Big Four auditors

The Big 4, sometimes written as the Big Four, are the four largest international accountancy and professional services firms, which handle the vast majority of audits for publicly traded companies as well as many private companies. The Big Four firms are shown below, with their latest publicly available data:

This group was once known as the "Big Eight", and was reduced to the "Big Five" by a series of mergers. The Big Five became the Big Four after the near-demise of Arthur Andersen in 2002, following its involvement in the Enron Scandal.

Legal structure

None of the Big Four accounting firms is a single firm. Each is a network of firms, owned and managed independently, which have entered into agreements with other member firms in the network to share a common name, brand and quality standards. Each network has established an entity to co-ordinate the activities of the network. In two cases (KPMG and Deloitte Touche Tomatsu), the co-ordinating entity is Swiss, and in two cases (PricewaterhouseCoopers and Ernst & Young) the co-ordinating entity is a UK limited company. Those entities do not themselves practise accountancy, and do not own or control the member firms.

In most cases each member firm practises in a single country, and is structured to comply with the regulatory environment in that country. However, in 2007 KPMG announced a merger of four member firms (in the United Kingdom, Germany, Switzerland and Liechtenstein) to form a single firm.

The figures in this article refer to the combined revenues of each network of firms.

2007 Performance Analysis

The Big Four accounting firms had a banner year in 2007 with double-digit revenue growth following strong performance in 2006 and 2005. KPMG had the highest annual growth rate among the firms with 17.4%, followed by Deloitte at 15.5%, Ernst and Young at 15% and PricewaterhouseCoopers at 14.4%. Despite relatively slow growth, PwC remains the world's largest accounting firm with 2007 revenues of $25.2 billion, ahead of Deloitte at $23.1 billion, E&Y at $21.1 billion and KPMG at $19.8 billion.

Combined, the Big Four firms had a total revenue of $89.2 billion. If the firms were to continue this level of performance, the combined total would exceed a hundred billion dollars in 2008.

The depreciating US dollar in 2007 was also a key contributor to this performance, as all the Big Four firms report in US$ but earn much of their revenues in Europe and Asia, where local currencies appreciated strongly against the dollar. In terms of local currencies, growth was a little subdued. Combined Big Four revenues grew 11.7% from $77.1 billion in 2006 to $86.1 billion in 2007. Thus foreign exchange effects contributed a full 4% points or $3 billion to the combined firms revenue.

These spectacular growth patterns are seen usually in much smaller companies, and that huge $20 billion professional service companies are able to achieve double-digit back-to-back growth rates is testimony to their global reach and ability to capitalize on the need for financial services by all of the world’s economies. Big Four firms leveraged well global mega trends of stringent financial reporting (Sarbanes Oxley, internal audit), strong IPO listings (and subsequent audit work), complex M&A deals (due diligence, assurance), growing tax complexity, emerging economies, globalization, private equity buyouts, and risk management.

Service Line Performance

In terms of service lines, Advisory and Consulting services for all four firms combined grew the fastest at 21.7% from $18.0 billion to $21.9 billion. Ernst and Young reported a terrific 29% growth in this service line. All other firms grew close to 20% in 2007.The Tax service line services for all four firms combined grew at 18.4% from $17.6 billion to $20.8 billion. KPMG’s Tax service line grew the fastest at 20%, and Deloitte grew the slowest at 16.5%.

Audit or Assurance service line grew at the slowest relative pace. For all four firms combined, revenues grew 12.9% from $42.1 billion to $47.5 billion. This service line is the largest contributor to revenue and was likely held back by the sheer size of the practice. Ernst and Young again was the winner in this category with a revenue growth of 16%. PwC’s Assurance service line grew only 10.2%, the slowest in this category, and the lowest growth rate among all service lines and across all firms.

Owing to its high growth the Advisory service line became a larger contributor of total revenues to the Big Four firms. For all Big Four firms combined, the share of the Advisory service line of the total revenue grew from 23.1% in 2006 to 24.3% in 2007. This share gain of 1.2% came at the expense of Tax and Audit. Advisory services now contribute almost one-quarter of Big Four firm revenues, though there is disparity among the firms. In Deloitte and Touche, Advisory and Deloitte Consulting were 31% of total revenues in 2007, and in KPMG Advisory Services were 32% of total revenues. For E&Y, Advisory services were only 12% of total revenues in 2007.

Tax service line also marginally improved its contribution share. For all Big Four firms combined, the share of the Tax service line of the total revenue grew from 22.6% in 2006 to 22.9% in 2007.

Audit, owing to its slower growth, lost a lot of its contribution to the total. For all Big Four firms combined, the share of the Audit service line of the total revenue actually dropped from 54.3% to 52.8%, a share decrease of 1.5%. If such growth patterns were to continue in the service lines, Audit could well drop to less than 50% of total revenues in just a couple of years. Already in KPMG and Deloitte, Audit is less than 50% of total revenues.

