I was in
conversation with a perceptive reader, long concerned as I have been about the
viability of the Big Four model of audit services for global-scale companies.
Our context was the October 3, 2013 announcement that Deloitte had, for an undisclosed sum,
settled out of court the life-threatening $ 7.5 billion claims by the trustee of
the criminally-driven bankruptcy of mortgage lender Taylor Bean & Whitaker.

That news – along
with the size of the number, when it eventually surfaces — should trouble all
those not evading the reality that “Black Swan” litigation could trigger the
catastrophically viral collapse of the Big Four – a possibility beyond denial
given the death spiral of Arthur Andersen in 2002.

The only sure
alternative, I have believed, is the resolution, on a pre-collapse basis, of the
seemingly intractable impediments to a sustainable audit function for the
future – including the Big Four’s persistent performance quality challenges, litigation
liability, financial fragility, uninsurability, and independence-based
constraints on their scope of services.

My friend had a new
take, however, based on the rapid growth of the Big Four consulting practices.
Despite widespread prohibitions on consulting for audit clients, they are reporting[1]
robustly increasing consulting revenues. Their growth rates year-on-year range
from 8 % to 18 %, representing steadily increasing percentages of their overall
revenue while three of the Big Four report audit revenues that are flat to
diminishing.

Consulting by the
Big Four has reached levels not seen since the large firms’ various exits from
the business – the bitter divorce between Arthur Andersen and Andersen
Consulting commenced in 1998 and finalized with the launch of Accenture on
January 1, 2001; EY’s sale to CapGemini in February 2000; KPMG’s 2001 spin-off
to create what became BearingPoint, and PriceWaterhouse’s sale of its practice
to IBM in July 2002.

My friend’s
hypothesis is that, running at such levels, Big Four consulting underpins the
next logical step in a survival strategy, namely to firewall and close down
their audit practices altogether – in effect taking the Big Four out of “Big
Audit.”

This I briefly found
a tantalizing idea, one I’d never before considered: that Big Four leadership
would be so visionary and creative – because the profession has not shown that
level of positive self-interest since successfully lobbying to capture the
assurance service business upon passage of the American securities laws in the
1930’s.

But on reflection,
I conclude that my friend is wrong. Not because separation of audit from consulting
cannot be done – as shown by
Accenture’s growth since birth to a prosperous $
29 billion enterprise today.
Plainly, it can.

Nor because of the
reaction of another commentator to whom I exposed this idea – that Big
Four “flight to consulting” was unlikely, since the firms would keep at least
minimal audit capacity for the sake of credentials and credibility. But that
point is readily answered by experience: Accenture not only did not need an on-going relationship with its
erstwhile accounting bedmate — it could scarcely wait for the ink to dry on
the divorce decree before scrubbing itself of prior history and maximizing the
distance between the two.        

It’s because Big
Four withdrawal from their audit practices would not of itself mark the
immediate end of “big audit.”

Closing the Big
Four audit practices would not resemble a company simply firing its workers as
it exits a geographic market or shelves a product or shuts down a factory or a
division. Big Four audit practices may be fatally flawed and unsustainable in
their business models – an adverse jury verdict in Taylor Bean would
have proved that – but they still generate annual revenues in the multiple
billions, and globally employ several hundred thousand professionals – revenue
and jobs that a consulting-oriented leadership could neither fold up into the
surviving practice nor isolate and hand-cuff under non-compete or “garden
leave” restrictions.

Instead, what would
happen is that newly-redundant and jettisoned audit partners would, through
some form of spin-off or “management buy-out,” create four (or more) firms that
would be pure “audit only” – perhaps hauling along an ancillary tax division or
two.

If so, the outcome
would not be the disappearance of “big audit” – at least not yet – but transfer
of this poisoned chalice to “slightly-less-big” audit — narrow in practice
scope and financially even weaker and more exposed to the existential threats
in their litigation portfolios.  

Which in turn means
that my friend’s analysis is in the end not really wrong, but only incomplete. The
eventual day of final reckoning for private audit would not be upon the
withdrawal of the Big Four into the prosperity of consulting, but when one of
their offspring should suffer the fate that only recently threatened Deloitte.

And if that is
true, the real debate about survivability retains its vitality, and should retain
its hold on our attention and concern.

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