Near the end of the twentieth century, the ‘Big Five’ accounting firms attempted to expand their operations to compete in the legal industry. However, this was disrupted by the collapse of energy firm Enron in 2001. The firm covered up its losses using mark-to-market accounting i.e., valuing assets based on predictions of future prices rather than historical ones. It was found that the company overstated its profits by $591 million between 1997-2000. After being declared bankrupt, its auditor Arthur Andersen was found guilty of destroying documents that were of relevance to regulators. The firm had to void its auditing licence, reducing the ‘Big Five’ to the ‘Big Four.’ Importantly, legislation such as the Sarbanes-Oxley Act of 2002 introduced strict controls over what services these auditors could provide. This dramatically scaled back their legal ambitions.
A turning point occurred in 2007. The Legal Services Act was passed in England and Wales. One of its main aims was to allow for greater competition within the industry and more choice for consumers. This led to the creation of alternative business structures (ABSs), enabling large companies outside of law to enter the legal market and provide legal services. The first ‘Big Four’ accounting firm to acquire an ABS licence was PwC in 2014, allowing it to develop its PwC legal department. EY and KPMG followed suit later that year. Deloitte acquired an ABS licence in 2018.
The ’Big Four’ reap the benefits of enormous revenues. Indeed, in 2020 these firms had a greater global revenue than the largest 200 global law firms combined. Their total revenue reached $167.3bn in 2021, a 7% rise on 2020. This has allowed for substantial technological investment. KPMG announced that it would make a $5 billion investment in technology between 2019-2024. It also announced a partnership program with Microsoft to develop cloud technology to underpin its specialist products. This enables the firm to offer its clients optimised cloud-based solutions. This meets clients’ growing demands for efficient solutions to their problems. In 2016, Deloitte worked with law firm Allen & Overy to produce auto-drafting technology, enabling large-scale repapering of derivatives contracts. This exemplifies the approach clients now demand.
The ‘Big Four’ also have an enviable client base. Their clients include 97% of the FTSE 350 companies; as a result, they are already acting for the clients that law firms are fighting over. In addition, the ‘Big Four’ have a presence in 80 legal markets around the world, while the top ten law firms are only represented in 31. The accounting firms are able to provide a ‘one stop shop’ for these firms and their issues, creating a significant appeal.
However, despite their recent exponential growth, a significant threat looms over the ‘Big Four.’ There have been multiple investigations for inadequate auditing. In the past three years, they have been fined £42 million for auditing failures. KPMG has been under fire for its auditing of the collapsed construction company Carillion and openly admitted that six of its employees had forged documents to investigators. They are currently defending a £1.3 billion lawsuit from the collapsed firm. In July 2021, the Financial Reporting Council stated that KPMG’s auditing of banks was unacceptable. In late autumn, the firm was threatened with a ban on bidding for public contracts by the UK government. As a result, the firm decided to not make any formal bids.
PwC has also not been free of scrutiny. In November 2021, its offices in Germany were searched in a tax fraud investigation. In the UK, the firm is currently being investigated for its auditing of the defence group Babcock, construction contractors and notably Greensill Capital, which filed for insolvency last year. This has led its UK boss, Kevin Ellis, to state that criticism of the industry was harming the firm's ability to attract auditors, especially domestically. All this only enhances the stigma around transparency within the industry, stemming from the Enron scandal, and has had a tangible impact, particularly on attracting talent, which will be crucial to continue growth.
Ultimately, law firms cannot turn a blind eye to the ‘Big Four.’ Their strengths, including enormous revenues, client bases and technological investment, allow these firms to satisfy clients’ demands of an efficient full-service approach. Macfarlanes LLP has taken notice and is cross-qualifying its tax team to ensure that they can satisfy this change. However, law firms may benefit from this competition if they utilise it to ensure adequate technological investment and the promotion of dynamic efficiency. In November 2021 Sir Jon Thompson, Chair of the FRC said that sometimes the ‘Big Four’ “don’t run their own businesses very well.” At this moment in time, law firms should not be overly afraid, as long as they pay close attention to new developments.