Geographical Performance

As in previous years, the Big Four firms reported the strongest growth in Asia, helped by underlying strength in China, India and Southeast Asia. Europe turned in surprisingly good numbers while the mature market of the Americas had the slowest growth rate.

While Asia remains the smallest geographical segment, it grew by 22.2% from 2006 to 2007. Ernst and Young’s Asia segment grew by a spectacular 27%. Even Deloitte, with the slowest growth among the firms reported a 17.2% growth rate. Owing to its high growth rate, Asia’s share of total revenues for all the firms improved by 1% from 12% in 2006 to 13% in 2007, at the expense of the Americas.

Many firms reported more than 30% annual growth in the BRIC (Brazil, Russia, India and China) economies, reflecting the strong economic momentum in these countries.

Europe is the largest region by far for all the firms. On a combined basis, Europe had strong growth of 19.2% from $34.7 billion in 2006 to $41.4 billion in 2007. KPMG grew by 20.9% in Europe, while the slowest grower Deloitte reported a 12.6% growth rate. The combined Big Four European revenues in 2007 was $41.4 billion, a full 46% of the total combined revenue and increasing from 45% in 2006. For KPMG, Europe is already 54% of total revenues, contributing to more than half its total revenues. Surprisingly, the European region in 2007 raced ahead of Americas on a combined basis, widening its lead to almost $5 billion. By contrast, in 2006, combined European revenues was only $1.4 billion more than the Americas.

For all the Big Four firms the Americas grew the slowest and also lost its leading share in terms of revenues. On a combined basis, Americas had only moderate growth of 10.3% from $33.3 billion in 2006 to $36.7 billion in 2007. Deloitte grew by 11.9% in Americas, while the slowest grower PwC did not even make the 10% mark, reporting only a 9.1% growth rate. The combined Big Four American revenues fell a full 2% points from 43% of the total combined revenue in 2006 to 41%. KPMG, which is heavily Europe-based, only produced 33% of its total revenues from the Americas. Even the PwC behemoth had only 38% of total revenues from Americas.

On a combined basis, the Americas are nearly $5 billion in revenue behind the biggest region, Europe, and this gap appears to be widening rather quickly. This geographic size and growth disparity, especially in the Americas, is sure to pose some interesting questions to the currently-US-centric Big Four firms about their future center-point and constitution of their top leadership.

Mergers and the Big Auditors

Since 1989, mergers and one major scandal involving Arthur Andersen have reduced the number of major accountancy firms from eight to four.

Big 8 (until 1989)

The firms were called the Big 8 for most of the 20th century, reflecting the international dominance of the eight largest accountancy firms:
#Arthur Andersen
#Arthur Young & Company
#Coopers & Lybrand
#Ernst & Whinney (until 1979 Ernst & Ernst in the US and Whinney Murray in the UK)
#Deloitte Haskins & Sells (until 1978 Haskins & Sells in the US and Deloitte Plender Griffiths in the UK)
#Peat Marwick Mitchell, later Peat Marwick
#Price Waterhouse
#Touche Ross

Most of the Big 8 originated in alliances formed between British and US accountancy firms in the 19th or early 20th centuries. Price Waterhouse was a UK firm which opened a US office in 1890 and subsequently 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: Touche Ross in 1960, Arthur Young (at first Arthur Young, McLelland Moores) in 1968, Coopers & Lybrand in 1973, Deloitte Haskins & Sells in 1978 and Ernst & Whinney in 1979. [ [http://www.icaew.com/index.cfm?route=155661 Institute of Chartered Accountants in England & Wales: Firms' family trees] ]

The firms' initial international expansion was driven by the needs of British and US based multinationals for worldwide service. They expanded by forming local partnerships or by forming alliances with local firms.

Arthur Andersen had a different history. The firm originated in the United States, and expanded internationally by establishing its own offices in other markets, including the United Kingdom.

In the 1980s the Big 8, each now with global branding, adopted modern marketing and grew rapidly. They merged with many smaller firms. One of the largest of these mergers was in 1987, when Peat Marwick merged with the KMG Group to become KPMG Peat Marwick, later known simply as KPMG.

Big 6 (1989-1998)

Competition among these public accountancy firms intensified and the Big 8 became the Big 6 in 1989 when 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.

Confusingly, in the United Kingdom the local firm of Deloitte, Haskins & Sells merged instead with Coopers & Lybrand. For some years after the merger, the merged firm was called Coopers & Lybrand Deloitte and the local firm of Touche Ross kept its original name. In the mid 1990s however, both UK firms changed their names to match those of their respective international organizations. On the other hand, in Australia the local firm of Touche Ross merged instead with KPMG [http://www.deloitte.com/dtt/article/0,1002,cid%253D12279,00.html] [http://query.nytimes.com/gst/fullpage.html?res=950DE7DD103BF936A35751C1A96F948260] . 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 5 (1998-2002)

The Big 6 became the Big 5 in July 1998 when Price Waterhouse merged with Coopers & Lybrand to form PricewaterhouseCoopers.

