Going from the Big 8 to the Big 0??

The auditing profession has confronted significant changes over the last several decades. The major CPA firms, considered capable of auditing the world’s largest publicly traded companies, have undergone consolidation or liquidation (Arthur Andersen). Major corporate scandals have rocked the financial markets.

Is this a sustainable activity – paying for audits that do not uncover the major frauds that are occurring? Why do the major auditing firms fail to find the frauds even though the auditing standards require the auditing firms to actively search for fraud? What would happen if the model for auditing required the insurance companies to hire the auditors before insurance for company, officer and director liability could be issued?

The issue of independence is so fundamental to an effective auditing system that brings accountability to stakeholders (creditors, shareholders, future shareholders, taxpayers, the public).

Unfortunately, independence is sacrificed far too often in the auditing profession.

Big 8 (until 1987)

1.     Arthur Andersen

2.     Arthur Young & Co.

3.     Coopers & Lybrand (originally Lybrand, Ross Bros., & Montgomery)

4.     Ernst & Whinney (until 1979 Ernst & Ernst in the US and Whinney Murray in the UK)

5.     Deloitte Haskins & Sells (until 1978 Haskins & Sells in the US and Deloitte & Co. in the UK)

6.     Peat Marwick Mitchell (later Peat Marwick, then KPMG)

7.     Price Waterhouse

8.     Touche Ross

Big 6 (1989–1998)

1.     Arthur Andersen

2.     Coopers & Lybrand

3.     Ernst & Young (1989 - Ernst & Whinney merged with Arthur Young)

4.     Deloitte & Touche (1989 - Deloitte, Haskins & Sells merged with Touche Ross )

5.     KPMG

6.     Price Waterhouse

Big 5 (1998–2001)

1. Arthur Andersen

2.     Ernst & Young 

3.     Deloitte & Touche 

4.     KPMG

5.     PricewaterhouseCoopers (July 1998 when Price Waterhouse merged with Coopers & Lybrand)

Big 4 (2002–)

1.     Ernst & Young 

2.     Deloitte & Touche 

3.     KPMG

4.     PricewaterhouseCoopers

(Enron  was audited by Arthur Andersen, which eventually was indicted for obstruction of justice for shredding documents related to its audit. The resulting conviction, since overturned, resulted in the demise of Arthur Andersen. )

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But, let’s look at the major accounting scandals over the last several decades. Everyone, except Paramalt and Bernard Madoff were audited by the one of the Big 4-8 firms.

Notable accounting scandals

Company	Year	Audit Firm	Country	Notes
Informix	1996	Ernst & Young	United States
Sybase	1997	Ernst & Young	United States
Cendant	1998	Ernst & Young	United States
Waste Management, Inc.	1999	Arthur Andersen	United States	Financial mistatements
MicroStrategy	2000	PricewaterhouseCoopers	United States	Michael Saylor
Computer Associates	2000	KPMG	United States	Sanjay Kumar
Lernout & Hauspie	2000	KPMG	Belgium	Fictitious transactions in Korea and improper accounting methodologies elsewhere
Xerox	2000	KPMG	United States	Falsifying financial results
One.Tel	2001	Ernst & Young	Australia
Enron	2001	Arthur Andersen	United States	Jeffrey Skilling, Kenneth Lay, Andrew Fastow
Adelphia	2002	Deloitte & Touche	United States	John Rigas
AOL	2002	Ernst & Young	United States	Inflated sales
Bristol-Myers Squibb	2002	PricewaterhouseCoopers	United States	Inflated revenues
CMS Energy	2002	Arthur Andersen	United States	Round trip trades
Duke Energy	2002	Deloitte & Touche	United tates	Round trip trades
Dynegy	2002	Arthur Andersen	United States	Round trip trades
El Paso Corporation	2002	Deloitte & Touche	United States	Round trip trades
Global Crossing	2002	Arthur Andersen	Bermuda	Network capacity swaps to inflate revenues
Halliburton	2002	Arthur Andersen	United States	Improper booking of cost overruns
ImClone Systems	2002	KPMG	United States	Samuel D. Waksal
Kmart	2002	PricewaterhouseCoopers	United States	Misleading accounting practices
Merrill Lynch	2002	Deloitte & Touche	United States	Conflict of interest
Nicor	2002	Arthur Andersen	United States	Overstated assets, understated liabilities
Peregrine Systems	2002	KPMG	United States	Overstated sales
Reliant Energy	2002	Deloitte & Touche	United States	Round trip trades
Tyco International	2002	PricewaterhouseCoopers	Bermuda	Improper accounting, Dennis Kozlowski
WorldCom	2002	Arthur Andersen	United States	Overstated cash flows, Bernard Ebbers
Royal Ahold	2003	Deloitte & Touche	Netherlands	Inflating promotional allowances
Parmalat	2003	Grant Thornton SpA	Italy	Falsified accounting documents, Calisto Tanzi
HealthSouth Corporation	2003	Ernst & Young	United States	Richard M. Scrushy
Nortel	2003	Deloitte & Touche	Canada	Distributed ill advised corporate bonuses to top 43 managers
AIG	2004	PricewaterhouseCoopers	United States	Accounting of structured financial deals
Bernard L. Madoff Investment Securities LLC	2008	Friehling & Horowitz	United States	Massive Ponzi scheme.[39]
Anglo Irish Bank	2008	Ernst & Young	Ireland	Anglo Irish Bank hidden loans controversy
Satyam Computer Services	2009	PricewaterhouseCoopers	India	Falsified accounts
Lehman Brothers	2010	Ernst & Young	United States	Failure to disclose Repo 105 transactions to investors