SEC Plans for Collapse of Big Four Accounting Firm

Once upon a time, in an America where the national debt was less than $1 trillion, Democrats controlled both ends of Pennsylvania Avenue and there were no ice hockey teams in Florida or Arizona, there were eight big accounting companies. The Big 8, as they were known, have been halved, and the Big 4 now audit 78% of America’s publicly held companies’ books. It’s an oligopoly, and the Securities and Exchange Commission is looking into what might happen if one of them fails. It is a problem with no obvious solution.

Deloitte & Touche LLP, Ernst & Young LLP and PricewaterhouseCoopers LLP are all just fine as near as anyone can guess, but the US Justice Department could indict KPMG for allegedly selling illegal tax shelters. Even if the company were acquitted on all counts, an indictment would see countless clients go elsewhere; an indictment is a death sentence. And frankly, that wouldn’t keep many people up at night as the nation survived the demise of Arthur Andersen.

However, if the number of major accounting firms falls to three, the potential for price gouging increases, and the inherent conflicts of interest soar. The rules on reporting and how accounting gets done have increased transparency for investors (which is inherently a good thing) but these improvements come at a cost. Especially at the micro-cap end of the spectrum, the benefits of being a public company are not as great as they once were relative to the costs of being public. Many companies are choosing not to grow by tapping the stock market because it isn’t worth it to them, and others are choosing to go private to avoid these costs - -thereby decreasing their own transparency for their private investors.

There is some hope that the regional or foreign accounting firms will be able to step up to the plate and fill the gaps, but they have manpower restraints. A rash of mergers to create a new fifth or sixth national accounting firm may help, but such M&A is expensive and not guaranteed to work. Meanwhile, every nation’s accounting customs and rules are unique. The plain truth is a Japanese or Italian accountant could do the job, but the amount of education needed to master the US system may make it an unattractive career move.

The system isn’t broken, but it is clearly under a great deal of pressure, and it won’t take much for the Big 4 to become the Big 3, or 2, or 1. If that happens, the need for Congress to regulate the situation is clear or auditing fees will soar, further hampering the American economy. But the current administration and Congress would be ideologically opposed to this. It is rapidly becoming a situation with no good options, just choices between lousy and rotten.


© Copyright 2005 by The Kensington Review, J. Myhre, Editor. No part of this publication may be reproduced without written consent.
Produced using Fedora Linux.

Home