The impunity of the Big Four auditors

By Felix Salmon
October 28, 2011
Agnes Crane makes a strong case that they are, in the wake of a very tough report from the Public Company Accounting Oversight Board about Deloitte.

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Are the big four auditors too big to fail? Agnes Crane makes a strong case that they are, in the wake of a very tough report from the Public Company Accounting Oversight Board about Deloitte. The problem is that the PCAOB has no real teeth: with the number of auditors already far too low, at four, no one can afford a potentially-fatal attack on any of them. And that gives each of the Big Four effective impunity when it comes to mistakes and lack of professionalism.

Not to mention the fact that the PCAOB itself is horribly conflicted, as Jon Weil has discovered:

Three of its five board members had recused themselves from participating in meetings or discussions this year concerning Deloitte, because of past or current ties to the firm…

You have to wonder how good a job this board can do when a majority of its members can’t make decisions about one of the largest firms it oversees. No agency’s ties to the industry it regulates should run this deep.

Weil also points out that the PCAOB hasn’t even attempted to explain why it took 41 months to disclose its Deloitte evaluation; he might have added that we have no idea how many other, similar evaluations might be in the works.

I’m reminded of Jed Rakoff’s pointed questions for the SEC: what’s the point of regulating a company if you have no way of enforcing those regulations?

The dynamics at both the PCAOB and the Big Four are horrible. The incentive at the Big Four is to keep prices down to the point at which it’s impossible for a new entrant to break into their charmed group; after all, if it means they end up cutting corners, the worst that happens is that they get gummed by the toothless PCAOB. Even if they get broken up so that their consulting arms are spun off from their auditing arms, that still leaves only four auditors for most of the world of big business.

Is there a way of fixing this mess? Not an obvious one. Agnes says that “the only way to increase competition in the industry is for the incumbents to break into pieces”. But they’ll never do that voluntarily. And it’s very hard to see who’s going to force them.

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