The Big Four Auditors? Not As Much Anymore

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Just read a very interesting article on WSJ. Thought it'd be interesting to share with you guys!

As you know, the Big 4 are known for audit/tax/accounting; however, in recent reports, it seems that is no longer their largest revenue generator. Consulting has grown exponentially within the four and now accounts for over 40% of revenues.

For years, the Big Four accounting firms have pushed into consulting, seeking growth their core auditing businesses weren't providing. Since 2012, the firms' combined global revenue from consulting and other advisory work has risen 44%, compared with just 3% growth from auditing.

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Likewise, of the firms' $17 billion in revenue growth for 2017, 42% was from consulting, with audit now taking place in second at 35%.

With all the focus on their advisory roles and the huge expansion this serves as no surprise to me. EY Parthenon, Deloitte S&O/Monitor, PwC Strategy&, and KPMG Advisory are all very sought after by undergrads and have seen tremendous growth in workflow, prestige, exit opps, etc. Do you see any downsizing in audit for the future due to automation or something of a similar sort? How big do you think these guys can get at consulting? MBB level one day?

Source: WSJ

Comments (25)

  • freshstudent
  •  Apr 8, 2018

Hi all,

First post on WSO,

Bit of background, I'm in my final year of University and did 3 years of full time big4 audit during my undergrad here in Australia. Will be moving to a tier 2 strategy firm start of next year.

During my time at big4, it was very obvious there was a huge push for the consulting divisions to beef up. All the action and buzz in the firm was happening on the consulting side (not including Monitor/Parthenon/S&) where Assurance keeps moving into a cost-cutting game.

I don't think there will be a down size, as you will always need auditors, but Tech is really eliminating the need for a lot of man power to run the audits.

MBB vs Big4 in consulting isn't exactly comparable. If you want to talk about size regarding revenue and employees, then Big4 look monstrous compared to MBB globally.

Big4 is leading the charge from the implementation side and creeping into strategy. I don't ever think that they will be as prestigious as MBB as they are chasing the huge pools of cash in implementation (mind you with very low margins).

    • 3
Apr 9, 2018

Audit will certainly be automated to some extent (however not completely) in the coming years. The type of consulting projects that MBB (and upper 2nd tier) consulting firms do are quite different from BIG4 consulting.

As freshstudent stated above, BIG4 projects are usually longer in duration and are more geared towards implementation. Most consultants at BIG4 are also usually more specialized in a specific function or sector where "pure" strategy consultants (at least in the first few years of your career) are more generalists.

It is true though that there is some competition between BIG4 and "pure" strategy firms but I don't think there will soon be a complete overlap.

    • 6
Apr 9, 2018

From my understanding of this post, consulting has grown by 40% lately, but I am not sure if that means that consulting is a top revenue generator. I might be wrong as I didn't look into the exact breakdown of the revenues by firm.

    • 2
Best Response
Apr 9, 2018

I've worked in Big 4 audit. I would say there are three factors that attribute to these levels in audit:

  1. For these firms, audit is a legacy. It's more something to say they have done and continue to do. However, there are only a certain number of firms that require audits, and only a certain amount you can charge/increase per year. So I don't think we will ever see an audit explosion, and I don't think one of these firms could technically exit audit.
  2. More and more people/customers are beginning to realize that audit is useless, and by useless I mean in practice, not the idea of it. The idea that an independent 3rd party should check the work is good, but audits are "designed" to come up with "reasonable" assurance, not absolute. Also, these firms try to make more money, so they reduce expenses (labor, time allocated to jobs). Couple that with most audits are performed by 22 year olds out of college who don't really understand what they are looking at, and the product you deliver doesn't really mean anything.
  3. Less talent in audit because it kinda lacks the prestige. Essentially, you don't really make a product, and your product doesn't differ from another firm. I work in research, and I can tell you the only time I look at who audit the Q/K is when the numbers are fucked up.
    • 12
    • 1
Apr 9, 2018

Pretty good historical indicator we are at the end of a business cycle

    • 2
Apr 9, 2018

I work in Big4 strategy and can tell you that in terms of prestige I don't think B4 will ever compete with MBB. Agreed that most of the consulting work done today at B4 is implementation and longer projects, but can also say that we do a lot of pure strategy work and compete with and win out against MBB all the time.

