An accounting network or accounting association is a professional services network whose principal purpose is to provide members resources to assist the clients around the world and hence reduce the uncertainty by bringing together a greater number of resources to work on a problem. The networks and associations operate independently of the independent members. The largest accounting networks are known as the Big Four.
The Big Four
The Big Four are the four largest international professional services networks, offering audit, assurance, tax, consulting, advisory, actuarial, corporate finance, and legal services. They handle the vast majority of audits for publicly traded companies as well as many private companies, creating an oligopoly in auditing large companies. It is reported that the Big Four audit 99% of the companies in the FTSE 100, and 96% of the companies in the FTSE 250 Index, an index of the leading mid-cap listing companies. The Big Four firms are shown below, with their latest publicly available data. None of the Big Four firms is a single firm; rather, they are professional services networks. Each is a network of firms, owned and managed independently, which have entered into agreements with other member firms in the network to share a common name, brand and quality standards. Each network has established an entity to co-ordinate the activities of the network. In one case (KPMG), the co-ordinating entity is Swiss, and in three cases (Deloitte Touche Tohmatsu, PricewaterhouseCoopers and Ernst & Young) the co-ordinating entity is a UK limited company. Those entities do not themselves perform external professional services, and do not own or control the member firms. They are similar to law firm networks found in the legal profession. In many cases each member firm practises in a single country, and is structured to comply with the regulatory environment in that country. In 2007 KPMG announced a merger of four member firms (in the United Kingdom, Germany, Switzerland and Liechtenstein) to form a single firm. Ernst & Young also includes separate legal entities which manage three of its four areas: Americas, EMEIA (Europe, The Middle East, India and Africa), and Asia-Pacific. (Note: the Japan area does not have a separate area management entity). These firms coordinate services performed by local firms within their respective areas but do not perform services or hold ownership in the local entities. This group was once known as the "Big Eight", and was reduced to the "Big Six" and then "Big Five" by a series of mergers. The Big Five became the Big Four after the demise of Arthur Andersen in 2002, following its involvement in the Enron scandal.
|Firm||Revenues||Employees||Revenue per employee||Fiscal Year||Headquarters||Source|
|Ernst & Young||$29.6bn||230,800||$128,362||2016||United Kingdom|
History of accounting networks and associations
Accounting networks were created to meet a specific need. “The accounting profession in the U.S. was built upon a state-established monopoly for audits of financial statements.” Accounting networks arose out of the necessity for public American companies to have audited financial statements for the Securities Exchange Commission (SEC). For over 70 years, the SEC has continually sought for greater coordination and consistent quality in audits everywhere in the world. Networks were the logical model to address these requirements. They expanded outside of the United States since financial results had to be audited wherever a company conducted business. In the US, the Public Company Accounting Oversight Board's (PCAOB) regulations provide for inspection of non-United States firms. Without a network with common standards and internal means of communications, conducting the required audits would not be possible.
There were other profession-based factors which favored the growth of accounting networks. As a result of competition for the audit work, consolidation was inevitable. These include the fact that a network can establish a brand. A brand establishes the credibility of the network and allows the individual members to charge more. Creating a brand is very difficult when all of the members of a network are providing essentially the same services.
Being a network member establishes that the firm is part of a large group. Additionally, the larger the firm, the more likely it will be invited to render auditing engagements. A large organized network allows for spreading the costs to price competitively. Ultimately, size is the only real means of differentiation that is readily available on accounting firms to assure clients that they can do international work.
Networks also reflect the clients’ needs for seamless worldwide services because they are more efficient and cost-effective., From the perspective of the accounting firm, a global regulated organization with consistently applied standards significantly reduced the risk. However, increasing the size of the networks can enhance legal liability risks and quality control issues that have not been resolved.
With these factors in play, some networks continued to grow; others remained in a stasis position. Individual members of networks began to offer other services related to accounting. These services included forensic accounting, business appraisals, employee benefits planning, strategic planning, and almost anything associated with financial parts of the client’s business. The network’s structure easily accommodated these services and their geographical expansion.
As the Big Eight consolidated to become Big Six, the Big Five and then the Big Four, new networks naturally developed to emulate them. BDO and Grant Thornton were the earliest followers. Networks were then developed to serve mid-market companies and private businesses. New networks also sprang up as an extension of a single accounting firm in the same way the Big Eight were formed. New structures were created to further extend the networks.
The largest accounting networks adopted trade names that each member used. The names of the original firms that became part of the networks were lost and replaced with trade names. The perception was created that these networks were more than networks, but single entities rather than completely independent firms. This was never the case. The result was that the Big Eight concept was established which separated the eight firms from all other accounting firms.
Another factor in the development of networks in accounting was the American Institute of Certified Public Accountants (AICPA)’s prohibition of advertising. While the largest firms indirectly advertised their services, the small firms complied with the rules and believed advertising to be unprofessional. Additionally, midsize firms were de facto restricted from advertising simply because of limited budgets. They could not create a brand that was able to compete with the one established by the Big Eight. The advertising restriction was lifted in the 1970s by the Federal Trade Commission.
In the 1990s, the large accounting firms reached another ceiling in the services they made available to their clients. Having reached their natural limit on growth with more than 90% of auditing for public companies, the Big 6 branched out to become multidisciplinary in legal, technology, and employment services. Since the essential infrastructure was in place, it was thought to be relatively simple to incorporate other services into the existing network. As a network, it was natural to create independent entities in these other professions which themselves could be part of the network. The method and structures varied from firm to firm.
