Jul 11 2016

Top tax expert calls for Big 4 accounting firms to be broken up. Me too

Posted by: Nicholas Shaxson in: Thoughts

George Rozvany

Adapted from the Tax Justice Network blog:

In March The Economist magazine rang alarm bells (again) about a rise in concentrated market power: a problem where the biggest firms get ever bigger and more like monopolies, making it easy to extract wealth from the rest of us (as opposed to creating wealth.) This, in turn fosters steeper inequality and poverty and reduces economic growth. As they put it:

“High profits across a whole economy can be a sign of sickness. They can signal the existence of firms more adept at siphoning wealth off than creating it afresh, such as those that exploit monopolies. If companies capture more profits than they can spend, it can lead to a shortfall of demand.”

It is a scary article: though mostly focused on the United States, it touches on a phenomenon that is affecting most countries, where the problem seems to be getting worse, fast.

The accountancy firms, of course, take this problem and inject steroids. It’s not just market power in their own industry that’s a problem: through the tax (and other) shenanigans that they design and market for their multinational clients, they transmit this problem to all other sectors: far beyond their own areas of audit and accountancy. The fact that they have unusually concentrated power in their own market – see below – makes this worse still.

Now Michael West, one of Australia’s best-known tax journalists, is quoting a rare voice of reason and authority: George Rozvany, a former head of tax for Australian multinationals and a former insider at Ernst & Young, PwC and Arthur Andersen. Though he’s Australian, his words are intented to have global relevance:

“Although presenting as “the guardians of commerce” they are unregulated and unaccountable; they have infiltrated governments at every level and should be broken up.
. . .
“The Big Four have, under a Rasputin-like cloak of illusion strayed from their original and critical role of verifying the accuracy of financial accounts for all stakeholders, to be “accountants of fortune” merely representing the accounting position for multinationals and developing aggressive international tax avoidance practices,” he told michaelwest.com.au.”

These four global behemoths, which employ 800,000 people and are expected to enjoy revenues of $130 billion this year, are arguably the greatest vectors for tax injustice the world has ever seen.

So how big is the problem, in terms of market power?

Well, The Economist has a graph showing that the top four firms’ average share of total revenue, with market share rising to shocking levels, nearly 50 percent for technology firms.

Economist monopolies

It doesn’t break this down for accountancy and audit. But we do know that in the market for auditing corporations with over $1 billion in annual revenue, the Big Four market share is 98 percent (see also here.)

Ponder that statistic for a moment. Does anyone think this state of affairs is remotely healthy?

Now back to Michael West’s article: Oligarchs of the Treasure Islands. There is a lot more in there to get your teeth into: and it makes it clear that I agree:

As Nicholas Shaxson, author of “Treasure Islands”, the bestselling work on tax havens, told us over the weekend, “Like the too-big-to-fail banks, they pose multiple threats to our societies”.

“The Big Four are too influential, in too many countries, in too many parts of the economy. They help their clients exploit loopholes in the law, they milk multiple conflicts of interest, and they lobby governments relentlessly. The wealth they obtain for themselves and for their clients is extracted from the rest of us.”

Now from Rozvany:

“From a regulatory viewpoint, it makes perfect sense to split the accounting and tax functions of each of the Big Four to improve financial integrity and to split each of these firms again into two firms to create competition. International commerce will then have eight international audit firms and eight international tax firms from which to choose.”

Break ’em up. This, alone, is worthy of a major global campaign.

one comment

Roger Wiley 9th September, 2016 5.39 pm

I agree that the big 4 pose a threat if not broken up. This can be especially seen in the recent Taylor Bean case. In that case where their client went bankrupt, PwC got exposed for how they are able to get away with performing limited audit procedures while they are being paid millions to perform detailed audit procedures. The only reason they get away with doing that routinely is because they are part of a comfy oligopoly.

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