Down the road I think the gap between B4 and MBB will begin to shrink because these larger companies (B4) that can do the actual work (implementations) and pure strategy are going to start to win out more and more.

At the end of the day, if I can develop the strategy and implement the work, why would you go with a MBB?

I'm biased obviously, but this is what I have been seeing more and more lately. B4 winning out against MBB because we can do both strategy & implementation.

    • 3
Apr 9, 2018

And yes we are throwing tons of money into hiring more and more consultants to grow the business at a much larger clip than audit. The fees are substantially higher..

    • 2
Apr 9, 2018

I can see audit simply getting smaller with a full blown turn towards consulting. People say the Big 4 could never be MBB, but why can't they grow into something even greater if they were to focus on picking more top talent and investing in growing their strategy arms like Parthenon?

    • 1
Apr 10, 2018

I don't believe audit will get smaller, why give up a constant revenue stream (try convincing the audit partners at Deloitte or PWC to give up their own job... see what I mean?). Audit not really growing, that I can agree with. Audit will probably grow at the pace of the economy more or less.

Consulting makes a lot of sense to BIG4 firms because then they can provide the complete service package to their clients (audit, accountancy, tax, legal, IT, HR, tech... and finally also strategy projects). Also BIG4 firms are too big to only rely on strategy consulting, they can't be as picky as the much smaller "pure strategy" firms. They'd have to let go 90% of the workforce as well as a lot of their clients. Audit clients typically have a relatively low churn rate whilst consulting projects are more open to competition between firms (and thus riskier to rely on) since every project is different and another firm may have more expertise in a certain area.

Anyway that's my view.

    • 1
Apr 10, 2018

Only problem with the thought that they can provide the complete package to clients is that they are not allowed to do consulting work for clients that they audit.

Apr 10, 2018

They're increasingly providing legal services as well. Apparently PwC has their own law firm.

https://www.pwc.com/us/en/industries/law-firms.html
http://www.abajournal.com/news/article/pwc_opens_u...

Apr 11, 2018

I used to work for one of the Tier 2s (S&, S&O Monitor) and one of the funniest things was the chase for "prestige".

Here's what I mean: at my firm it was clear that consulting was rising fast. Even within consulting though there were "tiers" -- the S& / S&O junior folks looked down on the consultants from the other consulting practices. BUT, here's the funny thing -- the S& / S&O Partners were extremely envious of the implementation ones.

I had great relationships with Partners on both side. An implementation one, who's primary role was to sell managed services (aka, IT management outsourced to the consulting firm), had by FAR, the best life out of any Partner at the firm. Each of his contracts would be worth $40-$50 million per year, meaning that he only had to sell one and crush his targets. He spent the rest of his time traveling to conferences, taking out the clients he had previously sold those contracts to, and acting in "leadership roles" for the firm. His take home each year was north of $3 million.

Meanwhile, the S& / S&O Partners were busting their balls trying to sell strategy work to hit their targets, and cranking out "white papers" or "thought ware" so that they would be known for their strategic advice / thinking, and therefore they could sell strategy work.

My point is this, and I think it should resonate on this forum: $$$ is king.

Apr 10, 2018

Agree with the last comment.

As much this is a forum about Wall Street/Banking, there are definitely more ways to make money that are far from the street. Mike Rowe outlines a bunch of these on his show "Dirty Jobs"; I mean, they're are goat farmers making millions, but no one knows about them because they don't pop up in a magazine at the store or on some "Goat Farmers Wives" show or some shit.

