Can the Big Four Save Themselves?
Have the accounting reforms arrived just in time to save the Big Four firms from extinction? In an opinion piece last week, New York Times writer Floyd Norris theorized that the demise of Arthur Andersen in the wake of Enron may not spell the beginning of the end for the four remaining large firms.
Norris said the accounting firms and the airline industry share a common struggle-never have their services been more in demand but never too has their survival been so challenged.
He believes the current problems facing the Big Four come from the industry-wide emphasis in the 1990s on growth over quality. “Partners were rewarded for bringing in more business and penalized for offending clients with tough audits. There was no effective regulator,” Norris wrote.
He cites the example of the Andersen partner who was put in charge of writing the firm's new document-retention policy after he was found to have shredded evidence involved with the fraud at Waste Management. He wasn't fired, but given new duties related to his misconduct. When Andersen partner David Duncan was later found to be shredding documents related to Enron (an act that in the end took down Andersen itself), he cited that same document-retention policy as justification.
But there are real signs that things are changing, beginning with the inception of the Public Company Accounting Oversight Board (PCAOB), created as part of the Sarbanes-Oxley Act of 2002. Other countries appear to be following the lead of the United States.
Norris wrote that the firms are getting tougher as well. ''We are turning down clients at an unprecedented rate,'' James H. Quigley, the chief of Deloitte & Touche's American operations, told the Times in an interview. ''We are very rigorous in terms of who we become associated with in this world of unlimited liability.''
There's not a politician out there who wants to risk the exposure of suggesting a cap on firm liability, an idea so unpopular that the British government recently rejected a call for a cap on damage awards in that country.
“If Big Four managements really appear to be determined to run quality firms, governments are not likely to bring criminal charges that will put them out of business, even if individual partners committed outrageous acts,” Norris wrote.