Big 4 (2002-)

The Enron collapse and ensuing investigation prompted scrutiny of their financial reporting, which was audited by Arthur Andersen, which eventually was indicted for obstruction of justice for shredding documents related to the audit in the 2001 Enron scandal. The resulting conviction, since overturned, still effectively meant the end for Arthur Andersen. Most of its country practices around the world have sold to members of what is now the Big Four, notably Ernst & Young globally and Deloitte & Touche in the UK.

Big 4 are sometimes referred as "Final Four" [http://news.google.co.uk/archivesearch?hl=en&client=firefox-a&rls=org.mozilla:en-GB:official&hs=tnM&um=1&ie=UTF-8&tab=wn&q=%22final+four%22+accounting] due to widely held perception that authority is unlikely to allow further concentration of accounting industry and that the fifth biggest accounting firm, BDO International, is too small compared to the Big Four. Another widely held belief is that, if something similar to Enron/Arthur-Andersen occurs, the authority is unlikely to punish the remaining Big 4 in a manner which destroy the firm itself like U.S. authority did with Arthur Andersen.Who?

2002 also saw the passage of the Sarbanes-Oxley Act into law, providing strict compliance rules to both businesses and the auditors.

Mergers and developments

*Arthur Andersen
**Developed from Andersen, Delany
*Ernst & Young
**Arthur Young
**Ernst & Whinney
***Ernst & Ernst (US)
***Whinney Murray (UK)
***Whinney, Smith & Whinney
*PricewaterhouseCoopers
**Coopers & Lybrand
***Cooper Brothers (UK)
***Lybrand, Ross Bros, Montgomery (US)
**Price Waterhouse
*Deloitte Touche Tohmatsu
**Deloitte & Touche
***Deloitte Haskins & Sells
****Deloitte Plender Griffiths (UK)
****Haskins & Sells (US)
***Touche Ross
****Touche, Ross, Bailey & Smart
*****Ross, Touche (Canada)
*****George A. Touche (UK)
*****Touche, Niven, Bailey & Smart (US)
******Touche Niven
******Bailey
******A. R. Smart
**Tohmatsu & Co. (Japan)
*KPMG
**Peat Marwick Mitchell
***William Barclay Peat (UK)
***Marwick Mitchell (US)
**KMG
***Klynveld Main Goerdeler
****Klynveld Kraayenhof (Netherlands)
****Thomson McLintock (UK)
****Main Lafrentz (US)
***Deutsche Treuhand Gesellschaft (Germany)

Policy issues concerning industry concentration

In the wake of industry concentration and individual firm failure, the issue of a credible alternative industry structure has been raised. [ [http://papers.ssrn.com/sol3/papers.cfm?abstract_id=928482 Lawrence A. Cunningham, Too Big to Fail: Moral Hazard in Auditing and the Need to Restructure the Industry Before It Fails, Columbia University Law Review] ] The limiting factor on the growth of additional firms is that although some of the firms in the next tier have become quite substantial, and have formed international networks, effectively all very large public companies insist on having a "Big Four" audit, so the smaller firms have no way to grow into the top end of the market.

Other countries

India

In India, the affiliate firms of the Big Four are:

*., S. B. Billimoria Co,C. C. Chokshi & Co., A. F. Ferguson & Co, Fraser & Ross, MCA & Co P. C. Hansotia and Deloitte Haskins & Sells - affiliates of Deloitte Touche Tohmatsu
*Bharat S. Raut & Co (BSR & Co) - affiliate of KPMG
*Price Waterhouse, Price Waterhouse & Co, Lovelock & Lewes & RSM & Co.,Dalal & Shah - affiliates of PricewaterhouseCoopers
*S.R. Batliboi & Co, S.R. Batliboi & Associates - affiliate of Ernst & Young
* Walker Chandiok & Co - affiliate and member firm of Grant Thornton LLP

In India, foreign accountancy firms are prohibited from entering the audit and assurance sectors. The Big Four therefore service clients through affiliate firms.

Egypt

In Egypt, the "Big Four auditors" are local affiliates of the Big Four international firms:

# Hazem hassan KPMG
# Mansour & co. - member of PricewaterhouseCoopers
# Saleh, Barsoum, Abdel Aziz & Co. - member of Deloitte & Touche
# Hafez Rageb - member of Ernst & Young

Republic of Korea

The following domestic accountancy firms have joined the membership of international Big Four firms.

