The vast majority of audits of publicly traded corporations are performed by just a handful of accounting firms:
- Deloitte Touche
- Ernst & Young
Known as the ‘Big 4’, these firms completely dominate the industry, auditing more than 80 percent of all US public companies. In addition, these mammoth organizations advise on tax and offer a wide range of management and assurance services.
Although usually identified as single companies, each one of the Big 4 Accounting Firms is actually a network of independent corporations who have entered into agreements with one another to set quality standards and share a common name.
History of The Big 4 Accounting Firms
Even the smallest of the Big 4 is several times the size of the 5th largest firm and industry experts believe it is unlikely that any existing corporation will ever be able to match the size of the major players.
This is partly due to the fact that, until the late 1980s the major accounting firms were known as the Big 8 and included the likes of Coopers & Lybrand, Ernst & Whinney, Deloitte Haskins & Sells, Arthur Andersen, Price Waterhouse and Touche Ross.
In 1989 the Big 8 became the Big 6 following the merger of Ernst & Whinney with Arthur Young to form Ernst & Young, closely followed by the merger of Deloitte, Haskins & Sells with Touche Ross. In July 1998, Price Waterhouse merged with Coopers & Lybrand to form PricewaterhouseCoopers, further reducing number of market leaders to five.
The Financial Collapse
The last major change to the fortunes of the global accounting firms followed the collapse of the Enron corporation which was audited by Arthur Anderson. In the aftermath of the collapse, the accounts company was found guilty of criminal charges relating to its business practices. Although the conviction was eventually overturned, the damage to its reputation meant Arthur Andersen was unable to recover and eventually sold most of its business to members of what would come to be known as the Big 4.
Big companies see it as a mark of prestige to have their audits carried by a member of the Big 4, even though the cost of such a service may be significantly higher than what would be charged by a smaller firm carrying out exactly the same work.
This same notion of prestige also applies to all those working for the Big 4. New graduates looking for careers in the financial services industry face fierce competition for the places that are made available each year, knowing that spending time with one of the Big 4 is the equivalent of obtaining a degree from an Ivy League university and will put them on the fast track to success.