The impact of the Big Four on the auditing profession

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Audit is an evaluation of a person, organisation, system, process, enterprise, project or product (Graham W. et al., 2009). It plays a significant role in the accountancy market.

Key Note reports that the global accountancy market is dominated by the Big Four global accountancy firms (see Appendix 1). They audit all the top 100 public companies as well as the majority of the top 350 companies. However, nowadays, a controversy over the roles of the Big Four accounting firms has been encouraged because the emergence of numerous audit failure cases in the past few years.

Therefore, this report is based on the debated issues and aiming to concern the auditing profession through analyse the following questions:

Task A: the impact of the Big Four on the auditing profession.

Task B: the ethical issues concerning a Big Four firm tendering for the audit of a large FTSE 100 company, who is the direct competitor of another FTSE 100 company already audited by the firm.

Task C: the concept of 'true and fair', and how relevant and useful it is to the stakeholders of a business.

Task A

A number of recent developments have raised concerns about the state of competition and choice in the audit market, particularly in relation to the highly concentrated market structure, with the Big Four audit firms being by far the largest auditors around the world. Therefore, the impact of the Big Four on the auditing profession as follows.


Standardized Process

Standardization of business processes helps to improve personnel efficiency and performance and is aided by the information intensive nature of the process. The emphasis on similar organisation set up and team structures facilitates rapid permeation of process standardization throughout the company.

People expertise

Because the Big Four's only product is the output of its employees, it can provide more training and give better exposure to their staff.

A larger office has more collective human capital. Auditors working in a large office have greater exposure to different clients, and therefore have more collective experience which enables them to provide higher quality audits (Carcello et al., 1992).

A larger office has a bigger client base, which gives auditors more opportunities to interact with different clients (DeAngelo, 1981). Auditors working in a larger office also have more peers to consult with and hence have a better local support network.

Auditor turnover results in the loss of auditor expertise and knowledge, and especially the specific knowledge built between an auditor and a client. Large firms are more likely to have multiple clients in the same industry (Satava, 2003). If turnover affects one engagement teams working in the same industry.

So the Big Four can help the audit market to train professional auditors.

Provide Professional audit to firms

Previous research has shown than the Big Four have lower litigation rates; they report more conservatively; and have clients that are not likely to have abnormal accruals.

Engaging a big audit firm, which has the reputation for supplying a higher quality audit that enhances the credibility of the financial statements, enables firms to reduce their financial costs (Pittman and Fortin, 2004) (see Appendix 2 ).

Pool of resources

The Big Four have access to a varied pool of resources which gives it the ability to compile comprehensive reports as a part of its connected thinking approach. The companies also have own publications compiled by the professionals. The employees who are professionals with a compounding experience add value to the already existing pool of resources of the companies.

Credibility as a criterion

The clients who avail the assurance services or audit services from the company gain the reputation as the attestation of the company has high credibility. The high credibility also increases the loan availability of the client. This is a great advantage to the clients in obtaining project finance.


1. Other auditing companies are in high barriers to Entry

Because of the sheer size of most large listed companies, and the current gap in size between the second tiers of audit firms, there is a high barrier to entry into the market for auditing these largest companies.

A lack of resources to audit the largest companies;

Investment is particularly risky due to the high costs of scaling up to meet the resource requirements of auditing the largest organizations.

If barriers to entry remain high, at the current level, and investment into new or other firms, into this market remains risky, there will be little competition to rival the Big Four's dominance ( see Appendix 3 ).

2. Customers are lack of choice.

For the very largest UK companies there is a real lack of choice of audit provider, especially in financial services. Because of the regulations surrounding audit and non-audit work for the same client and also auditing of close competitors, some have no realistic choice of alternative auditor in the short term future.

The biggest impactor on choice of auditor is the auditor independence rules, and combined with having just the Big Four results in a severe restriction on companies. We found that this lack of choice has resulted in higher prices, and that due to the lack of alternatives these higher prices are able to stick and there is a lack of downward pressure on audit prices.

3. Customers have the negative perceptions.

The Oxera report (2006) notes that reputation is a significant driver in the choice of auditor, "favouring the Big Four, whether this is based on real or perceived differences between the Big Four and mid-tier firms." Oxera also found that very few (<10%) large companies would even consider using a mid-tier firm, although a majority of those surveyed believed they were technically capable.

