Ed. note: the following is penned by Bob Jennings CPA, EA for his Taxspeaker.com newsletter. Bob has given us permission to reprint in full and we are enthusiastically doing so in the hopes it will spark much-needed conversation about one of the profession’s most significant issues: the Big 4 oligopoly.
According to the SBA, small business generates about 44% of GDP in America and 2/3 of new jobs annually. These businesses have their financial advisory needs served by hundreds of thousands of small firm accountants and CPAs nationwide. Small business has unique needs for accounting services: primarily tax and advising, and secondarily day-to-day accounting needs to act as de-facto controllers and decision makers. The need for formal financial statements is rare because lenders realize the high cost of audited financials is not beneficial to either party, so usually a tax return or basic prepared or compiled financial statement is provided. Similar to most small firms, my firm stopped auditing over 20 years ago and stopped performing reviews over 10 years ago because of this lack of client or creditor demand.
Thus, small firms provide indispensable advisory services to small businesses that account for nearly all new job creation and ½ of GDP. This small business group of accountants is declining at an alarming rate because of aging, retirement and, primarily, lack of new entrants in the field. The lack of new entrants comes from two factors: first a nationwide decline in accounting students (none of whom get hired by small firms); and second because small firms charge too little for their services to be able to pay comparable salaries. Smaller firms cannot pay competitive salaries because the graduates must be expensively retrained in small business accounting needs.
The burgeoning problem is exacerbated by educators leading students to work exclusively in Big 4 firms, educating their students exclusively in Big 4 curriculum and educators that were employed in a Big 4 oriented educate-train-work-educate cycle. This “Circle of Death” has led to a rapid demise of the very firms advising small business, the most critical part of the American business growth cycle. This circle is caused by the power wielded by the Big 4 firms over educators in the form of accreditation in college accounting programs, administered by the AACSB. Educators themselves also bear great responsibility for their failure to address or inform students about small business providing so much to America. The AACSB only accredits those schools providing the Big 4 demanded curricula, eliminating from accreditation any school offering alternative small-business accounting education tracks to the exclusion of nearly ½ of American businesses.
The traditional Big 4 accounting firms in the United States are Ernst and Young; KPMG; Price Waterhouse Coopers(PwC) and Deloitte Touche. Examine any college curriculum, AACSB accreditation requirement or news headline and it is quite evident the Big 4 control the educators through curriculum requirements, the state board rule makers through their board membership and background, national lawmakers through their PAC funds, and the media.
Ask any college accounting major and they have “swallowed the juice” of their accounting program and are trained, lemming-like, to only look at Big 4 firms and curriculum as the be-all, end-all future employer choice. They have learned nothing about the needs of small business with minimal (if any) coverage of financial statement preparation without an audit, working for clients without an internal accounting department, or the realities of being a small business advisor. An accounting degree in 2022 ignores the needs of companies providing nearly ½ of American GDP and 2/3 of new job creation.
Before I address this problem, here are a few headlines about the people that make the rules. And as an introduction, let’s just get it out of the way now: College accounting programs are taxpayer funded training programs for the Big 4. There, I’ve said it. Ticked off people make changes and it is far past time to tick off some people.
September 29, 2022. The Securities and Exchange Commission today charged Deloitte Touche Tohmatsu Certified Public Accountants LLP (Deloitte-China), the Chinese affiliate of the Deloitte global network of accounting firms, with failing to comply with fundamental U.S. auditing requirements in its component audits of U.S. issuers and its audits of foreign companies listed on U.S. exchanges. Deloitte-China agreed to settle the charges by paying a $20 million penalty and agreeing to extensive remedial measures.
June 28, 2022. The Securities and Exchange Commission today charged Ernst & Young LLP (EY) for cheating by its audit professionals on exams required to obtain and maintain Certified Public Accountant (CPA) licenses, and for withholding evidence of this misconduct from the SEC’s Enforcement Division during the Division’s investigation of the matter. EY admits the facts underlying the SEC’s charges and agrees to pay a $100 million penalty and undertake extensive remedial measures to fix the firm’s ethical issues.
February 15, 2022. The Canadian affiliate of Big Four firm PwC has agreed to pay nearly $1 million in penalties after regulators found widespread cheating on internal education courses.
September 12, 2021. The PCAOB fined KPMG $450,000 for cheating on internal continuing education courses. By the way, I read about this at www.goingconcern.com.
June 17, 2019. The Securities and Exchange Commission assessed KPMG with a $50 million penalty for using inside information to cheat on firm inspections, the agency also found that auditors were using inside information to cheat on internal training exams meant to reinforce professional work standards.
These are the companies leading our education programs. These are the companies that drive accreditation. These are the companies that taxpayers support through state budgets in accounting programs. Many will claim these are isolated instances. Absolutely not, these are indicators of a pervasive mixing of auditing with consulting under the pressure of profits from the very rule-makers and industry-leaders themselves. These cases are examples of the actions of companies willing to ignore rules. Yet, these very companies drive education, accreditation and training with taxpayer funded training programs.
Let’s look at a few of the filter down industry requirements from the Big 4.
