Friday , June 14 2024

Book Review: ‘The Big Four’ by Stuart Kells and Ian D. Gow

From Enron to Lehman Brothers and Bernie Madoff, recent massive financial scandals have exposed cracks in the fortress of traditional accounting, particularly when it comes to the Big Four — Deloitte, PricewaterhouseCoopers, Ernst & Young, and KPMG. All have been under scrutiny of late, and there’s a clamor to break up their hegemony. Ian D. Gow and Stuart Kells dive into the prospects and consequences facing these icons of capitalism in The Big Four: The Curious Past and Perilous Future of the Global Accounting Monopoly. Well written, peppery and smart, the book is a fascinating read.

Gow and Kells are industry professionals as well as academics, and their inside-outside perspective serves them well. They approach the subject with savvy expansiveness, first attending to the earliest emergence of accounting, galloping as far back as Mesopotamia. “As we look back with modern eyes, the line between early mathematics and magic appears strikingly fine,” they note.

It’s a wry, apt comment: Under scrutiny, the Big Four collectively represent a monolith hiding shady ethics and shaky ventures, and not hiding it too well. As the authors show, smoke and mirrors worked its way into the accounting profession despite the industry’s noble principles, and never really left.

Firms promised to guide their clients through a perilous terrain, and towards a noble goal. The four largest accounting and audit firms have profited spectacularly from widespread confidence in this idea,” the authors write, then pose some useful questions: “How well founded is that confidence? How fit are the big firms as trustworthy guides? And how stable is their position?

As an insider’s look at the secrets of these giant firms, the book is rich. The authors walk us through those glass and steel lobbies to reveal a cutthroat culture, a debauched and craven atmosphere, and a unique, even somewhat bizarre taxonomy delineating the ranks. Partners are put through a selection ringer that includes paid actors and real-time test scenarios, but often chosen as much for their swagger as their acumen. As the authors point out, Partners all tend to look alike: tan, long faces, and a combination of “preppiness, nerdiness and clubbability.”

Then there are Super Partners — who tapped into undiscovered territory and parlayed it into a gold mine for themselves and the firm. The heady profits render them invincible, prone to playing a lot of golf, and getting away with virtually anything. Sound familiar? And far, far beneath are legions of workers, toiling under a weighty and tedious bureaucracy. Not surprisingly, there are few people of color, women or LGBT in the ranks, despite recent discrimination lawsuits.

But what may take down the Big Four has nothing to do with golf. The authors track a number of near-death experiences for each firm, tracing the chain of bad decisions or corrupt motives that set them on such a disastrous course. Within the very complex process of accounting are endless decisions to be made, and with them, the potential for dangerous mistakes.

A firm may advise clients and then get caught up in a terrible deal; a company may throw all its weight behind an audit only to find out it wasn’t actually carried out by an auditor, and it’s too late. Accounting is as much about assumptions as magic. A fine but impenetrable scrim seems to stand between the firms and the clients, woven with threads of trust and blind faith. However, what may take these firms down is simply that they can’t keep up with the times.

So many companies depend on the Big Four that any shift in their status, from breaking them into smaller firms to shifting their focus to auditing only would have serious ripple effects — to businesses, the national and global economy, and the very way we live. But the forces at work that may bring down these titans regardless are of a more inevitable ilk. Younger firms who prefer a new kind of transparency (and not realizing the exposure they risk) and ambitious global initiatives, such as a push into China, that may be the firms’ undoing.

While Kells and Gow don’t have a crystal ball, they present a number of possible ways the story of the Big Four may end. As it turns out, it may not be that the Big Four are too big to fail. It may be that they’re already failing, and too big not to.

For more about Ian D. Gow and Stuart Kells visit their website

About Patricia Gale

Patricia Gale has written and ghostwritten hundreds of blogs and articles that have appeared on sites such as Psychology Today, Forbes, and Huffington Post, and in countless national newspapers and magazines. Her "beat" is health, business, career, self-help, parenting, and relationships.

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One comment

  1. It’s not only the public accounting firms. There are audits by government agencies like the IRS, General Accounting Office, auditors of the Federal Reserve Bank, auditors of the Securities Exchange Commission and auditors of the State and local governments.

    The most desired work product of an audit is an Unqualified or Clean opinion which states that the audit was conducted in accordance with Generally Accepted Accounting Standards, as well as, audit standards. Clients are not supposed to “shop around” for an accounting firm who will give them a clean opinion when the converse is the case. In fact, the regulatory apparatii of the accounting profession disallow opinion shopping or dealing with clients who lack integrity.

    There were a number of problems pertinent to the crash of ’08. Some of the most outstanding problems were an out-of-control derivatives market, as well as, bad loans in the Fannie Mae and Freddie Mac. In the current economy, there are burgeoning problems with a $1 trillion student debt crisis that could cause a Wall Street tailspin. That’s part of the reason many politicians are talking about free community college and indeed free college. The NYU Medical school is about to offer all students free tuition which is quite unheard of for a medical school.

    The good news is that derivatives are more carefully monitored by experts of the buyers and sellers. In addition, zero collateral loans are disappearing. Entities like the Financial Accounting Standards Board, the International Federation of Accountants, the Cost Accounting Standards Board and others are toughening standards to protect the public from a lack of transparency, waste, fraud and financial improprieties.

    Soon enough, President Trump may peg the dollar to gold at an arbitrary figure like $10K an ounce in order to provide a solid foundation for the dollar. This would be a reversal of what President Nixon did in the early 70s which was to toss the gold standard in essence.