14 Chapters
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12 One Four Ten The Big Four in China

Gow, Ian D.; Kells, Stuart Berrett-Koehler Publishers ePub

In China, the Big Four have attained a dominant position in the accounting services market. Each of the firms is generating billions in revenue there. In a sign of just how much the world has changed, some of China’s largest state-owned enterprises have become Big Four clients. This surprising victory, though, is likely to be short-lived. At every step of their China foray, the firms have faced opposition from powerful forces. That opposition has now reached a crescendo. And it has reached the courts.

Disputes about something as seemingly incidental as audit working papers have become the centre of a transnational legal and regulatory battleground. In Shanghai, Deloitte recently found itself in a wicked dilemma. Deloitte had been the auditor of Longtop Financial Technologies. Longtop, a Chinese financial software company, had failed after accounting fraud was revealed. Longtop’s chairman admitted to Deloitte that ‘fake cash recorded on the books’ was the result of ‘fake revenue in the past’, a reminder that the strictures of double-entry accounting extend even to fraud. The American SEC demanded that Deloitte hand over working papers related to the audit. But Deloitte argued that handing over the papers would place it and its personnel at ‘substantial risk of prosecution’ under Chinese law. Facing enforcement action from the SEC, Deloitte worked frantically to resolve the dispute.

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5 Mere Automata Staking out the Big Four’s turf

Gow, Ian D.; Kells, Stuart Berrett-Koehler Publishers ePub

In one of his notorious purges, Henry Ford famously sacked his accountants en bloc. ‘They’re not productive,’ he said. ‘They don’t do any real work. I want them out of here today.’ That story cannot be the whole truth; Ford’s enterprise would’ve collapsed without in-house bookkeepers and financial controllers. But the anecdote helps illustrate a wider twentieth-century trend, that of large industrial companies electing to outsource their accounting services. Corporates that had maintained significant in-house accounting units – such as IBM and Unilever – would decide it was preferable to buy those services from the marketplace.

This trend, unsurprisingly, helped spur and transform the accounting firms, as did other twentieth-century shifts: diversification of the firms’ activities, particularly into ‘management consulting’ or ‘advisory’ services; cosying up with governments; benefiting from the ‘audit explosion’ and the rise of the ‘audit society’; and, like modern Medici, spreading out internationally, with networks of branded franchises in which each national practice was a separate legal entity.

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7 Porn Star The culture of the Big Four

Gow, Ian D.; Kells, Stuart Berrett-Koehler Publishers ePub

The day-to-day correspondence of the Medici Bank reveals men concerned with external matters such as the alum mines, the wool and silk markets and the creditworthiness of monarchs. But they were also concerned with internal matters. Were the bank’s systems strong enough to detect fraud and prevent financial disaster? Who was ready for a pay rise and a promotion? Were the young men graduating from the abacus schools up to Medici standards?

Angelo Tani, Rinieri da Ricasoli and Cosimo de Medici all understood ‘leverage’, which in partnerships means growing the business by hiring junior staff to complement and extend the capacity and capability of partners. The Medici Bank was one of the first large partnerships to grapple with the underlying equation of leverage: the incontrovertible calculus that profit per partner is equivalent to margin times hourly rate times utilisation (the extent to which staff are busy) times the number of staff per partner. Bringing on more staff was one of the few ways in which the bank could pursue higher profits.

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1 Introduction

Gow, Ian D.; Kells, Stuart Berrett-Koehler Publishers ePub

Stretching back centuries, the history of Deloitte, EY, KPMG and PwC is a fascinating story of wealth, power and luck. In many profound ways, the so-called Big Four accounting and audit firms have influenced how we work, how we manage, how we invest and how we are governed.

The firms have been called many things. High priests of capitalism. More powerful than sovereign states. Protectors of the public interest. The conscience of the free market. Heroes of corporate integrity. Benign watchdogs. Toothless lapdogs. A necessary evil. An institutionalised oligopoly. Corporate sweatshops. Accountants of fortune. Skilled enablers of white-collar fraud. Each of the Big Four is a case study of corporate triumph – and drama. Underneath their polished images are colourful tales of commercial success, but also of ethical compromises, professional angst, botched ventures, debauched parties, scandalous marriages, disreputable interests and arcane rites.

In a field that is seen as somewhat beige and lacking in prestige, the Big Four are the glamour boys, the glowing success stories of their field. In 2011 their total revenue broke emphatically through the US$100 billion mark. Since then it has kept on rising, surpassing US$130 billion in 2016. In that year, before a regrettable incident at the 2017 Oscars, PwC ranked alongside Disney, Nike and Lego as one of the ten most ‘powerful’ brands in the world.

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3 Transported How the Big Four began in the dangerous world of nineteenth-century accountancy

Gow, Ian D.; Kells, Stuart Berrett-Koehler Publishers ePub

Lombard Street in the City of London was named after the colloquial term for an Italian banker. By the nineteenth century, London had long supplanted Florence as the centre of global finance and the prime mover in financial innovation. All the Big Four trace their history directly to predecessor firms that began in nineteenth-century London, such as Deloitte & Greenwood, Cooper Brothers, W.B. Peat & Co. and Marwick, Mitchell & Co. The nineteenth century was a boom time for accounting. It was also the profession’s ‘wild west’ era, even more so than the 1980s. In 1811 the London trade directories listed twenty-four accounting firms. Seventy years later they would list 840.

Many of the men who were attracted to accountancy would quickly leave the field. Richard Le Gallienne, for instance, left the Liverpool-based accounting firm of Chalmers Wade & Co. to become a poet. (Other former accountants throughout history include the actor Randolph Scott, the author John Grisham, and the pistol designer Georg Luger.) But among those who remained were some now famous names. William Deloitte started practising in 1845; Samuel Price, in 1848; William Cooper, in 1854.

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