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The Big Four Accountancy Firms

Aug 15

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15/08/2017 15:06  RssIcon

In this extract from their latest study, Richard Murphy and Saila Naomi Stausholm, explain what’s wrong with the current system and how it needs to change


The ‘Big Four’ accounting firms (Deloitte, PricewaterhouseCoopers, EY and KPMG) dominate the audit market for the world’s major corporations.

Between them, they audit all but two of the FTSE 100 companies registered in the UK and all but 10 of the FTSE 350 companies.


Image: Corporations


They are also economically significant in their own right: their combined sales revenue exceeded €120 billion in 2016. Of this, €43 billion was earned from audit and assurance services, almost €28 billion from tax services and €49 billion from consulting.

Operating in tax havens

Our interest in these firms is based on the fact that auditing firms play a significant role in our economy through the trust placed in them to report on the truth and fairness of the financial statements of firms to regulators and investors.

The fact that they play an important role in tax havens, or secrecy jurisdictions as we prefer to call them, just adds to the curiosity about the activities of these firms.

Of the 186 locations where the firms are found, 43 were secrecy jurisdictions. Nearly 10% of the staff of the Big Four firms that we could locate work in secrecy jurisdictions.

The firm with the largest secrecy jurisdiction representation by number of locations is KPMG, which is present in 40. Our findings suggest that the Big Four firms are over-represented in secrecy jurisdictions when their presence is weighted by either local population or the jurisdiction’s GDP.

On average, the number of staff employed in an office in a tax haven was almost double that for an office in a non-secrecy jurisdiction small state.


Opaque ownership

With regard to ownership structures, a case study was undertaken on KPMG. This showed that the ownership of its network of member firms is not always disclosed in the locations in which it is active.

Rather than being a single corporate entity, each of the Big Four organise themselves as ‘networks’ of related but independent ‘member’ firms that operate under license and according to common standards that are set by a central organising body, usually based in London.

It is our suggestion that the Big Four, and other networks of professional services firms, adopt an opaque ownership structure with the result that they are unaccountable. It seems likely that there are advantages to doing so beyond the benefits that opacity itself provides.

The first of these advantages is to limit their regulatory risk; the structure they use means that their activity in each place only has responsibility to local regulators, which simplifies and limits these firms’ liabilities.

Secondly, by splitting themselves into legally unassociated parts, these firms seek to limit their legal risk in the event of failure on the firms’ part.

Finally, the splitting up of their operations means that these firms protect their clients from enquiry by authorities from outside the particular jurisdiction from which services are supplied.

This differs from a normal multinational structure in that although multinational corporations normally consist of groups of smaller companies (for legal and management purposes), these corporations nevertheless ignore those subdivisions and produce consolidated financial accounts representing the overall economic substance of the business.

In contrast, the Big Four do not ignore their subdivisions, instead treating their (highly coordinated) network of members as independent entities with no legal commitment to one another.


Recommendations to improve transparency

As a result of our research we make four recommendations aimed at improving the transparency and accountability for these firms through regulatory changes:

1. These firms should be split so that their audit and other activities (including tax) are separated so that the conflicts of interest currently inherent within them can be addressed.

2. These networked groups of firms must be considered to be single entities under common control for EU regulatory purposes and so be required to file a single set of consolidated financial statements for their global operations.

3. Firms should be required to apply for a single licence to provide audit and taxation services of any sort throughout the EU, as a condition of which they will be required to comply with the accounting recommendations we suggest.

4. Firms should be required to file full country-by-country reports on public record, which would support this regulatory process and hold these networks of professional service firms to account.


This is an edited extract from The Big Four: A Study of Opacity, published by the European United Left and Nordic Green Left (GUE/NGL) European Parliamentary Group. 









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