The sign of (the big) four

Mick James looks at the past – and perhaps the future – of the big consulting practices

Recent corporate scandals have provoked another bout of unease with the oligopolistic audit market, and prompted calls for the audit arms to be, once again separated from their lucrative counterparts in tax and consulting.

But as we ponder the potential demise of the Big Four it’s worth reflecting that the term “Big Four Consulting” has quite a chequered history in the industry.  Just as the Holy Roman Empire had a dubious claim to be any of those things, so the “Big Four” have at times been neither big, nor consultants, nor quadruple.

There was, a long time ago, an easily identifiable “Big Four”, at least in the UK, when the “Big Four” of AIC, P-E International, PA Consulting and Urwick Orr dominated consulting this side of the Atlantic.  There was even a period in the 1970s when PA could lay claim to be the largest consultancy in the world

Expanding the initials of these firms —“associated industrial consultants”, “production engineering” and “personnel  administration” –shows how far from the world of accountancy they were positioned.  Yet by 1984 Urwick Orr had been acquired by Price Waterhouse, at that time one of a Big Eight of accountancy firms all making rapid inroads into consultancy.

That Eight became Six in 1989 with mergers giving us Ernst & Young (now EY) and Deloitte & Touche (now Deloitte. Nine years later Price Waterhouse and Coopers & Lybrand became PwC, but a proposed merger between Ernst & Young and KPMG came to nothing, so with Arthur Andersen we now had a Big Five.

Or did we? Arthur Andersen had earlier separated its consultants into Andersen Consulting, either an autonomous “sister” firm or a wholly-owned subsidiary (depending which of them you asked).

So in consulting terms the “Big Five” were today’s Big Four plus Andersen Consulting.  To complicate things even further, Arthur Andersen then launched its own Business Consulting arm.

Although technically “Big” this fast-growing practice never got very big at all before it was swept away along with the rest of Arthur Andersen by the Enron affair in 2002. The consultants either got other jobs or formed their own start-ups.   By sheer good luck Andersen Consulting had already completed its separation a year earlier to become Accenture, but the fallout prompted the surviving Big Four to get rid of their consulting arms

These had by now become very big on the back of the rapid expansion of IT consulting, which led PwC to become for a while the largest employer of SAP consultants in the world.

PwC at first attempted to spin-out this entity Monday (which might have gone better had they registered IntroducingMonday.co.uk before they were cybersquatted).  In the event a purchaser was found in IBM, while Ernst & Young’s consultancy became part of CapGemini.  KPMG illustrated the fissile nature of these allegedly global partnerships by becoming BearingPoint in the US but selling to Atos in the UK and the Netherlands.  Deloitte found itself in the happy position of the man who was in the pub toilets when the fight broke out.  Despite having reached the stationery-printing stage of a rebrand as Braxton, the consultants realised that the heat had died down and stayed where they were.

So now we had a Big Four accounting firms, of which only one had a consulting arm, and a variable cast of successor entities to the Big Five consultancies depending on which country you were in.

Ironically, it was at this very moment that the idea of “Big Four consulting” began to emerge in its modern form.  Needless to say the term is rarely, if ever used by the Big Four themselves but it has become a parasite brand, used mainly by Big Four alumni setting up on their own. This is either positive (“we offer Big Four Consulting at boutique prices”) or negative (“we wanted to get away from Big Four consulting”).

What we might (and I did) call the “Big N” period came to a close as the remaining Big Four firms inexorably regrew their consulting arms to become the forces we know today.

But it’s anything but business as usual.  Where once consultants were considered the somewhat raffish junior partners they are now in the driving seat, at least financially, not only are auditors no longer a source of consultancy clients, but they put some of the biggest companies in the world off limits while being a source of considerable reputational risk.

Since the banking crash the Big Four as auditors have attracted substantial and mounting criticism. Last year (2017) saw a series of record fines, topped by PwC’s eye-watering £5.1m penalty for its audit of RSM Tenon.

More recently the financial meltdown of Carillion has prompted the feeling that all these firms should be punished somehow, and given the impossibility of imposing a global break-up, at least suffer the ignominy of having their consultancy arms lopped off (again).

The issue has become political: while the FRC investigates Carillion’s auditors Labour’s John McDonnell has already promised “no more Carillions under Labour’s watch” and set up its own review of the sector under Professor Prem Sikka, who recently tweeted:

“Corruption is institutionalized within big accountancy firms but the firms are permitted to audit the world’s largest companies, advise govt departments, run PFI schemes and write tax laws”.

While we await the outcome of this impartial process, and indeed the next election, it’s worth pondering what would happen if the Big Four did allow Her Majesty’s Opposition to dictate their futures.

The Big Four’s consultants could not easily be sold off—PwC ‘s consultancy (“advisory”) practice is now about as big as Accenture, McKinsey and IBM put together.  It’s idle to speculate on the value of such entities but the Big Four’s combined revenues surpass the total value of IPOS in technology and financial services in 2017.

Despite all the bad publicity it’s not inconceivable that these firms would opt to retain the equity in the Big Four brands for tax and advisory work and instead dispose of the audit function.

Again this has been considered before. In the 1990s EY had a well-developed plan to spin off the audit arms into a low-cost, commoditised venture based on the recruitment of school leavers into a very flat pyramid. This could be greatly facilitated by the growth of apprenticeships and the desire of many would-be young professionals to start working and avoid a massive student debt.

How this would improve the quality of audit is debatable.  Arguably the separation of audit and advisory work has prevented the Big Four from offering more substantive support to troubled clients.  Whether that is an issue for the consultants is debatable.  Despite losing ground repeatedly to accountants, no consultancy firms have ever shown the least interest in entering the audit market.  And it is highly unlikely is that such diminished audit entities could ever again regain any sort of consultancy presence

So in future “Big Four” might again refer unequivocally to consultancies, and future historians will write articles along the lines of Once Were Accountants: the forgotten origins of the consultancy industry.

 

 

 

 

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