Big Four (Accounting Firm) – Definition

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Big Four Definition

The Big Four refers to the largest accounting and auditing firms in the United States. This measurement is taken by their revenue details, and not really the quality of their work, although the latter might also come in handy in this analysis. These companies offer different services like tax consulting, management consulting, property valuation, market research on the businesses, provision of legal advice and assurance on tax or business financial related issues. Most companies turn to these firms for auditing and accounting, and sometimes, they can be hired by the IRS to conduct audits. They provide expert advice on different issues. The Big Four are Deloitte, Ernst & Young, Price Waterhouse and Coopers (PwC), and KPMG.

A Little More on What is the Big Four Accounting Firms

Formerly, the title of Big Four was the Big Eight, and what we currently have is as a result of an industry consolidation in 1989. The eight top firms are alphabetically given below.

    • Arthur Andersen
    • Arthur Young
    • Coopers & Lybrand
    • Deloitte Haskin & Sells
    • Ernst & Whitney
    • Peat Marwick Mitchell
    • Price Waterhouse
    • Touche Ross (U.K. and U.S.)

Through the years, mergers occurred, and this brought the numbers to what we currently have. Arthur Young merged with Ernst & Whitney to form Ernst & Young, and Deloitte Haskins and Sells merged with Touche Ross to form Deloitte. This initially reduced the number of to six firms. Afterwards, Price Waterhouse decided to merge with Cooper & Lybrand to form the Price Waterhouse and Cooper (PwC) group. A little while later, Arthur Andersen collapsed due to the shredding of Enron documents. This limited the number to just four firms, which is what we have today.

The Big Four is a great employer. As of 2017, research showed that the combination of these four firms have hired approximately one million workers, which can be evenly split to approximately a quarter million employees per company. Also, that same year, their annual revenue was $31 billion, a sum which is quite large for even a total of four auditing firms. These companies perform auditing taxes for big firms and companies around the world, and they have different resources which keeps their employees at the top of the game. No matter the qualification which one possess, there are enough training programs to keep them enriched when working with these firms.

Controversies Surrounding the Big Four

There are several controversies about the Big Four, and different critics seem to have strengthened these cases. Also the Big Four has different qualified personnels and offer high quality training and auditing services, they have never been able to uncover any case of high-level fraud within a company, even with the different harms that it causes shareholders. Two notable fraud cases, that of Enron and Worldcom were not exposed by any member of the Big Four but by forensic experts in accounting. This is deemed to be weird since the Big Four performed audits on both companies. Critics stipulate that the Big Four don’t want to compromise the benefits which they receive from their top paying clients by asking too much questions or by investigating suspicious records in their accounting reports. In this case, the saying of “biting the hand that feeds you” is highly relatable.

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Academics research on “Big Four”

Customer service quality and financial performance among Australian retail financial institutions, Duncan, E., & Elliott, G. (2002). Customer service quality and financial performance among Australian retail financial institutions. Journal of Financial Services Marketing, 7(1), 25-41. This paper seeks to explore empirically the relationship between customer service quality and financial performance among a representative cross-section of Australian banks and credit unions by correlating customer service quality scores from a sample of retail customers with financial performance measures over a five-year period.Results show that all financial performance measures (interest margin, expense/income, return on assets and capital adequacy) are positively correlated with customer service quality scores. They also show that the credit unions strongly out-perform the banks in customer service quality and also for some measures of financial performance (interest margin and return on assets). The positive link between financial performance and customer service is thus supported in this study. Implications for the three groups of institutions are also discussed.

An empirical analysis of audit delays and timeliness of corporate financial reporting in Kuwait, Al-Ghanem, W., & Hegazy, M. (2011). An empirical analysis of audit delays and timeliness of corporate financial reporting in Kuwait. Eurasian Business Review, 1(1), 73-90. This paper analyzes the factors that affect delays in the signing of audit reports. Audit delays are measured by the number of days that elapse from the end of the financial year until the date when the auditor report is signed. Previous studies of audit delays in various countries are reviewed, along with some of the results of the variables that were tested. This study focuses on 149 and 177 companies listed on the Kuwait stock market in 2006 and 2007, respectively. Six explanatory variables are tested to investigate delays in issuing audit reports. The results show that company size is the only variable that negatively correlates with audit delay in the period tested. The variables industry classification, leverage, percentage change in earning per share, type of auditors, and liquidity show no significant correlation with audit delays for listed companies in Kuwait. Liquidity, leverage, and type of auditors are negatively correlated with audit delay in 2006 for the first two variables and in 2007 for the type of auditors. Future research would consider other variables such as other interpretation of company size, ownership concentration, quality of internal control, direction of income or loss, and the mix of audit work

Efficiency, customer service and financial performance among Australian financial institutions, Duncan, E., & Elliott, G. (2004). Efficiency, customer service and financial performance among Australian financial institutions. International Journal of bank marketing, 22(5), 319-342. This paper seeks to explore empirically the relationships between efficiency, financial performance and customer service quality among a representative cross‐section of Australian banks and credit unions and the correlations between these categories of measures. In particular, it seeks to explore the strength of the relationship between efficiency, financial performance and service quality. Results show that all financial performance measures (interest margin, expense/income, return on assets and capital adequacy) are positively correlated with customer service quality scores. In contrast, the absence of a consistently positive relationship between efficiency and financial performance suggests that financial institutions that pursue improved financial performance through the single‐minded pursuit of lower costs may be fundamentally misguided.

Big four accounting firms’ annual reviews: A photo analysis of gender and race portrayals, Duff, A. (2011). Big four accounting firms’ annual reviews: A photo analysis of gender and race portrayals. Critical Perspectives on Accounting, 22(1), 20-38. This investigation analyses representations of gender and race in 19 Big Four UK accounting firms’ annual reviews from 2003 to 2007. Developing the critical literature considering the use of photographs in corporate annual reports and the intersection of accounting and gender and race it considers how photographs are used to depict men and women, black and white within firms’ annual reviews. Specifically, the paper analyses how people are represented in terms of job role, location, dress and their race and gender to arrive at its conclusions. As prior literature in accounting suggests, the reviews tend to under-represent women and people of colour; however, the effect is less marked than prior studies of corporate reporting. A finer grained analysis identifies the paucity of gender and race representations. Although an underlying theme of the annual reviews is to propose that the firms’ people create value for its clients and society, the job functions and locations in which people are portrayed evidences stereotyping and inequality.

Empirical analysis of delays in the signing of audit reports in Spain, Bonsón‐Ponte, E., Escobar‐Rodríguez, T., & Borrero‐Domínguez, C. (2008). Empirical analysis of delays in the signing of audit reports in Spain. International journal of auditing, 12(2), 129-140. This study sets out to analyse the factors that determine delays in the signing of audit reports. The delays are measured as a function of the number of days that elapse from the closure of the accounting period until the date when the audit report is signed. The study has been conducted in Spain, on 105 companies of the Spanish continuous market, from 2002 to 2005. The results obtained utilizing panel data methodology demonstrate that the two factors characterizing the companies that present less audit delay are: classification to sectors that are subject to regulatory pressure, such as the financial and energy sectors; and the size of company relative to its sector. Variables such as audit firm, qualifications or regulatory change show no significant relationship with audit delay in the Spanish context.

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