Big Four

What is Big Four?

The Big Four is the nickname used to refer collectively to the four largest professional services networks in the world, consisting of Deloitte, Ernst & Young, KPMG and PricewaterhouseCoopers. The four networks are often grouped together for a number of reasons:

  • they are each comparable in size relative to the rest of the market, both in terms of revenue and workforce;
  • they are each considered equal in their ability to provide a wide scope of quality professional services to their clients;
  • and, among those looking to start a career in professional services, particularly accounting, they are considered equally attractive networks to work in, because of the frequency with which these firms engage with Fortune 500 companies.

The Big Four each offer audit, assurance, taxation, management consulting, actuarial, corporate finance, and legal services to their clients. A significant majority of the audits of public companies, as well as many audits of private companies, are conducted by these four networks.

Until the late 20th century, the market for professional services was actually dominated by eight networks which were aptly nicknamed the “Big 8”. The Big Eight consisted of Arthur Andersen, Coopers & Lybrand, Deloitte Haskins and Sells, Ernst & Whinney, Peat Marwick Mitchell, Price Waterhouse, Touche Ross, and Arthur Young.

The Big Eight gradually reduced due to mergers between these firms, as well as the 2002 collapse of Arthur Andersen, leaving four networks dominating the market at the turn of the 21st century. In the United Kingdom in 2011, it was reported that the Big Four account for the audits of 99% of the companies in the FTSE 100 Index, and 96% of the companies in the FTSE 250 Index, an index of the leading mid-cap listing companies. Such a high level of industry concentration has caused concern, and a desire among some in the investment community for the Competition & Markets Authority to consider breaking up the Big Four. In October 2018, the CMA announced it would launch a detailed study of the Big Four’s dominance of the audit sector.

Legal Structure

None of the “firms” within the Big Four is actually a single firm; rather, they are professional services networks. Each is a network of firms, owned and managed independently, which have entered into agreements with the other member firms in the network to share a common name, brand, intellectual property, and quality standards. Each network has established a global entity to co-ordinate the activities of the network. In the case of KPMG, the co-ordinating entity is a Swiss association, and in the cases of Deloitte, PricewaterhouseCoopers and Ernst & Young, the co-ordinating entity is a UK limited company. Those entities do not themselves perform external professional services, nor do they own or control the member firms. Nevertheless, these networks colloquially are referred to as “firms” for the sake of simplicity and to reduce confusion with lay-people. These accounting and professional services networks are similar in nature to how law firm networks in the legal profession work.

In many cases, each member firm practices in a single country, and is structured to comply with the regulatory environment in that country.

Ernst & Young also includes separate legal entities which manage three of its four geographic areas: the Americas, Asia-Pacific, and EMEIA (Europe, the Middle East, India and Africa) groups, the fourth area being Japan, which has no larger co-ordination branch. These entities coordinate services performed by local firms within their respective areas, but do not perform services or hold ownership in the local entities. There are rare exceptions to this convention; in 2007, KPMG announced a merger of four internationally distinct member firms (in the United Kingdom, Germany, Switzerland and Liechtenstein) to form a single firm.

History of Mergers

Since the 1980s, numerous mergers and one major scandal involving Arthur Andersen, have reduced the number of major professional-services firms from eight to four.

Big Eight

The firms were called the Big Eight for most of the 20th century, reflecting the international dominance of the eight largest firms:

  1. Arthur Andersen
  2. Arthur Young
  3. Coopers & Lybrand
  4. Deloitte Haskins & Sells
  5. Ernst & Whinney
  6. Peat Marwick Mitchell
  7. Price Waterhouse
  8. Touche Ross

Most of the Big Eight originated in an alliance formed between British and US audit firms in the 19th or early 20th centuries. The firms’ initial international expansion were driven by the needs of British and American based multinationals for worldwide service. They expanded by forming local partnerships, or by forming alliances with local firms. Arthur Andersen was the exception: the firm originated in the United States, and then expanded internationally by establishing its own offices in other markets, including the United Kingdom.

Price Waterhouse was a UK firm which opened a US office in 1890, and later established a separate US partnership. The UK and US Peat Marwick Mitchell firms adopted a common name in 1925. Other firms used separate names for domestic business, and did not adopt common names until much later. For instance, Touche Ross was named such in 1960, Arthur Young, McLelland, Moores & Co in 1968, Coopers & Lybrand in 1973, Deloitte Haskins & Sells in 1978 and Ernst & Whinney in 1979. Even now, Deloitte’s technical name is Deloitte Touche Tohmatsu Limited, which reflects its history of mergers.

In the 1980s the Big 8, each with global branding, adopted modern marketing and grew rapidly. They merged with many smaller firms. KPMG was the result of one of the largest of these mergers. In 1987, Peat Marwick merged with the Klynveld Main Goerdeler group to become KPMG Peat Marwick, later known simply as KPMG. Note that this was not the result of a merger between any of the Big Eight.

Big Six

Competition among these firms intensified, and the Big Eight became the Big Six in 1989. In that year, Ernst & Whinney merged with Arthur Young to form Ernst & Young in June, and Deloitte, Haskins & Sells merged with Touche Ross to form Deloitte & Touche in August.

