Auditing-World Heavyweights: The Big Four CPA Firms - dummies

Auditing-World Heavyweights: The Big Four CPA Firms

Many CPAs form partnerships (also called firms). A CPA firm must be large enough to assign enough auditors to a client so that all audit work can be completed in a relatively short period — financial reports are generally released about four to six weeks after the close of the fiscal year.

Large businesses need large CPA firms, and very large global business organizations need very large international CPA firms. The public accounting profession consists of four very large international firms; several good-sized second-tier national firms; and many regional firms, small local firms, and sole practitioners.

The Big Four international CPA firms are household names in the business world:

  • Ernst & Young

  • PricewaterhouseCoopers (all one word with the C capitalized — the result of the merger of two firms)

  • Deloitte Touche Tohmatsu

  • KPMG (the PM in the name derives from an earlier time when Peat Marwick was part of the firm’s name)

These four firms and other large CPA partnerships are legally organized as limited liability partnerships, and you see LLP after their names. The Big Four audit the large majority of the public corporations in the United States.

The Big Four are international in scope and employ a large number of people. Ernst & Young has about 130,000 employees worldwide. In contrast, browse through the CPA section in the business listings of your local phone book; you’ll find many sole practitioners and small CPA firms.

Many CPAs do not do auditing. In fact, many wouldn’t touch auditing with a ten-foot pole. They provide income tax, financial advising, and business consulting services — and they make a handsome income doing so. They avoid auditing for several reasons, including the following:

  • There is a high risk of being sued for failing to discover fraud in financial statements on which the CPA expressed a clean opinion. Auditors have a lot of trouble discovering fraud.

  • Businesses don’t want to pay for the cost of a good audit; they want to buy an audit opinion on the cheap. Auditing is not as lucrative as income tax, advising, and consulting services.

  • Auditing is much more regulated as compared with income tax and consulting.

All in all, it’s a quieter life for CPAs without auditing. Auditing is a high risk and high stress activity, but not a particularly high income activity. Nevertheless, some small CPA firms do audits. Most mid-size and larger regional CPA firms do audits; auditing is a sizeable part of their revenue. Auditing is the mainstay of the Big Four and other national CPA firms.