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The 'Big Four': are their liabilities greater than their assets?

Paul Dowling discusses the dominance of the 'Big 4' accountancy firms and whether their role within powerful companies is healthy or should more be done to prevent abuse within the global corporate culture.

Posted on 03 December 2018

Over the course of the last year the activities of the ‘Big Four’ group of accounting firms, which includes Ernst & Young, PriceWaterhouseCoopers, Deloitte and KPMG, have been brought under the spotlight.

One example of this is the case brought by Leigh Day client Mr Amjad Rihan, who issued a legal claim in the High Court against various entities in the Ernst & Young group (EY) in December 2017. Mr Rihan alleges that EY pursued an unlawful, unprofessional and unethical approach to an engagement with a Dubai gold refiner in 2013, and forced him out of the firm after he raised concerns about the matter. EY denies liability.

In January 2018, construction giant Carillion went into liquidation with liabilities of nearly £7 billion and just £29 million in cash. In addition to the thousands of job losses that were triggered by the collapse, Carillion had pension liabilities of around £2.6 billion leaving its employees with the prospect of receiving reduced pensions. At the time of its liquidation Carillion also owed around £2 billion to its 30,000 suppliers, sub-contractors and other short term creditors, who are likely to receive little from the liquidation pot .

Carillion’s catastrophic demise belies the rosy picture that was presented in its 2016 accounts, which were published on 1 March 2017. On the back of those figures Carillion paid a record dividend of £79 million to its shareholders and large bonuses to its senior executives, only six months before the company went into liquidation .

The plight of Carillion has given rise to public scrutiny of a corporate culture which has permitted a public company of considerable magnitude to quietly implode. In May 2018, the Business, Energy and Industrial Strategy and Work and Pensions Committees issued a damning joint report on Carillion, describing its rise and fall as “a story of recklessness, hubris and greed”. In particular, the Committee pointed to a “rotten corporate culture” that permitted the entrenchment of longstanding problems, which ultimately led to Carillion’s downfall.

Whilst the Joint Committee attributed responsibility for Carillion’s failure to its senior executives, it also singled out for criticism the ‘Big Four’ auditing firms, who all provided auditing or other professional services to Carillion ahead of the collapse. The Joint Committee accused KPMG, Carillion’s auditor of 19 years, of “failing to exercise professional scepticism” and consequent complicity in accounts which had been “systematically manipulated to make optimistic assessments of revenue”. Meanwhile Carillion’s internal auditor, Ernst & Young, was said to have “failed in its risk management and financial controls role”.

Meanwhile PriceWaterhouseCoopers was this year fined a record £6.5m and a senior partner fined £325,000 for their role as auditors of BHS, which went into administration in late 2016 . PwC signed off BHS as a “going concern” in its 2014 accounts, just days before the sale of the company for just £1. A report by the Executive Counsel to the Financial Reporting Council on the failure of BHS dated 10 August 2018 notes that PwC “failed to guard against the self-interest threat created by the substantial fees they generated in providing non audit services to the Taveta Group”.

These major corporate collapses have placed the spotlight on the dominance of the Big Four in the management of the affairs of large corporations. In particular, this small number of powerful firms are afforded the crucial role of providing an independent critical assessment of the figures on which the capitalist economy relies, whilst at the same time providing a range of consultancy and other services to the very same companies whose accounts they are required to dispassionately assess. This gives rise to a potential for conflict of interest.

A troubling consequence of this skewed corporate culture is that dissenting voices and whistleblowers are liable to be ignored or side-lined. In its report on Carillion, the Joint Committee noted that Carillion’s brokers, Morgan Stanley, were marginalised by the Carillion board after Morgan Stanley told Carillion that the opportunity to raise equity to keep the company afloat had passed.

Leigh Day client and former Ernst & Young partner, Mr Amjad Rihan, claims to have been a victim of a corporate culture that persecutes whistleblowers and panders to commercial interests at the expense of independence and objectivity.

Mr Rihan claims that he was forced out of EY after he raised concerns about serious issues uncovered during a conflict minerals ‘reasonable assurance’ engagement with a Dubai gold refiner, Kaloti Jewellery International DMCC. The findings included the importing of 4-5 tons of gold bars from Morocco which were coated with silver to evade export restrictions.

EY denies any liability. It contends that the claim is time barred under Emerati law, that it did not owe the alleged duties of care to the Claimant, and that it acted responsibly, ethically and lawfully in dealing with the Claimant’s concerns about the audit findings.

Mr Rihan’s case illustrates the international reach of the Big Four and how their activities can have profound implications at a global level. It also helpfully demonstrates how the roles of the Big Four as financial auditors and reasonable assurance providers across whole industry sectors have the potential to create conflicts of interest.

Mr Rihan claims that EY was concerned about a conflict between the findings of the Kaloti engagement and a previous conflict minerals engagement on a Swiss gold refiner, PAMP. PAMP had been given a clean bill of health by EY, an opinion which, according to Mr Rihan, EY later realised may be flawed because it had been issued by EY’s tax team which had insufficient expertise and knowledge of conflict minerals.

Meanwhile Mr Rihan claims that EY was also concerned about potential conflicts with its previous financial audits of Kaloti. Such circumstances have the capacity to generate considerable tension between EY’s commercial interests and its duties of independence and objectivity in its various roles with its clients.

So, what can be done to address these fundamental deficiencies in the operation of the Big Four? The Joint Committee report on Carillion proposes a range of potential policy options, including:

  • more regular rotation of auditors and competitive tendering for audit contracts;
  • breaking up the audit arms of the Big Four to create more firms and increase the chances of others being able to enter the market;
  • splitting audit functions from non-audit services, reducing both the likelihood of associated conflicts of interest and the potential for cross-subsidisation.

Elsewhere there have been calls for more radical reform, including nationalisation of the statutory audit industry on the grounds that it is a public service which is ill-suited to companies motivated by profit.

The fact that this longstanding problem persists suggests that there is no easy solution. In a global marketplace, any significant regulatory intervention in the UK audit market is likely face criticism for hampering the UK’s international competitiveness.

Nevertheless, the Carillion Joint Committee report demonstrates that there is significant cross-party support for serious reform, and that this could be a watershed moment for an industry which, in the words of the Joint Committee, “is a cosy club incapable of providing the degree of independent challenge needed”.


Paul Dowling November 2021
Corporate accountability Corruption Human rights international Whistleblowing

Paul Dowling

Paul is a specialist international human rights lawyer