Case study: The notorious Big 4 Providing services in auditing and taxation, legal and actuarial facilities, management consulting, and corporate finance, the Big Four accounting firms dominate the market for professional services for both public and private companies. The four firms in question, namely, Ernst & Young (EY), Deloitte (Deloitte Touche Tohmatsu Limited), KPMG and PricewaterhouseCoopers (PwC), are now reported to audit 98 per cent of the companies in the FTSE 350 and S&P 500. Perhaps unsurprisingly, they have subsequently drawn attention and recent scrutiny from the Competition and Markets Authority (CMA). Fears centre around the fact that auditors are paid by the company whose accounts they scrutinise, not by investors, who are thus increasingly sceptical of financial statements. Combined revenues of the Big Four equate to nearly $150 billion, and it has been suggested that the firms have navigated tax requirements resulting in a cost of $1 trillion dollars per year to taxpayers. More recently, a series of high-profile corporate collapses in particular, that of Carillion (a British construction and services company, advised by all four firms prior to its liquidation) has raised further concerns over the role played by the Big Four. A Parliamentary enquiry published in 2018 suggested that the firms operate as a cosy club, which allowed evidently failing businesses to inflate their worth in order to collect substantial consultancy fees. In September 2018, the UK Business Secretary requested the CMA investigate the audit sector. It has been suggested that the dominance of the Big Four indicates an ability to crowd out other quality competitors, and the chairman of KPMGs UK business has admitted, We [the Big Four] are an oligopoly. Moreover, in the USA, the PCAOB (Public Company Accounting Oversight Board) observed last year that the Big Four carried out audits in an incompetent fashion in 31% of cases in past decade. However, the PCAOB itself has been seen to be incredibly reluctant in bringing enforcement upon the auditors. As such, although political will to force a break-up of the Big Four is gaining traction, many analysts suggest such action would be ineffective and would not address current issues in the audit market. The Association of Chartered Certified Accountants (ACCA), alongside smaller, rival accountancy firms, have all voiced concerns over the potential death of the Big Four. The companies themselves have suggested that their dominance simply reflects an informed business service, and that they are fully supportive of entrants in the audit market. Conflicts of interest and incentive problems have long plagued the accounting industry, and regulation has never truly alleviated concerns. The proposals forwarded by the CMA investigation are currently being weighed up by the British Government, such as the requirement that all listed firms appoint one of the Big Four and a challenger firm to conduct joint audits. Although such regulatory changes have come in for criticism, the policy is designed to allow smaller firms to compete more effectively for auditing services, and to curb abuse of market power. Moreover, in recent months, the Financial Reporting Council (FRC) has forced the Big Four to separate audit departments from consultancy units. Regardless of the ultimate outcome of these and any future regulatory changes, there may still be life for the Big Four. Indeed, David Wilkins (director of the Center on the Legal Profession at Harvard Law School) has recently claimed that, Reports of the death of the Big Fourhave been greatly exaggerated.

Reports must identify, describe and solve the important managerial problem(s) faced by the economic actors identified in the case introduced above. Identify the pertinent economic problem or problems, analyse them using the asymmetric Information theory , and propose a relevant managerial solution or solutions