Have the Big Four lost their advantage?

The Big Four, and previously, the Big Eight, have always stood apart from other accounting firms of all sizes in the United States, in terms of size, reach and resources. This is still true today, but now more than ever, large national and regional firms are catching up in terms of technology adoption and deployment, especially in audit, new research has found.

A recent paper, titled “Information Technology in an Audit Context: Have the Big 4 Lost Their Advantage?” and published in the Journal of Information Systems, found that Big Four auditors are today not significantly more likely to use information technology than non-Big Four auditors, suggesting that the dominance of the Big Four firms' use of IT has lessened. In fact there are a few information technology applications where non-Big Four auditors appear to have taken the lead. In sum, “there are some indications that non-Big 4 firms are beginning to close the gap between their IT capabilities and those of the Big 4 firms, creating a more level playing field,” the researchers said in the paper.

While national and regional firms may be closing the gap, local firms are not, one of the researchers, James Bierstaker, Ph.D., of Villanova University, told Accounting Today. But local firms may not be as concerned, he added, because they may not be performing audits, and certainly not public company audits.

“The new concern is that the analytics investment on the part of the Big Four is enormous,” Bierstaker said. “Will smaller firms be able to complete with the Big Four’s new capacity they are generating?”

For instance, Bierstaker said, the Public Company Accounting Oversight Board is considering developing an analytics auditing standard. But if it does, he mused that small firms may just “bow out” of audit completely because they simply can’t afford big data analytics like the Big Four.

“I think firms are dying for PCAOB to create this standard,” Bierstaker said. “In consulting and tax, analytics have taken off like crazy; but in auditing they’re waiting for guidance. They’re chomping at the bit. But an unintended consequence could be that smaller firms decide not to participate if the standards are too complex. I recall one study that said when SOX was passed, 600 small firms decided not to register with PCAOB.”

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There are already some analytics products on the market that are broadly changing the audit landscape by using artificial intelligence. AI is now robust enough that it is having a meaningful impact on how audits are performed — for instance, observing and analyzing every data piece instead of just sampling data is rapidly becoming table stakes for audit. Based on this reality, the American Institute of CPAs recently announced an initiative to “develop a transformational auditing methodology supported by a state-of-the-art technology platform,” and the effort has been dubbed the Dynamic Audit Solution. This year also saw several accounting software providers, presumably seeing the writing on the wall from AI developers and associations like the AICPA, announce their own initiatives to develop intelligent and radically new audit solutions.

Bierstaker’s fear is that while expensive software may not be an issue for the larger, national firms, it may price smaller, local firms out of this new audit world. Although software has become more affordable for small audit firms, Bierstaker said, they may struggle to keep up with the investments in audit analytics that larger firms are making. However, mainstay software companies like Intuit, Sage Intacct and Xero, whose software is used by many firms, small and large, may keep those smaller firms in the game for longer than Bierstaker foresees.

Editor's note: An earlier version of this article stated that the researchers were all from Villanova Business School. In fact, the four researchers were from Arizona State University, Iowa State University, Virginia Polytechnic Institute and State University as well as Villanova.

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