BIG FOUR AUDIT FIRMS OLIGOPOLY: IMPACT ON RUSSIAN AUDIT AND ACCOUNTING SERVICES MARKET AND EDUCATION INSTITUTIONS

BIG FOUR AUDIT FIRMS OLIGOPOLY: IMPACT ON RUSSIAN AUDIT AND ACCOUNTING SERVICES MARKET AND EDUCATION INSTITUTIONS

Alexander Pozov

Candidate of science, assistant professor Saint Petersburg State University of Economics,

Russia, Saint Petersburg

ABSTRACT

Based on open sources and expert views notes about example Big Four audit firms oligopoly formation problem discussed. Suggestions on the ways how to resolve problems related to the audit oligopoly impact on russian audit and accounting consulting services market, accounting education and R&D in educational institutions are presented.

Keywords: Big Four, audit oligopoly, audit and consulting services, accounting education, research and development.

For the first time the term oligopoly of the big four audit firms (PWC, E&Y, Deloitte, KPMG) started talking in the UK in 2011. There was an antitrust investigation, which was considered in The House of Lords, but did not end. In 2013 “Auditorskie Vedomosti” russian professional accounting journal published an article “The development of  the accounting profession in XX-XXI centuries: the ways and challenges” with detailed analysis of impact Big Four firms have had on the russian audit services market and accounting education since mid-90^th to present day [1].

In UK nowadays we can hear voices that have spoken about oligopoly problem again. FRC chief executive Stephen Haddrill said that the Competition and Markets Authority (CMA) should look into possibility of “audit only” firms in a bid to enhance competition in the sector. The main idea of Mr. Haddrill: “Public confidence in audit is low, public understanding of what audit does is low. So it is undoubtedly time for a CMA review.” The FRC’s suggestion means that the firms could be forced to break their audit arms into separate businesses [2].

Chair of the Competition and Markets Authority (CMA) former Conservative MP Andrew Tyrie has hinted that the “competition aspect” of the Big Four is “certainly” something that needs to be looked at. He added that some “consider it an oligopoly” [3].

One of the latest examples in UK where Big Four firms have been criticized is a collapse of the Carillion construction firm: “PwC, which was appointed as administrator, has been accused of “milking the cash cow dry” after it was revealed it is charging £44.2m for one year’s work as special managers. KPMG was paid a total of £20.2m for its work on Carillion since 2008, with £16.8m coming from the company itself and £3.4m from government work. PwC was paid most of the four firms in fees with a total of £21.1m, including £8.5m from Carillion, £6.5m from government and £6.1m from pension schemes. EY was paid £18.3m from Carillion over the last 10 years (£15.6m from the company and £2.7m from government) and Deloitte was paid £12m (£10.3m coming from the company and £2.7m from government)” [4].

Don Quijones journalist at US based Wolf Street independent internet resource wrote about situation around Big Four in UK: “The government and regulators are considering breaking up the oligopolistic hold they have on the audit industry after a series of collapses of their audit clients. But that hasn’t stopped the four sprawling giants from exploring new avenues for expansion. One of those areas is the global legal services market, estimated to be worth some $600 billion. Deloitte recently begun to offer legal services through a new foreign law practice, all in the name of providing an even more holistic service to its clients. Deloitte is following in the footsteps of rival Big Four firms EY and PwC, who also recently expanded their legal services offerings” [5].

It seems UK problems are far away from Russia. Not indeed. National accounting firms reputation have chance to be recognized only inside Russia despite they use (International Auditing Standards) ISA as a basis of audit. Large companies apply to national accounting firms for Russian statutory audit only and the price of this work is miserable consider to price of international audit firm. For example “Mechel” (metal production company) paid to E&Y 342 RUR mln. for russian statutory audit in 2010. In the same time “Mechel” paid to russian audit firm “Energy Cons” for russian statutory audit in 2010 RUR 0,5 mln. There is another example of sharp differences from telecoms industry when “Vympelcom” paid to E&Y 166 RUR mln. for IFRS audit and paid to russian audit firm “Rosekspertisa” 22 RUR mln. for russian statutory audit[6]. This is only two short examples but of course could be more to make conclusion about inequality affect oligopoly have had on the market.

