Auditing: KPMG, PwC, Deloitte, EY and why understanding how they work matters

A thread on the “Big Four”

KPMG, PwC, Deloitte and EY - the “Big Four” - audit and review the financials of a lot of public and privave small, medium and large companies. These numbers are signed off and we, as investors, have to trust them most of the time.

Note that forensic accounting is not the same as auditing.

The FT wrote today:

London-headquartered KPMG, PwC, Deloitte and EY have reduced the amount of profits that are distributed to their partners each month by between 20 and 25 per cent to build up cash reserves and help survive a downturn in work.

Partners at the UK arms of the four firms, which between them employ about 74,000 people, earned an average of £720,000 last year and undertake activities including company audits, tax and restructuring advice, and consulting on transactions.

The economic blow to the professional services industry follows years of corporate failures and accounting scandals that have hurt their reputations. Despite this, overall revenues at the UK firms have soared over the past decade as they have expanded beyond their roots in audit, resulting in increasingly large sums of money paid out to their highest earners.

EY told its 17,000 UK staff on Wednesday that partners’ pay will be cut by 20 per cent, and said that it will “do everything possible” to navigate the coronavirus crisis without redundancies, furloughs or reducing employee salaries.

Their hesitancy follows criticism about their work for large UK employers including retailer BHS, construction group Carillion and Thomas Cook travel agency. Auditors failed to warn about the companies’ deteriorating financial health, leaving shareholders and staff out of pocket following their demise.

The global financial crisis in 2008 led to a downturn in the amount of advisory work for professional services firms around the world. Big Four firms were forced to lay off staff, cut partner pay and introduce new ways of working to reduce costs. KPMG asked its staff to switch to a four-day week to help keep redundancies down during the recession.

Article - https://www.ft.com/content/95fa5770-7442-4e2c-b082-9d69acb63af7

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