Comment: Time to end the Big Four accounting cartel
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Volume 1 Number 3
Comment Time to end the Big Four accounting cartel According to the Government Accounting Office (GAO) report mandated pursuant to Sarbanes–Oxley,1 the big four accounting firms audit 78 per cent of public companies required to report under the US securities laws and over 99 per cent of all public company sales.2 This may constitute a ‘shared monopoly’; certainly it constitutes an oligopoly. What this state of affairs might best represent is a cartel, since the benefits, which these firms collectively enjoy, are not purely price-setting, but include a special access and a seal of approval in the minds of investors. In its anodyne report on concentration in the accounting industry, the GAO found no evidence of price-fixing but, in my view, did not provide an appropriately in-depth analysis of the consequences of concentration in auditing public companies. In April, the SEC issued sanctions against Ernst & Young (E&Y) for becoming involved in a joint venture with PeopleSoft, a company for which it was the auditor. This instance recalls the breach of accounting ethics rules perpetrated by Coopers and Lybrand as it was merging with Pricewaterhouse to become PricewaterhouseCoopers in 1997 in 8,000 individual violations of accounting ethics independence requirements in its Tampa, Florida offices. In the context of the board of directors, the question of independence may be more textured than in the context of the auditor. The notion of auditor independence may be debatable in terms of which consulting services an accounting firm should undertake. It is a well-trodden path to conclude that an accounting firm which delivers consulting and/or tax services, may well be influenced to go easy in the audit. Again, this may be debatable. But, it is not debatable that going
into business with a client impairs, in all respects, auditor independence. The lengthy initial decision by the SEC administrative law judge examined the auditor independence rules as implemented by E&Y in its relation with PeopleSoft between 1994 and 1999.3 The administrative law judge found that E&Y earned $425m for implementing PeopleSoft Software for third parties in these years, and E&Y’s tax group had an implementation partnership with PeopleSoft. By 1998, E&Y had a People Service Line with 400 partners and 20 partners located in the USA and 750 consultants abroad. The administrative law judge also found ‘that the evidence was overwhelming that E&Y partnered with PeopleSoft to the maximum extent possible to accomplish sales and boost E&Y’s consulting revenue’, and the companies shared proprietary information. In the Healthcare field, the initial decision makes reference to a memo which states, ‘E and Y must help PeopleSoft close 7 to 10 healthcare deals in the next 45 days . . . they know they have more success in their sales cycle when they help us with ours.’ E&Y’s Peoplesoft 1999 business plan included a strategy for Peoplesoft to help E&Y become dominant in Peoplesoft Express. In 1999, E&Y embarked on a service industry initiative which inc
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