So from the Oxera report we can deduce that the audit committees of the UK's largest companies are choosing audit firms not necessarily on price and capability, but also significantly based on the reputations of the audit firms amongst investors (institutional and private) and the general public.

4. People pay more attention on the big four's mistakes

As long as the big four plays a significant role in the auditing market, customers enlarge the big four's fault events that have a negative influence on the auditing market.

The fundamental problem that the big accounting firm downplayed and attempted to cover-up, was the issue of maintaining independence from client audit engagements in 'fact and appearance' (Zeff, 2003 a, b). This lack of independence should have been their real concern.

To sum up, the Big Four have both positive and negative impact on the auditing profession, just like every coin has two sides. However, many surveys (see Appendix 4) indicated the Big Four play a positive role in the professional development.

Task B

Houghton and Jubb (2005) suggested that auditors are often exposed to the potential threats to independence during the audit engagement. An individual's interpretation of ethical behaviour is influenced by a variety of factors including industry and company guidelines, social and economic pressures, laws and regulations, and the surrounding values and beliefs. These influences develop a set of written and unwritten principles which are drawn on when faced with an ethical dilemma (Zhang Xuemei et al., 2009).

So about a Big Four firm tendering for the audit of a large FTSE 100 company, who is the direct competitor of another FTSE 100 company already audited by this Big Four firm, the auditors must balance their duty to their clients, their profession, society and numerous other stakeholders. Arguably the underlying principle of the auditing profession's ethics is independence.

1. Independence

Independence is fundamental to the reliability of auditors' reports. Those reports would not be credible, and investors and creditors would have little confidence in them, if auditors were not independent in both fact and appearance. To be credible, an auditor's opinion must be based on an objective and disinterested assessment of whether the financial statements are presented fairly in conformity with generally accepted accounting principles. Auditors shall conduct the audit of the financial statements of an entity with integrity, objectivity and independence.

Integrity is a prerequisite for all those who act in the public interest.

It is essential that auditors act, and are seen to act, with integrity, which requires not only honesty but a broad range of related qualities such as fairness, intellectual honesty and confidentiality.

It is important that the directors and management of an audited entity can rely on the auditor to treat the information obtained during an audit as confidential, unless they have authorised its disclosure or unless it is already known to third parties. Without this, there is a danger that the directors and management will fail to disclose such information to the auditor and that the effectiveness of the audit will thereby be impaired.

Objectivity requires the auditor's judgment is not affected by conflicts of interest.

Like integrity, objectivity is a fundamental ethical principle. Objectivity is a state of mind that excludes bias, prejudice and compromise and that gives fair and impartial consideration to all matters that are relevant to the task in hand.

The need for auditors to be objective arises from the fact that many of the important issues involved in the preparation of financial statements do not relate to questions of fact but rather to questions of judgment.

The need for independence arises.

Independence is related to and underpins objectivity. However, whereas objectivity is a personal behavioural characteristic concerning the auditor's state of mind, independence relates to the circumstances surrounding the audit, including the financial, employment, business and personal relationships between the auditor and the audited entity.

The need for independence arises because, in most cases, users of the financial statements and other third parties do not have all the information necessary for judging whether the auditor is, in fact, objective. Although the auditor may be satisfied that its objectivity is not impaired by a particular situation, a third party may reach a different conclusion.

2. Confidentiality

Confidentiality is also an important ethical issue in auditing.

A professional auditor should respect the confidentiality of information acquired as a result of professional and business relationships and should not disclose any such information to third parties without proper and specific authority unless there is a legal or professional right or duty to disclose. Confidential information acquired as a result of professional and business relationships should not be used for personal advantage of the professional accountant or third parties (Graham W. et al., 2009).

The audit will be conducted in a way that is in accordance with the law.

It has to be taken care during the audit that no sensitive and/or technical information is given to the auditors if the latter are working for a competing company. The auditor reserves the right to refuse to disclose requested confidential information (the European Competition Law).

3. The evolution of specialty skills and non-audit services

Today, effective audits depend more than ever on specialists.

For example, specialists used in audits include:

Technology and systems specialists

Actuaries, to help evaluate risk management controls

Treasury specialists, to help evaluate controls over cash management, financing, currency and derivatives

Tax specialists

Valuation specialists, to help evaluate the reasonableness of valuations of financial instruments, stock issued for assets or services

Providing services beyond the audit was profitable, it also led to increased overall knowledge of the client's business.

