“Big Four” Audit Oligopoly Expands Global Reach Further… But In Some Jurisdictions, They’re Under-fire After A Series Of Sudden Corporate Collapses.

By Don Quijones, Spain, UK, & Mexico, editor at WOLF STREET.

The “Big Four” audit and accountancy giants — KPMG, Deloitte, Ernst & Young (EY), and PricewaterhouseCoopers (PwC) — have found themselves in the rare position of being on the back foot in a number of key global markets, in particular the UK where the government and regulators are considering breaking up the oligopolistic hold they have on the audit industry after a series of collapses of their audit clients. But that hasn’t stopped the four sprawling giants from exploring new avenues for expansion.

One of those areas is the global legal services market, estimated to be worth some $600 billion. Deloitte recently begun to offer legal services through a new foreign law practice, all in the name of providing an even more holistic service to its clients. Deloitte is following in the footsteps of rival Big Four firms EY and PwC, who also recently expanded their legal services offerings.

Traditional legal services firms are understandably wary of the development. The Big Four will be “very, very serious players” in the market, says Nick Davis, the managing partner of City law firm Memery Crystal. “[They] will have a very large impact on the mid market. They have got such a strong client base and they are so good at integrating business services into their offering,” he said.

As always, acquisitions will play a key role in the Big Four’s new growth strategy. This week, EY announced that it had acquired tech-centric alternative legal provider Riverside Law – a move that is widely seen as a shot across the bow of the traditional legal market. EY’s global legal leader Cornelius Grossmann confirmed as much, saying the firm has a plan “to aggressively grow the legal business” over the next five years.

EY’s UK law leader for financial services Matthew Kellett put it in even blunter terms: “So, we’ve acquired Riverview — you weren’t expecting that — watch this space — lines are being drawn.”

The Big Four’s recent expansion into legal services was made possible by a regulatory change in the UK that allowed non-lawyers to own law firms, which the Big Four no doubt had lobbied for. Once the law was changed, the Big Four seized upon the opportunity with characteristic efficiency. According to a report from ALM Intelligence, PwC already has 2,500 lawyers in 85 countries, which would place it as the sixth-largest legal services provider in the world in terms of headcount. KPMG and EY have 2,200 and 2,100 lawyers respectively, while Deloitte, which joined the party late, has 1,800.

The Big Four’s vast economies of scale and ability to harvest and invest huge amounts of money have been instrumental in their whirlwind takeover of the legal services sector. In 2017 PwC had a global revenue of $37 billion while Deloitte posted nearly $39 billion. By contrast, only two law firms — Latham & Watkins and Kirkland & Ellis — have broken the $3 billion mark.

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The big irony is that this is all happening as governments around the world are finally beginning to express reservations about the huge amount of power the “Big Four” accountancy firms have managed to amass in recent years, often with the same governments’ approval, if not direct assistance.

The influence of the four firms is now virtually unparalleled across the industries in which they operate. Their alumni control the international and national standard-setters of the accounting industry, ensuring that the rules of the game suit the major accountancy firms and their clients. Their reach also extends deep into the heart of government.

The Big Four’s combined global annual revenues reached $134 billion in 2017. And their number of employees, at 890,000 combined, has been expanding — including via acquisitions of smaller competitors — at over twice the rate of the economies they serve.

Even in the all-important audit industry, whose big attraction is that it opens doors to the more lucrative contracts for Big Four’s consulting and tax services — and now legal services — the rate of growth is impressive. Recent findings from the UK regulator, the Financial Reporting Council (FRC), showthat the total audit fees across the Big Four accounting firms rose by 5.7% during 2016/17, compared to 2.7% in 2015/16.

As long as this oligopoly continues to dominate the global audit industry with such impunity, audit fees are likely to continue to rise, even as the quality of the audits themselves deteriorates. The Big Four currently audit 99 of the FTSE 100 companies, 497 of the 500 S&P companies, and over 90% of the companies listed on the benchmark exchanges of the vast majority of EU Member States.

But the backlash has begun. In the UK lawmakers are considering breaking the audit arms of the Big Four accounting firms into separate pieces to create a more competitive environment and reduce the potential for conflicts of interest to arise in the sector. Meanwhile, in Brussels the Big Four’s conflicted role as the world’s largest facilitator of corporate tax avoidance while helping national governments and the European Commission draft corporate tax policy is finally getting some attention.

Today those four firms have their sights set on a new prize, which could offer them even greater power. There are no guarantees they will win it. The Big Four’s last attempt to take over the legal services sector was nixed by the Enron scandal, which turned the Big Five into the Big Four and spurred a regulatory crackdown on some of their activities. But if the Big Four do win it this time around, they will become even more unassailable, with businesses, their shareholders and stakeholders worldwide paying the price. By Don Quijones.


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