As mush as you need to feel good about yourself, and working hard, too many people are enthralled with the though of glamour and mahogany offices. But as much as Hollywood is for beautiful people, and Washington is said to be Hollywood for ugly people, Wall Street is probably Hollywood for smart people.

    • 5
Apr 10, 2018

Strategy will always be a secondary or even tertiary function at the Big 4. Strategy revenues are highly cyclical with declining fees (becoming more competitive). Audit, on the other hand, constitutes a steady and sizeable stream of revenue. The projects are bigger, last longer and are stickier (higher switching costs for the clients). Audit always comes first and top management is obsessed with audit quality and PCAOB comments.

This whole story has been manufactured by the media to drive sales. It's basically clickbait. Fake news. Expanding into consulting actually creates synergies for the firm that improves audit quality (gain access to real SMEs who can assist in audit function). The media always loves to drive doomsday scenarios. Much to do about nothing.

    • 6
Apr 10, 2018

Nailed it.

    • 1
Apr 10, 2018

Audit is a broken system in general; depending on how you run your audit is a major factor in determining if you get to do the audit the following year.

It's kinda like if you didn't want to get a personal trainer, but the government required you to have one; would you hire the one who trains you easy or the one who makes you work the hardest.

The real question is do audits really serve a purpose? How much fraud or risk have they really uncovered?

    • 1
Apr 10, 2018

I do believe audit will for sure get smaller, although when is difficult to predict.

  1. As Ironman32 mentioned, there are only certain firms that will need audits, and if M&A continues into the future, there will simply be less smaller firms in the future that will require things like SOX audits.
  2. There's only so much that happens under the auditing sun, especially when you realize a lot of what people do is essentially roll things forward from the previous year, so only is the work dull but very mundane, and this will be increasingly evident in applications.
  3. Since most of the work in audit is very simple, more and more of it can get automated. A lot of tests that took multiple people several hours to do can now be done much more quickly through certain in-house programs. There is a larger push to hire people more skilled at data analysis and programming (as is everywhere) to design, analyze, and implement these programs, but they'll be more productive per person than the marginal auditor will be.
  4. Lastly, due to the back office nature of audit work, the career path is prohibitively limiting if you decide to stick it out. The progression is from associate to partner, a lateral move to a competitor, or a move to industry, but in all these cases there will be very few differences and that's incredibly daunting and mundane for some (for everyone really).
    • 3
Apr 10, 2018

Agreed audit is stable revenue, but the margin are significantly lower. I've heard audit margins can be as low as 5-12%, whereas consulting/strategy margins are generally 40+%. (b4)

The sentiment above is correct, one of my previous partners landed a 5 year BPA worth 100MM over 5 and they basically can retire from one big score.

    • 1
Apr 10, 2018

I think both of those margin numbers are quite low. I started my career in B4 audit and the did transactions work for a couple of years and I never saw any engagements that low. Audits were in the 40-50% range and most diligence engagements were 50%+.

Keep in mind that salaries aren't that high in many of these roles and there has been a huge push to do as much work as possible in India because they bill out at roughly the same rates as their American counterparts but cost pennies on the dollar.

    • 1
Apr 10, 2018

Margins are much lower but raw profit is sizeable (due to size of engagements) and they're less variable.

    • 1
Apr 10, 2018

Uhh...

Correct me if I'm wrong, but wouldn't Sarbanes-Oxley prohibit a lot of auditing firms from doing consulting (I imagine both services are provided to the same clients)?

"Work ethic, work ethic" - Vince Vaughn
    • 1
Apr 11, 2018

There are restrictions on what services you can provide to audit clients but non-audit clients are free game.

Apr 10, 2018

Didn't Enron happen the last time this was the case? Which one of the big 4 is about to be Arthur Andersened and which of their clients will be implicated is what I'm wondering.

Aug 25, 2019
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Aug 25, 2019