CORPORATE CRIME REPORTER
Break
Up the Big Four Audit Firms?
24 Corporate Crime Reporter 2(14), January 13, 2010
The Big Four audit firms – KPMG, Ernst & Young, PricewaterhouseCoopers,
and Deloitte – audit the financial statements of nearly all the global
public companies in the world.
And arguably they are the only audit firms able to do so.
And there is a real fear that the Big Four might become the Big Three – or maybe even the Big Two.
Is that too much concentration?
The American Antitrust Institute last month released a paper examining the issue.
The paper – Financial Reform and the Big Four Audit Firms – was written by Albert Foer and Bernard Ascher.
“The firms have two major burdens,” the authors write. “They are heavily regulated by governments, and they are vulnerable to massive lawsuits when investors and creditors suffer large losses due to fraud or error. Since the dual shocks of the collapse of Arthur Andersen – reducing the Big 5 to 4 – and the enactment of stringent regulations by the U.S. Congress in 2002 in reaction to corporate accounting scandals, there is great concern in the financial community that another of these companies could be forced out of business, further reducing the choice of auditors for multinational corporations and causing disruptions in the marketplace.”
The paper proposes that, if the Congress were to consider limiting the liability of audit firms, no such relief should be granted without setting conditions that are likely to make the auditing of public companies more competitive.
“One way to do this would be to set incentives for voluntary structured divestitures as a means of reducing heavy concentration in the audit industry in an orderly manner,” Foer and Ascher write. “This could serve as a starting point for determining how the open season for divestiture would operate and how to deal with the inevitable questions and issues as they arise during the legislative process.”
“We were considering some sort of public negotiation with the Big Four,” Ascher told Corporate Crime Reporter in an interview last week. “If there were to be this kind of a remedy, how would you attract new firms, new competition? How would you help mid-tier firms that are still much smaller than the Big Four? And how would you get new networks to grow?”
“One of the ways would be to have a quid pro quo for liability caps,” Ascher said. “The companies would agree to divest some of their clients – spin them off to other firms outside the Big Four. That would increase competition.”
Would there be an open season? That would be a period of time where the companies would be able to negotiate with smaller accounting firms to turn over their clients.
“One problem would be – do the clients want to be turned over to another firm?” Ascher said. “How would you determine the percentage of divestiture that would be required to justify the liability limitation? In catastrophic cases, should the cap apply only to punitive damages or compensatory damages as well? Should the liability cap expire after a certain period, or remain in effect permanently? What safeguards should be built into the legislation governing reacquiring a client after receiving liability caps for the original divestiture?”
“These are just some of the questions that we raised. This paper stopped short of getting into all of the problems. We were just proposing an idea that would be a starting point for consideration of this type of remedy.”
Ascher said he could found no antitrust case brought in the United States against the Big Four audit firms – although Italy did fine the then Big Six in 2000 for antitrust violations.
And he said that making auditing a public function would be difficult.
“The only place where I found the government took over the accounting function was in Greece in the 1990s,” Ascher said. “They made it a government function. But I believe it has been resolved now by the Organization of Economic Competition and Development.”
“I’d have to think really hard about whether there is any point where you would want to privatize the auditing companies,” Ascher said.
[For a complete transcript of the Interview with Bernard Ascher see 24 Corporate Crime Reporter 2(14), print edition only.]
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