main push factor. If a big four firm audits a major corporation, there are strict limits on the extent to which the firm can also advise that corporation. The more audit clients, therefore, the less advisory work is available.
There are other costs, too, from diversification. Staff in the big four advisory teams still have to comply with certain types of audit-related regulations. This imposes a large cost overhead on the non-audit business lines.
Another diversification cost: advising corporations in secret on how to minimise tax tends to undermine the audit narrative of transparency and good corporate citizenship.
These causes have been around for several years, but new factors have emerged that are making the talk of a split more urgent.
Capital markets have witnessed the emergence of a private equity market for professional services firms and business units. This means, in the event of a big split of a big four firm, there would be active markets for both the large and small fragments of the disassembled firm.
Another driver of change: the pandemic has transformed modes of work, such that the bigs now have to work much harder to attract, motivate and retain staff. At the same time, regulators are pushing harder for the big four to improve audit quality and ameliorate conflicts of interest.
In the face of more assertive regulators, the bigs have taken proactive steps such as establishing new boards, with external directors, to sit over the top of their audit divisions, and therefore to impart an element of independence.
But that makeshift hasn’t worked, in part because it put the independent directors in an impossible position: their presence did not solve the underlying problems of audit quality and audit conflicts, and yet it required them to bear the associated risks.
One more factor that is making the talk of splitting more immediate: the logic of the first mover.
The first big four firm to split will create the first post-big-four pure-play auditor and the first post-big-four adviser, with consequent market standing and market share rewards.
A split would also be an opportunity to adopt a new organisational form, such as by becoming a corporation. The current multi-partnership model is past its use-by date. Just one example: not one of the big four firms has a global head office with sufficient authority to impose consistent service standards across the constituent international partnerships.
A new corporate structure would support efforts to improve service quality globally, and it would enable the resulting firms to raise capital to fund innovation (such as audit bots), and to invest in new modes of working for the next generation of young and demanding consultants.
While there are strong forces behind splitting, there are also big obstacles.
The four firms’ brands are among their largest assets (even though they have periodically taken hits due to audit scandals and tax scandals – think Carillion, Wirecard, Akai, TBW, the Panama Papers…). The brands help the firms win work, and they differentiate sharply the four from other accounting industry contenders.
In that light, the idea of splitting poses curly questions for the subsequent branding.
In an audit-advisory split, for example, does the current brand go to the resulting advisory firm, or to the auditor? Another option is to share the brand, such as by creating ‘KPMG Audit’ and KPMG Advisory’ – but solutions such as that could never work in the long run.
Yet another branding option: do away with the old brand altogether, and give both successors wholly new names. That might be practical, but it would involve a courageous loss of brand value. (There are other risks here, too. Previous attempts at big four brand innovation produced such clangers as ‘Monday’ and ‘Strategy&’.)
Perhaps the easiest big four brand to split – and therefore the easiest ‘big’ to carve up – is EY. In an EY split, ‘Ernst’ could go one way and ‘Young’ could go the other; and perhaps the firm’s successor parts could also revive some of the names from EY’s past – such as Whinney, McClelland and Moore – and therefore exploit even more of the historical brand value.
Likewise other splitting big four firms could revive previously discarded names such as Touche, Tohmatsu, Lybrand, Garnsey, Goerdeler, Kettle and (perhaps) Sneath.
Like Mt Everest, the challenges of a split are not insurmountable. Far from it. The first-mover logic, plus the capital market appetite for another Accenture or two, or three or four, means a big four split in the near term is inevitable.
So we are left with three big questions: Which ‘big’ will move first? How generously will the market reward the first mover? And what will the demerged progeny be called?
Stuart Kells is adjunct professor at La Trobe Business School. He wrote ‘Ashurst: The story of a progressive global law firm’ and (with Ian Gow) ‘The Big Four: The Curious Past and Perilous Future of the Global Accounting Monopoly’.
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