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September 28, 2023

Reminder: The Big 4 Are Big, an Accident Waiting to Happen

James Ulvog published an excellent post this morning that puts the size of the Big 4 firms into context.

Some of these you've likely heard us mention before: 

If the next three firms after KPMG merged, the[y] would be just over half the size of KPMG.

To surpass KPMG at #4 revenue, the next 9 largest firms would have to merge.

To surpass E&Y at #3 would require the next 18 firms after the Big 4 to merge.

But he threw in a few intriguing extras, too:

If the 74 largest firms after KPMG merged, the new mega firm would barely be larger than Deloitte.

If the growth in each of the Big 4 were magically spun into separate companies, the new, imaginary firms would be the 8th, 9th, 10th, and 11th largest firms in the U.S. The Big 4 combined grew (4,713) more than the total revenue of the next three largest firms (4,691).

If the growth in the 4th largest firm could magically be spun off into a new firm, the new firm would be the 8th largest in the country.

As far as the Big 4 are concerned, this is not a problem. Look no further than Deloitte's smug press release announcing its FY 2016 revenues as evidence.

The concentration of large accounting firms, particularly audit firms, is something that few people worry about. We'd be much better off, I think, if everyone who worried about non-GAAP accounting metrics worried about the dwindling number of audit firms instead.

Luckily, the people who do worry about the BIG AUDIT oligopoly are persistent and Ulvog's blog post got them talking on Twitter: 

FULL DISCLOSURE: Jim Peterson writes for Going Concern on occasion and Francine McKenna used to, so you're probably thinking, "We've heard this story before, Chicken Little." And yes, you have!

But it's worth noting that the problem is only getting worse, as Ulvog's points about revenue growth illustrate. Even KPMG, a firm that is 4th among the Big 4 by a long shot, has revenue growth that outpaces the gains of the next three firms' combined. There's literally nothing that the second-tier firms can do about it.

No, no one — not even a former CEO — is creating a new behemoth out of the legacy firms to compete with the Big 4. The only way we're getting a 5th mega firm is if Andersen Tax starts doing audits again and drops "Tax" to complete the resurrection. All the Andersen alums who bolted would return en masse. Public companies would crawl back, solely based on the nostalgia of getting an Andersen audit. The media would call it the "Comeback of the Century." Hollywood would come calling because, even in this imaginary world, they can't resist a shitty reboot. President Trump would invite the partners to the White House to congratulate them and then take all the credit.

Meanwhile, back in this dimension, the Big 4 regularly survive embarrassing displays of professional malpractice, gross ethical misconduct and billion-dollar lawsuits. They're like Rasputin, these firms. And yet you'd be a fool to believe that they're not on the precipice of disaster. A comedy of errors will send one of these firms into a blazing dumpster and it will be tragic. The ruined careers. The disruption in the global business world. The think pieces. Oh, god, the think pieces.

The only bright side is that the media will stop referring to Enron when reporting on subsequent accounting scandals. I have to confess that I’m looking forward to that.

[Attestation Update]

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