The Big Four accounting firms are one (more) scandal away from collapse (permalink)
One of the wildest features of the crypto wipeout is that all of these "multi-billion-dollar" firms never bothered with an independent audit, and they all turned out to be lying about their balance sheets. Amidst this carnage, it's easy to forget that the Big Four accounting firms are terrible enablers of fraud, and the fact that they sign off on your books is no guarantee that you're not a giant scam waiting to implode.
This is just wild to consider. After all, independent auditors are the lifeblood of capitalism. Rich people really need to know that the people they trust with their money aren't lying about their finances. Usually rich people get their way.
But not with accounting. Accountancy has dwindled to four massive, structurally important, terminally conflicted companies: EY, KPMG, PWC and Deloitte, and all four make more money selling "consulting" to companies than they do for signing off on their books.https://pluralistic.net/2021/02/18/ink-stained-wretches/#countless
That means that the Big Four routinely sign off on fraudulent books, because a failure to make nice with companies that are cheating the taxman and/or their investors and/or their creditors will cost the Big Four those fat consulting contracts.
Besides, the Big Four have a sweet gig: when they sign off on fraudulent books – as all four did for Carillion, the company that went bust in 2018 after billions went missing – they are the only companies big enough to oversee the bankruptcies. All four made millions off of Carillion's bankruptcies.
Shorn of any consequences for wrongdoing, the Big Four are hotbeds of corruption. Who can forget when KPMG's top management was fined millions…for helping their auditors cheat…on ethics exams (!!!!).
https://pluralistic.net/2021/06/04/aaronsw/#crooked-ref
There is a contradiction at the heart of "consulting" and auditing. The consultant's job is to help a company obscure its bad deeds – for example, helping it hide its tax fraud, or its wage theft – while an auditor's job is to bring transparency to a company's financials. These two activities are fundamentally incompatible with one another, and the fact that the Big Four make more money from cooking books than from uncooking them means that they forever lurch from scandal to scandal.
Those scandals are getting worse, and if a very big one should break, it could bring down the whole sector, and with it, large swathes of the economy. Writing for The Dig, Jim Peterson describes the system risk:
https://thedig.substack.com/p/tipping-point-the-financial-fragility
The problem lies in the fact that the Big Four are "voluntary private partnerships to which individual accountants commit their energy, reputations and personal capital." If a scandal threatens the business, partners who quit might get away clean, while those that stay behind will be mired in scandal and financial ruin.
That means that when disaster looms, each partner is better off individually running for the doors, even though a disciplined stay-and-hold posture might let the firm weather the storm. This is exactly what happened at Arthur Andersen during the Enron collapse, and the risk to other firms was identified by "Study on the Economic Impact of Auditors’ Liability Regimes," a 2006 EU report:
https://www.iasplus.com/en/binary/europe/0610audit.pdf
The thing is, each partner at a big firm knows exactly how much dirty laundry they have personally buried in the company's garden, and they have well-founded suspicions about what their partners have buried out there, too. When someone starts digging, they're all gonna scarper.
Which is to say that if a firm faces sufficiently steep litigation damages or enforcement penalties, it could precipitate a sudden collapse of one of the remaining Big Four firms. That wouldn't just be bad news for the firm – its clients would struggle to land another large auditor to sign off on its books.
Remember, most of the world's auditing capacity has been gathered into four giant, brittle, opaque, compromised firms – if one of them goes bust, the remaining Big Three won't have the capacity to take on its orphaned clients.
Peterson: "another collapse would strand significant numbers of the world’s large public companies, leaving them unable to procure the audit opinions required for their securities listings and regulatory compliance, from any source and at any price."
Peterson's written a fascinating-sounding book on the structural problems with monopolized accounting, "Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms," which is in its second edition:
https://www.emerald.com/insight/publication/doi/10.1108/9781787147003
(Image: Vectorportal.com, CC BY 4.0, modified; inspired by an illustration by Matt Kenyon for the Financial Times)
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