Are the Big 4 “Too Big to Fail”?

Since KPMG hit the headlines recently, I’ve found myself grappling with the question of whether the Big 4 are, in practice, too big to fail. We’ve now seen significant governance and ethical failures involving several of Australia’s largest professional services firms over the past few years.

Yet the firms all remain major players in the market.

The Scandals

Deloitte faced criticism after AI-generated references appeared in a government assurance report and Deloitte’s own internal quality review failed to detect them.

Next was PWC’s ‘Tax-gate’ scandal, where they had used information they’d gained from advising the government on new tax avoidance legislation to simultaneously advise their clients – globally – on how to get around those very same avoidance measures.

Now KPMG is in the headlines, for breaching client confidentiality to win other client work – an issue which is arguably more significant than both Tax-gate and Reference-gate combined.

The Ramifications

While “don’t do a Deloitte” has become part of the corporate vernacular, the firm refunded part of its fee, attracted significant public criticism and then largely moved on. There appear to have been relatively limited regulatory or commercial consequences for the firm itself. That’s despite Senator Murray Watt – whose department was on the receiving end of the erroneous report – describing it as a:

“…clearly unacceptable act from a consulting firm.” [1]

But then we have PwC, who was subsequently banned from tendering for government work until they cleaned up their house. They’ve now been determined to be an “ethically sound company” [2] and are once again allowed to tender for government work. This is despite the government once having this to say about the firm:

“The interactions that PwC and PwCIL have had with this committee have failed to meet the behaviours expected of a firm that has any respect for law and the parliament. This has greatly diminished the firm’s standing in the eyes of the committee and should be a warning to all potential customers for the services they offer. At every turn, PwC has sought to avoid scrutiny and played for time, seeming to hope that the committee’s interest would wane. Ultimately, the firm was forced through threat of summons to attend hearings and provide material—often with significant redactions— in a tardy manner. The firm’s collective behaviour over the time since the tax matters became public reveal a general contempt for the democratic process.” [3]

Ouch.

Now to be clear, even if they want to, PwC can’t tender for any government contracts until 2028 due to a non-compete they signed when the government consulting arm of the firm was sold off for $1 and became Scyne Advisory [2].

But let’s be clear here: this is a commercial contractual restriction, not a legal or regulatory one. From a procurement perspective, PwC is once again eligible to compete for Commonwealth work, notwithstanding the separate commercial restrictions arising from the sale of its government consulting business.

The current KPMG matter still has a long way to play out, and it would be premature to speculate on the ultimate outcome.

Looking at these events collectively raises the question:

Are we seeing isolated failures by individual firms, or are we seeing evidence that the consequences for major professional services firms, when these failures happen, are constrained by the market’s dependence on them?

This isn’t a criticism of the firms themselves – organisations of any size inevitably experience failures of some kind. But what I’m finding interesting is the market’s response when those failures occur.

Impacts on the Industry

When Arthur Andersen collapsed after Enron, the ‘Big 5’ became the ‘Big 4’ almost overnight.

More than two decades later, regulators are arguably in a very different position. Another failure would further concentrate an already highly concentrated market. Governments and regulators face an uncomfortable balancing act – they need to impose meaningful consequences when trust is breached, while also preserving sufficient competition in markets that already have relatively few large providers.

Of course, there are the mid-tier firms who could step up and fill the gaps, but there will always be multinational companies that need the depth and breadth of experience, technical capability, global reach and specialist expertise that relatively few firms can presently offer.

At what point does misconduct by a firm become severe enough that clients decide the institution itself is no longer trustworthy?

Or perhaps the more interesting question isn’t whether the Big 4 are too big to fail. Perhaps it’s whether we’ve unintentionally built a professional services market in which allowing one to fail is no longer considered an acceptable option.

I’d be interested to hear what others think.

Claire Berry (CA, CFE, CPRM, AMIIA) is the Founder and Director of Green Pen Consulting, providing tailored risk management and internal audit support to risk and audit teams.

With nearly 20 years’ experience across audit, risk and governance roles, prior to establishing Green Pen Consulting Claire was Group General Manager – Risk & Internal Audit for an ASX100 entity in the chemical manufacturing industry.

Claire also authors the monthly Green Pen Digest newsletter, keeping readers up to date on the latest news and events across the accounting and auditing industries.