- The classic 150 hours of education requirement that has decimated new student entry to the field,
- The audit independence rules that have eliminated any small firm in America from auditing financial statements. This is not a bad thing. But, after reading the above cases do you need any further proof that it should also be required in Big 4 firms? The AICPA effectively eliminated competition for the Big 4 firms with the necessary independence rules, but conveniently wrote the rules in a manner to permit the Big 4 to work both sides of the audit fence.
- Auditing itself has become a farce for small businesses that must consider multiple expensive disclosures for items that are not present in the business, but for which the accountant could be reprimanded or censured for not disclosing. Between necessary independence requirements and unnecessary disclosure requirements the AICPA has effectively shut out any small accounting firm from performing audits and has forced creditors to abandon the need for outside accountant’s reports whose cost exceeds their benefit to the client or creditor.
- The AACSB accrediting agency for college programs that is so clearly run by the Big 4 that they are essentially a division of the amalgam EYPWCKPMGDT.
- A required college curriculum that ignores small business to the tune of lunacy. There is no education for lesser-than-audit level reporting; payroll; sales tax; nexus; property tax; small accounting software; client advising, bank reconciliation; individual income tax (1 practice case doesn’t cut it); or the myriad small business issues that occur daily. A single finance course discussing buying vs. leasing provides more useful information for small business than any auditing course.
- Media input: Let us show you how ridiculous it is for the media to quote someone from a Big 4 firm about individual or small business taxes by asking a simple question: How many small firms have Fortune 500 clients and how many clients do they have earning hundreds of millions of dollars annually? That would be none, but small firms don’t try to answer media questions about how a new law affects Fortune 500 clients, while the Big 4 are happy to talk about how a new law affects the “average American”. Ludicrous.
The accounting industry is facing a major dilemma caused by the last five year’s crop of new students being so small. It is so small because of the 150-hour rule, the work them to death plan at Big 4 firms, and the perception of unethical behavior that these headlines instill. Few of these graduates will consider working for a small firm-it has been instilled in them from the beginning that Big 4 is the only option. Small business and small accounting firms are totally ignored in our current AACSB-mandated education system and small business and small firms are the canary in the mine of accounting students. The dilemma has been caused solely by the Big 4 and their heavy-handed control of college educators, rule makers and PAC-influenced politicians.
Small business and small firm accountants have already passed the tipping point, they are caught in an avalanche of aging and retiring (or dying) accountants, a paucity of new hire interest, an overwhelming lack of recognition by the media, a failure by their state Boards to recognize anything about small firm problems, and an education system that is worthless for small business.
What intelligent business owner would hire a new graduate for $75,000 annually that is so incompetent in small business that they can’t even fill out a W-4 to start working? Frankly, the new graduates don’t even know what a W-4 is or what it is used for or how our tax system works.
My limited suggestions for improvement for small firms follow, and they are sure to tick off the pointy-heads.
- Immediately, now, yesterday do away with the AACSB accreditation rules for all national accounting programs.
- Add a new small business component requirement. You could make room for this by dropping all ethics courses for AACSB Big 4 curriculums since they don’t get followed anyway.
- Cut off all state/university funding for accounting schools until a small business component is added and the AACSB actually talks to someone doing accounting and modifies its Big-4 curriculum requirements.
- Require accounting professors to have relevant work experience (in the last 5 years) in the field, including 2 years or more in smaller firms. How can you teach this stuff if you’ve never done it? If the professor’s only experience is in a national firm auditing department, limit them to teaching those courses and general accounting courses. Replace “publish or perish” evaluation rules in accounting education with “practice and perform” reviews.
- Drop this insane 150-hour requirement in all states so that we can get students interested in a field that does not require a master’s degree. We aren’t Doctors.
- Educate the media about small business. Hello, McFly-the AICPA should be all over this. Media quotes for how laws affect small business should come from small business accountants.
As a 40+ year licensed CPA (Indiana) I long ago figured out that I did not need to be a CPA to work with small businesses. Bankers don’t want audits anymore from small business; they are happy with tax returns, and I don’t need to be a CPA to do what I do. Most of my small-firm peers have come to the same conclusion that without many of these changes, small firm accounting is dead.
Accounting degrees now have minimal value for practicality in small business, so we now recommend that everyone interested in small business become an IRS Enrolled Agent (I have been for 12 years) and possibly a CFP® (I was for over 30 years) for the practical side. The training requirement to become an EA or CFP is much more practical than any accounting degree, and a whole lot cheaper. Both are much more useful than being a CPA for the businesses that generate 44% of American GDP. Hire a math major or a manager at Wendy’s and train them in the practical side of taxes and financial advising through a tax bootcamp or a CFP® training program.
Give this to your elected representatives and potential students. There is a place for Big 4 firms, without a doubt, and my experience with the old Coopers & Lybrand was incredible. The Big 4 need to recognize however that without small business feeding the pipeline, there would be no big business for them, and the current model has totally failed.
Bob is a 40+ year experienced practicing small-firm CPA and 20+ year former university accounting professor. He has spoken to tens of thousands of tax professionals in a 35 year career as President and founder of Taxspeaker as a fiercely independent and US-owned national education company. Bob is the author of dozens of manuals and articles, as well as the author of several books about Social Security and Financial Planning as a former CFP.