The Big Six after both mergers occurred were:

  1. Arthur Andersen
  2. Coopers & Lybrand
  3. Deloitte & Touche
  4. Ernst & Young
  5. KPMG
  6. Price Waterhouse

There has been some merging of ancestor firms, in some localities, which would aggregate brands belonging to the Big Four today, but in different combinations than the present-day names would otherwise suggest. For example, the United Kingdom local firm of Deloitte, Haskins & Sells merged instead with the United Kingdom firm of Coopers & Lybrand. The resulting firm was called Coopers & Lybrand Deloitte, and the local firm of Touche Ross kept its original name. It wasn’t until the mid-1990s that both UK firms changed their names to match those of their respective international organizations. Meanwhile, in Australia, the local firm of Touche Ross merged instead with KPMG. It is for these reasons that the Deloitte & Touche international organization was known as DRT International (later DTT International), to avoid use of names which would have been ambiguous, as well as contested, in certain markets.

Big Five

The Big Six became the Big Five, in July 1998, when Price Waterhouse merged with Coopers & Lybrand to form PricewaterhouseCoopers.

The Big Five at this point in time were:

  1. Arthur Andersen
  2. Deloitte & Touche
  3. Ernst & Young
  4. KPMG
  5. PricewaterhouseCoopers

Big Four

Finally, the insolvency of Arthur Andersen stemming from their involvement in the 2001 Enron Scandal, produced the Big Four:

  1. Deloitte & Touche
  2. Ernst & Young
  3. KPMG
  4. PricewaterhouseCoopers

The Enron collapse and ensuing investigation prompted scrutiny of the company’s financial reporting, which that year was audited by Arthur Andersen. Arthur Andersen was eventually indicted for obstruction of justice for shredding documents related to the audit in the Enron scandal. The resulting conviction, although it was later overturned, still effectively meant the end of Arthur Andersen, because the firm was not allowed to take on new clients while they were under investigation. Most of its country practices around the world were sold to members of what is now the Big Four – notably Ernst & Young (now known as EY) globally; Deloitte & Touche in the United Kingdom, Canada, Spain, and Brazil; and PricewaterhouseCoopers (now known as PwC) in China and Hong Kong.

Services provided by the Big 4 Advisory Firms

The Big 4 advisory firms provide five core services:

Assurance/Audit 

An audit is a process by which a client company’s financial statements are scrutinized to determine if the statements are accurate and fair. It is conducted by a team of accountants employed by the concerned firm.

The audit is one of the most important and commonly used services provided by the Big 4 Advisory firms, as all public companies are required to furnish audited financial statements to provide accurate information to investors and shareholders. Furthermore, before a bank lends a large amount of money to any company, it needs the company’s audited financial statements to ensure the safety of the money lent.

The audit team carries out the following activities to determine the accuracy of a company’s financial statements:

 Review of supporting documents

  • Review of journal entries which constitute the financials
  • Understand how important financial transactions are presented in the statements through informed discussion with the client company’s employees

After the aforementioned steps have been completed with due diligence, the accounting team issues an “opinion on financials”. The opinion on financials states the degree of confidence that the audit team has in the fairness and accuracy of the client company’s financial statements. The opinion on financials is important information for the client company’s owners, lenders, and investors because a high degree of confidence means that the company’s financials have received the approval of the accounting firm and, thus, are considered legitimate.

Advisory/Consulting Services

Advisory/Consulting Services refers to the act of providing a third party with expert knowledge for a fee. The consulting services provided by the Big 4 include:

  • Increasing the efficiency of a company through an analysis of its processes
  • Risk management, i.e., determining the financial threats faced by the company and suggesting appropriate mitigation strategies/solutions
  • Creation of financial reporting programs which leverage the latest technology for the company
  • Creation of accounting programs which leverage the latest technology for the company

 It is important to note that, in the US, a Big 4 advisory firm providing consulting services to a company cannot provide auditing services to the same company. This is to ensure that the auditor has no financial interest in the company and, thus, will produce accurate and unbiased audit reports.

Tax-Related Services

Tax-Related Services refers to the services provided by the Big 4 Advisory firms to help their clients successfully navigate local and national tax laws. The most popular tax service provided by the Big 4 is the creation of tax avoidance strategies – helping the client to structure their transactions in a manner which creates a tax advantage for the company (such as refunds, deductions etc.) or which minimizes tax obligations. The tax team also helps the client company with international tax filing and regulatory filings. The tax team also collaborates with the audit team, because the financial statements of a company include a large amount of information regarding the company’s tax filings. Together, the two teams assess the accuracy of the tax-related information disclosed by the company in its financial statements.

 Transactions/Deals

Transactions/deals refers to the act of carrying out and/or facilitating mergers and acquisitions, spin-offs, leveraged buyouts, divestment etc. The Big 4 firms provide the following transaction services:

  • Assessing the accounting implications of a transaction for the client
  • Assessing and advising on the tax implications of a transaction for the client
  • Performing due diligence on the acquisition target or the section of the company being divested to ensure that the company is getting a fair deal
  • Building valuation models for the company by using appropriate financial information
  • Consulting with the client before, during, and after the deal has been carried out to ensure that the company adjusts efficiently to the changes in its working capital

Fraud investigation

The fraud investigation team travels extensively (both domestically and internationally) to help a company detect fraud and/or embezzlement. The fraud investigation team uses psychological tactics, the latest technology, and cutting-edge financial and accounting analysis to uncover fraud.