When the Big 6 began its expansion to the legal profession, it was met with fierce opposition from law firms and bar associations. Commissions, panels and committees were established by legal and accounting firms to argue their positions. Government agencies were enlisted. For more than five years the debate escalated. This movement ended abruptly with the fall of Arthur Andersen as a result of its association with Enron. Sarbanes Oxley followed, which effectively ended this trend. Some international associations of independent firms, such as Alliott Group, now include law firms within the membership.
Accounting networks are now facing a new challenge that go to the heart of the image that the firms wish to project to clients. The perception has been that the Big Four, Grant Thornton and BDO are single entities that perform services around the world for clients of this single entity. As a result of court cases this has introduced significant vicarious liability issues requiring the networks to distance themselves from the perception of being a single entity. The Parmalat case is the best illustration of the issues.
While the firms have lost a number of cases, the facts and circumstance, or procedural elements have reduced their actual liability.
Networks versus associations
The vicarious liability issues carry over into operations. Regulations in the EU have been imposed that require the “networks” to define whether they are "associations" of independent firm or are more integrated networks operationally and financially. Additional standards have been passed by IFAC, an independent associations of accountants, on distinguishing networks from associations. The objectives of each are to provide the clients a level of understanding about the degree of integration with each other. Examples of international associations of accounting firms include Alliott Group, Geneva Group International and Leading Edge Alliance.
Here is the list of top 10 global accounting associations, as published by the International Accounting Bulletin in February 2019:
Global Accountancy Associations Top 10
|2.||LEA Global/Leading Edge Alliance||3.31|
Conflicts of interest
Self-definition as a network or associations may determine if there is a conflict of interest. If the group is perceived as a network, it may be foreclosed from representation of clients because they cannot represent a competitor. Association members would not be foreclosed from representation because the firms are perceived as independent by clients.
Big 4 dominance of public company audits
Accounting scandals have again focused on the fact that the Big Four has a near monopoly on audits of public companies. Networks are demanding regulations on auditing to require that auditors rotate and include the smaller networks in this rotation. The demands also request that mid-market firms be able to participate to break up the monopoly of the Big Four.
List of accounting networks and associations
3E Accounting Abacus Worldwide Parker Russell International (formerly Parker Randall International) Andersen Global Alliott Group AGN International BKR International Baker Tilly BDO International (Binder Dijker Otte & Co) BOKS International Crowe Global Deloitte (Deloitte Haskins Sells/Deloitte, Haskins Sells, Touche Ross, Tohmatsu) DFK International Ernst & Young (Arthur Young, Ernst Whinney/Ernst Ernst, Whinney Smith Murray) Grant Thornton International Geneva Group International HLB International IECnet INAA Group INMACS Global
- JHI International
KPMG (Klynveld Main Goerdeler, Peat Marwick) Kreston Kudos MGI Worldwide Morison KSi Moore Global UHY International Nexia PKF International PrimeGlobal PwC (PricewaterhouseCoopers) (Coopers & Lybrand/Cooper Brothers, Lybrand Ross Brothers Montgomery, Price Waterhouse) Reanda International RSM International Russell Bedford International Santa Fe Associates International SMS Latinoamérica SGA World
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- "Legal statement". Ernst & Young.
- "Deloitte". Retrieved 2 August 2017.
- "PwC Global Annual Review 2016" (PDF). PwC.
- "EY Global Review 2016 - Facts & Figures". Ernst & Young.
- "International Annual Review 2016 KPMG" (PDF). KPMG. Archived from the original (PDF) on 2017-08-02. Retrieved 2017-08-02.
- Olson, W. E., “The Accounting Profession in the 20th Century”, The CPA Journal, (July 1999)
- For the history of accounting networks see: Stevens, The Big Six (1991); Zeff, S. A, “How the U.S. Accounting Profession Got Where jkui iujiui nit is today: Part 1” Accounting Horizons Volume 17, 189–205 (September 2003). Zeff, S. A, “How the U.S. Accounting Profession Got Where it is today: Part II” Accounting Horizons (September 2003)
- Baskerville, Hat, Globalization of professional accounting: The Big 8 entering New Zealand (June 2007) citing Greenwood, Cooper, Hinings, and Brown, “Biggest is best? Strategic assumptions and actions in the Canadian audit industry” Revue Canadienne des Sciences de l’Administration 10(4) 308–322 (1993)
- Freidheim, Cyrus, The Trillion Dollar Corporation (1999)
- Aharoni “Internationalization of Professional Services: Implications for the Accounting Profession” in Brock, Powell and Hindings, Restructuring the Professional Organization (1999).
- American Inst. of Certified Public Accountants, 113 F.T.C. 698 (1990)
- "The top 50 accountancy firms 2019".
- Networks Survey: global risk, Accountancy Age Smith, Phil November, 2008 Code of Ethics 290 revised the determination. It should be “made in light of whether a reasonable and informed third party would be likely to conclude that a network exists. A referral network is not a network by this definition. The shared costs must be significant. Common quality system and business strategies are important considerations.”
- OECD Report: Conflicts of Interest in Accounting and Auditing
- Karen Kroll, Get This: Accounting Firms are backing more regulation, CFO World Newsletter February 15, 2011
- Plans Grow for European Audit Cop, Wall Street Journal October 12, 2010
- Accounting News: 3E Accounting International network reaches 60 member milestone