The potential effect of non-audit services on auditor objectivity has long been an area of concern. That concern has been compounded in recent years by significant increases in the scope and amounts of non-audit services provided by audit firms.

The evolution of specialty skills into consulting practices was a logical extension of services as firms began hiring specialists for audit support. Expanding the scope of the specialists' activities helped firms attract and retain people with skills that were increasingly important to effective auditing.

Task C

D. R. Scott (1941) stresses enough the need for ture and fair in accounting and auditing. He points the first is all stakeholders should be treated equally in accounting procedures.

The concept of 'true and fair view' (TFV)

It is well know to accountants as well as auditors. It has been the fundamental basis of audited accounts for many years. The acceptable concept of TFV remained a cornerstone of financial reporting and auditing that there had been 'no substantive change in the objectives of an audit and the nature of auditors' responsibilities'; and that the need for professional judgement' remained central to the work of preparers of accounts and auditors (Answers. com).

The 'true' is that accounting information should reflect the true facts and the current status of business.

The 'fair' refers to the accounting information should be impartial presentation of the process and results of economic activities to avoid any bias or in selective disclosure of accounting information.

True and fair view are two closely linked but differentiated concept, the 'true' put emphasis on the inherent pursuit of accounting information; the 'fair' stresses the external social effects of accounting information.

'True and fair' is relevent to the stakeholder of a business

Lasward (1998) conducted research on TFV, he supports that the auditors should have involved the stakeholders rather than just targeting the people involved in the preparation of financial statements. TFV has, according to Flint (1982), a conceptual quality of great merit because it recognises the cultural dependence of accounting and financial reporting, and the fact of its evolving contiously to meet the needs and expextations of the changing social and economic environment.

Owners and managers require financial statements to make important business decisions that affect its continued operations. These statements are also used as part of management's annual report to the stockholders. What is perceived to be a TFV is, Flint (1982) argues, ultimately a matter of ethics or morality. In some indefinable way, choices between alternative accounting procedures are made by managers, verified by auditors and accepted by shareholders on the basis of consensus as to what is fair (Nobes and Parker 1991).

Employees also need these reports in making collective bargaining agreements (CBA) with the management, in the case of labour unions or for individuals in discussing their compensation, promotion and rankings.

Financial analyses are often used by investors and are prepared by professionals (financial analysts), thus providing them with the basis for making investment decisions. Equilibrium condition is prevailing and the prices are fair. Thinking along the lines of equilibrium, true and fair in an entity's external financial reporting refers to the entity's intrinsic value.

Financial institutions (bank and other lending companies) use them to decide whether to grant a company with fresh working capital or extend debt securities (such as a long-term bank loan or debentures) to finance expansion and other significant expenditures.

Government entities need financial statements to ascertain the propriety and accuracy of taxes and other duties declared and paid by a company.

Vendors who extend credit to a business require financial statements to assess the creditwothiness of the business. Watts and Zimmerman (1986) link market efficiency and explore that reporting according to TFV should be perceived as a continuous dynamic strive rather than as a static state at any given moment.

'True and fair' is useful to the stakeholder of a business

It plays a key role in support of enhancing the professional status of accountants and auditors because it could constraint their professional.

TFV concept is higher than the legal requirements of accounting standards, it is an ethical conduct in compliance with accounting standards, and i.e. it is an important professional standard.

Promotes efficiency and maximizes the value of the firm

According to Forker and Greenwood (1995), the actions of the Accounting

Standards Committee have been consistent with a view of flexibility under TFV, which promotes efficiency and maximizes the value of the firm.

An important safeguard against the presentation of an unfair view

According to Forker and Greenwood (1995), the TFV override provides an important safeguard against the presentation of an unfair view which can be insisted on by auditors to ensure comparability.


In conclusion, the Big Four are creating an oligopoly over the auditing industry, but it pushes ahead with the development of auditing profession.

The primary objective of an audit of the financial statements is for the auditor to provide independent assurance to the shareholders that the directors have prepared the financial statements properly. In another word, the goal of an audit is to express an opinion on the person, organisation, system, etc. in question, under evaluation based on work done on a test basis. The auditor issues a report that includes an opinion as to whether or not the financial statements give a true and fair view.

Public confidence in the operation of the capital markets and in the conduct of public interest entities depends, in part, upon the credibility of the opinions and reports issued by the auditors in connection with the audit of the financial statements. Such credibility depends on beliefs concerning the integrity, objectivity and independence of the auditor and the quality of audit work performed.