Finally, the Public Company Accounting Oversight Board is starting to probe the disturbing return to consulting by the Big Four accounting firms. Just 11 years after the enactment of the Sarbanes-Oxley Act of 2002, the remaining major four accounting firms are fully committed to rebuilding their consulting practices.

It is the logical outcome of the unhealthy oligopoly that exists in the accounting profession today. The same pressures to increase revenue and profitability that led to the poor judgment of auditors at Arthur Andersen are now driving the strategic planning of the Big Four executive leadership.

Let's briefly review the current state of the accounting industry. The Big Four accounting firms reported over $36.5 billion in fee revenue. The combined revenue of all of the remaining 96 accounting firms equals just $12.8 billion. This is a classic example of an oligopoly. The Big Four dominate the accounting industry and pay only lip service to the most basic tenets of independence promulgated by Section 103 of Sarbanes-Oxley.

In his recent speech to the American Institute of CPAs' Conference on SEC Developments, the chairman of the Public Company Accounting Oversight Board, James Doty, suggested that investors and the public are questioning the relevance of the audit ("Doty: Some question the relevance of audits," January 2014, page 21). He then goes on to describe various ideas that will provide additional comfort to investors, such as naming the individual partner who signs the audit opinion. Who cares? Perhaps the better question is whether the PCAOB is relevant. Doty and his cohorts are lost in the minutiae, trying to devise tests and standards that will provide evidence that they are good watchdogs. Instead, they ignore the obvious. There can be no independence when 99 percent of assets of SEC-listed companies are audited by just four firms!

The massive rebuilding of their consulting services has led to the inability of most Fortune 500 companies to change auditors. These companies invariably hire one of the Big Four for audit services and at least one or more of the other three firms for consulting services. There cannot be any change of auditors because there is only one other qualified, independent firm.

PwC, through its recent agreement to acquire Booz & Co., is an egregious example of their absolute disdain for the independence rules. They are now providing the highest level of strategy consulting to Fortune 500 companies. How can you offer strategy consulting to companies that you audit, or may audit? Who among the other three firms will step up to buy Bain, or McKinsey? Certainly, Ernst & Young, Deloitte and KPMG will not stay far behind.

It is time for the PCAOB to take bold action. It is not time to hold hearings to elicit self-serving responses from the Big Four. Do we really need to hold a hearing to determine the obvious independence issues? If the PCAOB cannot step up to the challenge, perhaps the Justice Department can. It is time to break up the oligopoly of the Big Four. There can be no serious defense of the status quo.

Must we wait for another Enron event to occur?

James J. Smart

CEO, Smart, Devine & Co.


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