THE BIG FOUR’S INHERENT CONFLICTS AND EVOLVING CHALLENGES

ETF Research & Analytics Team

The Big Four global powerhouses of the professional services industry, PricewaterhouseCoopers (PwC), EY, Deloitte, and KPMG, are grappling with internal conflicts and crises that pose significant challenges to their operational sustainability and reputational credibility. These firms collectively employ nearly 1.5 million staff and generate annual revenue of approximately US$190bn, dominating global markets in accounting, auditing, and tax-related advice.

PwC, for instance, has been confronted with a severe trust deficit in Australia. An array of issues, including a two-year bar imposed on its former head of international tax, the resignation of the CEO, governance restructuring, and an impending federal police investigation, have all led to a call for its banishment from government contracts. These events indicate a broader paradox within the Big Four—despite their self-promotion as strategy, governance, and risk management experts, these firms often significantly struggle with these areas internally.

The strategic approach of the Big Four is often nebulous, with PwC claiming to work with various entities to deliver "solutions and sustained outcomes"—a phrase lending itself to multiple interpretations. The firm’s diversification into a wide range of service lines including assurance, consulting, legal, HR, technology, infrastructure, deal-making, and tax-related services, suggests a “do everything” strategy. This expansion has been observed across all Big Four firms, with their consulting businesses growing faster than traditional services. Such unfettered diversification, while potentially lucrative, can expose these firms to diverse risks, requiring a careful balance between innovation and internal controls.

Furthermore, the Big Four's organizational structure, constituted by a network of separately owned, national franchises, lacks a strong global head office, which could potentially manage crises. This lack of centralized control could explain the difficulties faced by these firms when confronted with crises. Governance issues also plague these organizations. Unlike public companies, the Big Four firms, being networks of partnerships, do not have traditional boards of directors, thereby diminishing the potential for robust checks and balances.

The core conflict within these firms stems from the contradictory nature of their services—transparency and integrity in auditing versus profit-driven services like tax minimization advice. PwC's recent scandal, where tax personnel boasted internally about leveraging confidential government information for profit, starkly highlights this conflict.

In response to these crises, PwC has proposed mild solutions such as ring-fencing and governance board adjustments. However, these measures may not be sufficient to address the deep-rooted conflicts within the Big Four model. As demonstrated by the failure of EY’s Project Everest, these firms seem to lack the capability to resolve their inherent conflicts. Thus, the responsibility for imposing structural changes may eventually fall onto governments and regulators globally.

By resisting self-initiated restructurings, the Big Four seem to be paving the way for externally enforced, potentially chaotic break-ups. These firms have been warned repeatedly about the risks associated with their current business models, yet they seem to be persisting on a path of profit-driven diversification. The future implications of this strategy are uncertain, and it remains to be seen how these firms will navigate the challenges ahead.

A Time of Transformation and Regulatory Scrutiny
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1. Regulatory Challenges: The Big Four will likely face increasing regulatory challenges globally due to their inherent conflicts of interest and the recent high-profile scandals. Regulators around the world are growing increasingly concerned about the concentration of power within these firms and the potential risks this poses to financial stability.

  There is a growing consensus that the Big Four's diversified business model, which combines auditing with a range of consulting services, may need to be restructured to prevent conflicts of interest. Regulators may impose stricter rules around the separation of auditing and consulting services, potentially requiring the firms to split their operations.

2. Increased Competition: The Big Four's dominance may also be challenged by increased competition. Regulators in various jurisdictions are considering measures to boost competition in the audit market, which may involve encouraging the growth of smaller firms or imposing market share caps on the Big Four.

3. Technological Disruption: Technology, particularly artificial intelligence (AI) and blockchain, is disrupting the professional services industry. These technologies can automate many traditional auditing and accounting tasks, potentially reducing the demand for these services. The Big Four will need to adapt to this changing technological landscape, investing heavily in digital transformation and upskilling their workforce.

4. Reputational Risk: The recent scandals involving the Big Four have raised questions about their integrity and ethical standards, damaging their reputations. These firms will need to work hard to rebuild trust with clients, employees, and the public. This may involve implementing more robust governance structures, improving transparency, and demonstrating a commitment to ethical conduct.

5. Sustainability and ESG: There is growing pressure on businesses to demonstrate their commitment to environmental, social, and governance (ESG) issues. The Big Four, like other businesses, will need to show that they are taking these issues seriously, both in their own operations and in the services, they provide to clients.

In summary, the outlook for the Big Four is complex and challenging. These firms are likely to face significant regulatory, competitive, technological, and reputational challenges in the coming years. However, they also have opportunities to adapt and innovate, potentially transforming these challenges into drivers of change and growth.