# Hanyoung LLC - member of Ernst & Young
# Samjong LLC - member of KPMG
# Samil LLC - member of PricewaterhouseCoopers
# Ahnjin LLC - member of Deloitte & Touche

Turkey

In Turkey, the "Big Four auditors" are local affiliates of the Big Four international firms;

# Güney Bagimsiz Denetim ve S.M.M. A.S. - member of Ernst & Young,
# Akis Bagimsiz Denetim ve S.M.M. A.S. - affiliate of KPMG,
# Basaran Nas Bagimsiz Denetim ve S.M.M. A.S. - affiliate of PwC
# DRT Bagimsiz Denetim ve S.M.M. A.S. - affiliate of Deloitte

In addition to the big four, there are other affiliate companies which have weaker affiliate relations compared to affiliates of big four.

Israel

In Israel, there are five large auditors, four of whom are affiliates of the Big Four:

# Kost, Forer, Gabbay & Kasierer (Ernst & Young Israel)
# KPMG Somekh Chaikin
# Deloitte Brightman Almagor
# Kesselman & Kesselman, PwC Israel
# BDO Ziv Haft (affiliate of BDO International)

Indonesia

In Indonesia, there are four large auditors, all are affiliates of the Big Four:

# KAP Purwantono, Sarwoko, Sandjaja - affiliate of Ernst & Young
# KAP Osman Bing Satrio - affiliate of Deloitte
# KAP Sidharta, Sidharta, Widjaja - affiliate of KPMG
# KAP Haryanto Sahari - affiliate of PwC

Japan

In Japan, the “Big Four auditors” are local affiliates of the Big Four international firms:

* ShinNihon - affiliate of Ernst & Young
* AZSA & Co. - affiliate of KPMG
* PricewaterhouseCoopers Aarata - affiliate of PricewaterhouseCoopers
* Tohmatsu - affiliate of Deloitte Touche

Following the discovery of the accounting fraud at Kanebo, the Financial Services Agency in Japan suspended ChuoAoyama from conducting audit work for inadequate internal controls, for two months from July 1, 2006 onwards. On July 1 2006, PwC started a new accountancy firm in Japan, called PricewaterhouseCoopers Aarata. Unlike ChuoAoyama, which is a network firm of PwC, PricewaterhouseCoopers Aarata is a member firm of the PwC global network and will adopt its internal controls and methodologies. [http://www.pwc.com/extweb/ncpressrelease.nsf/docid/0F5DAE3C47C4A4798025718C0030FC36] Misuzu dissolved in 2007.

The Philippines

In the Philippines, the affiliate firms of the Big Four are:

*Isla Lipana & Co. (formerly Joaquin Cunanan & Co.) - affiliate of PwC
*Manabat Delgado Amper & Co. (formerly C.L. Manabat & Co.) - affiliate of Deloitte Touche Tohmatsu
*Sycip Gorres Velayo & Co. (SGV & Co.) - affiliate of Ernst & Young
*Manabat Sanagustin & Co. (formerly Laya Mananghaya & Co.) - affiliate of KPMG

Pakistan

In Pakistan, the Big Four are affiliates of the following local audit firms, which are the prominent firms of Pakistan:

# A.F. Fergusons - Member of PricewaterhouseCoopers [ [http://www.pwc.com/extweb/pwclocations.nsf/(ViewLocByCityDisplay2005)/Pakistan~GX~ENG~CY PWC website] ]
# Ford Rhodes Sidat Hyder & Co. - member of Ernst and Young [ [http://www.ey.com/global/content.nsf/Pakistan/Home E&Y website] ]
# Taseer Hadi & Co. - member of KPMG International [ [http://www.kpmg.com.pk/ KPMG website] ]
# M. Yousuf Adil Salim & Co - member of Deloitte & Touche [ [http://www.deloitte.com/dtt/home/0,1044,sid%253D75423,00.html Deloitte website] ]
# Anjum Asim Shahid Rahman - member of Grant Thornton International [ [http://www.gti.org Grant Thornton website] ]

ri Lanka

In Sri Lanka the afiliated firms of the big four are:
* Ernst & Young Sri Lanka - Ernst & Young
* Ford Rhodes & Thornton - KPMG
* Price Waterhouse Coopers Sri Lanka - Price Waterhouse Coopers
* Someswaran & Jayawickrama, Manoharan & Sangakkara (SJMS) Associates - Deloitte Touche Tomatsu

References

External links

* [http://raw.rutgers.edu/raw/internet/big5.htm A table of links to the Big 4 accountancy firms] , from a Rutgers University website
* [http://ilovebig4.com/ ILoveBig4.com] - Weblog with news about Big Four auditors
* [http://www.jobs-for-accountants.co.uk/ Big 4 Jobs] - Bespoke Recruitment Agency Website for Big Four auditors