In the 1980s, eight firms dominated public accounting. Mergers reduced them to the Big Six, then the Big Five. The demise of Arthur Andersen ushered in the era of the Big Four. Throughout this period the so-called second-tier firms struggled to catch up, but there was always a clear divide between them and the big players in terms of revenue and manpower.
Today, thanks to provisions in Sarbanes-Oxley requiring companies to use different firms for tax and audit work, second-tier firms are closing the gap. "We are sort of back to being the Big Eight again," says Robert Kueppers, deputy CEO of Deloitte & Touche USA. "The eight largest firms are working together to have a voice." Each of the eight firms audits more than 100 public companies, and they have worked closely together to launch The Center for Audit Quality and to provide input to regulators.
But there are still notable distinctions between the Top Four and the Other Four. KPMG, currently the smallest member of the Big Four, posts $4.4 billion in revenue, while RSM McGladrey, the next largest firm, tops out at $1.3 billion. In terms of employees, the falloff is even more striking: KPMG boasts some 13,000 employees worldwide, while McGladrey employs just 4,600.
There also remains the problem of public opinion, says Paul Danos, dean of the Tuck School of Business at Dartmouth and a director at General Mills and BJ'S Wholesale Club. "CEOs and CFOs have a real psychological comfort level with the top firms," says Danos. "There is a fear that markets will take it wrong if you don't go with a Big Four firm."
Even as the second-tier firms gain ground, there remains some concern about what would happen if a member of the Big Four imploded the way Andersen did, leaving just three dominant firms. "You'd have to have some system of breaking up the industry," says Danos. He suggests that regulators would have to agree on a plan to shift business from the biggest firms to other competitors, perhaps by mandating that no one can audit more than 10 percent of any given industry.