In the accounting education sector we may see something similar to what is going on in the accounting and auditing services market. Traditionally from soviet era russian higher accounting education have been provided by the state universities. They are financing by state budget. The total expenditure for 2018 on all Russian education system is 620 RUR bn. or about 10 USD bn [7]. The total number of russian state higher education system staff is around 265 thousands[8]. The question is how much of this amount has been spent on accounting education and how much of staff involved in accounting education in Russia? If we compare this raw figures with figures of only one accounting professional organization ACCA with around 200 thousands members and 500 thousands students and around 0,4 USD bn. budget it will give some idea of what is going on[9]. The ACCA and Big Four are using Russian universities basically as a marketing channel to recruit students on their programs and jobs. They do not consider seriously (with rare exceptions) local university staff to be involved in their educational and other processes. Therefore university researches may consider only state budget financing and their own resources for R&D works. At present time the university itself is combining the R&D and education functions but they are not strictly set up in terms of expenditures and articles. By this reason the major share of expenditures are spending on current education function. For example share of R&D expenditures in Saint Petersburg State University of Economics (UNECON) by the published financial statements is only 0,12% of total expenditures (see the copy below):

Table 1.

Financial Report of UNECON 2018:  R&D expenditures 1,7 RUR mln. Total expenditures 1,48 RUR bn. (0,12% of total)

And what is a share of intangible assets of the UNECON (suppose R&D results should be a part of it) in total assets? It is only 0,02 % (residual value of intangibles 0,4 RUR mln./ total assets 2,2 RUR bn.). This share is a good characteristic on what is going on with university R&D as whole and in particular accounting research. Therefore state budget is trying to support education function for the first. R&D expense is a residual figure and is not systematic article. As a result of such financing the most capable specialists are hired by the Big Four. They are not going to be researches. In the same time the prestige of the profession as a whole is deteriorating. There are many cases of fraud in various fields. These fraudulent activities involved the representatives of the profession. Unfortunately professional community reacts sluggishly to what is happening. Nowadays the role of universities in accounting profession is kept to a minimum. There is no question of systematic support from Big Four for researchers in the field of accounting, improving the image of the profession in society. That is, they do not bear their share of responsibility for what is happening with the education system, working in Russia. This is an alarming signal, because unlike the UK, we do not have a developed system of private education, where funding for scientists, research exists independently of the state budget. In these circumstances, the situation in accounting education will also deteriorate.

In addition in Russia there is no task to analyze the compliance of university programs and courses with what is happening in developed countries. The number of hours and vacancies of teachers are decreasing. The pressure of the bureaucratic machine, which aims to provide its own tasks or create the appearance of work and improvements is increasing. We can cite an example of the working programs, the alteration of which takes place about annually and concerns the issues of registration of the document not the substantive issues. At the same time, the quality of the program or course, its content is beyond the attention of the regulator.

As a summary and view from Russia on the problem of oligopoly and its consequences, I would like to repeat the idea expressed in 2013. There is need to create a foundation for the development of the profession in which the Big Four would allocate funds to support accounting education and research.

References:

1. Electronic resource: http://avjournal.info/archive.php?mag=201307 (request date 28/04/2021)
2. Electronic resource: https://www.theguardian.com/business/2018/mar/16/frc-inquiry-big-four-accountancy-kpmg-deloitte-pwc-ey (request date 28/04/2021)
3. Electronic resource: https://www.independent.co.uk/news/business/news/big-four-accounting-cma-competition-investigation-deloitte-kpmg-ey-pwc-a8576196.html (request date 28/04/2021)
4. Electronic resource: https://www.pbctoday.co.uk/news/planning-construction-news/frc-investigations-carillion/53033/ (request date 28/04/2021)
5. Electronic resource: https://wolfstreet.com/2018/08/12/big-four-audit-oligopoly-expands-global-reach-further/(request date 28/04/2021)
6. “Auditorskie vedomosti” 7/2013,  A. A. Pozov, “The development of  the accounting profession in XX-XXI centuries: the ways and challenges”, p.77.
7. Electronic resource: http://investorschool.ru/byudzhet-rossii-2018-v-cifrax (request date 28/04/2021)
8. Electronic resource: http://stat.edu.ru/stat/vis.shtml (request date 28/04/2021)
9. Electronic resource: https://annualreport.accaglobal.com/assets/downloads/Consolidated-financial-statements-and-corporate-governance-statement-2018.pdf (request date 28/04/2021)