BDO Challenges Big 4 – Big 4 Says, "Huh?"

By Francine • Nov 12th, 2007 • Category: BDO, Deloitte, EY, KPMG, PricewaterhouseCoopers


New chief of BDO challenges Big 4

BDO International could be a “credible challenger” to the Big 4 accounting firms, according to its new head. Jeremy Newman, newly appointed chief executive of the company, told the Financial Times that he sees a large opportunity in the market but that becoming a fifth tier to the dominating Big 4 “would be a sign of failure”.

“Being a credible alternative doesn’t mean being the same. There’s no doubt the Big 4 are essentially global corporations driven out of head offices. We’re more adapted to the local market,” he said.

 

…BDO …has over 600 offices in 100 countries.

You’ve got to wonder what this guy is smoking…The FT article goes on to quote Mr. Newman, “…there are invisible barriers to entry to the market for top-level company audits (for the non-Big 4).” The article also states, “In the UK, for example, all the FTSE 100 are audited by the Big Four and only eight of the FTSE 250 are non-Big Four, shared between BDO Stoy Hayward and Grant Thornton, its biggest rival.”

Recent UK research by BDO Stoy Hayward showed nearly half of investors would be concerned if a company switched to a non-Big Four auditor and a third would review their investment decisions. But of those with concerns, a quarter were unable to say why and a third could only cite lack of reputation.

“A lot of these perceptions are based on assumptions that have been there a long time,” said Mr Newman. “We’ve managed to displace those in the UK and the US…”

Why would the FT print such incredible crap? It’s PR, not news. Where’s the critique? That sounds like some good reasons for lack of credibility. I’m not sure the US firm will be much help to BDO International or that anyone has displaced those concerns here. On the contrary, the statistics and their reputation are not much better with US based companies.

Per Ames Research Group International:

BDO Seidman US Marketshare
With BDO Seidman’s future in the US audit market now the subject much speculation and discussion, it might be useful to look just how big their US marketshare is.

BDO Seidman audits approximately 305 US-based “public” companies—meaning they file a 10K with the SEC. Not all of that number are currently trading. Furthermore, this excludes mutual funds and benefit plan audits. By that measure, BDO Seidman is the the 2nd largest 2nd tier firm, behind Grant Thornton with about 50 more clients.

 

KPMG is the closest Big Four firm, with almost 3 times more clients.

For another view on why the next-tier firms are “not ready for prime time“, go to Jim Peterson at the IHT.

In June of 2006, the last time this report was published in this form by Compliance Week, the statistics were startling.

This Internal Control Report Scorecard, developed by Compliance Week, tracks the “Pass/Fail” grades of public companies on Section 404 of The Sarbanes-Oxley Act of 2002. The data are from the 10-Ks of the Russell 3000, and are derived from the section titled: Report of Independent Registered Public Accounting Firm.
The Big Four

Deloitte & Touche, LLP
10-Ks Audited 488
10-Ks Passed 442 Percent Passed 90.57%
10-Ks Failed 46 Percent Failed 9.43%

Ernst & Young, LLP
10-Ks Audited 756
10-Ks Passed 708 Percent Passed 93.65%
10-Ks Failed 48 Percent Failed 6.35%

KPMG, LLP
10-Ks Audited 530
10-Ks Passed 484 Percent Passed 91.32%
10-Ks Failed 46 Percent Failed 8.68%

PricewaterhouseCoopers, LLP
10-Ks Audited 618
10-Ks Passed 571 Percent Passed 92.39%
10-Ks Failed 47 Percent Failed 7.61%

All Big Four
10-Ks Audited 2392
10-Ks Passed 2205 Percent Passed 92.18%
10-Ks Failed 187 Percent Failed 7.82%

The “Second Six”
BDO Seidman, LLP
10-Ks Audited 57
10-Ks Passed 44 Percent Passed 77.19%
10-Ks Failed 13 Percent Failed 22.81%

BKD, LLP
10-Ks Audited 4
10-Ks Passed 3 Percent Passed 75.00%
10-Ks Failed 1 Percent Failed 25.00%

Crowe, Chizek & Company, LLC
10-Ks Audited 9
10-Ks Passed 8 Percent Passed 88.89%
10-Ks Failed 1 Percent Failed 11.11%

Grant Thornton, LLP
10-Ks Audited 57
10-Ks Passed 44 Percent Passed 77.19%
10-Ks Failed 13 Percent Failed 22.81%

McGladrey & Pullen, LLP
10-Ks Audited 8
10-Ks Passed 8 Percent Passed 100.00%
10-Ks Failed 0 Percent Failed 0.00%

Moss Adams, LLP
10-Ks Audited 4
10-Ks Passed 4 Percent Passed 100.00%
10-Ks Failed 0 Percent Failed 0.00%

All “Second Six”
10-Ks Audited 139
10-Ks Passed 111 Percent Passed 79.90%
10-Ks Failed 28 Percent Failed 20.10%

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6 Responses »

  1. That 20% of the second tier CPA firms’ clients have internal control problems proves nothing. Why? Firstly, their clients are smaller. Correct for size of client in terms of market cap and see what happens. Next, it may mean that the smaller firms are tougher to satisfy. A few years ago Martin Weiss of Weiss ratings did a study of CPA firm “going concern” comments and found that the smaller firms were more likely to insert them in circumstances he thought appropriate than the Big Five at the time. This ratio analysis in your post proves nothing to me.

  2. There’s another problem with the ratio “test”. What? The SEC is much easier on the Big 87654 than other firms. I used to work for a Big 8 firm and now do my own SEC stuff. It’s my observation that SEC staffers look to pass Big 87654 stuff. Why? They’re looking for Big 87654 jobs when they leave.

  3. The purpose of the statistics was primarily to show the huge gulf in the number of 10Ks audited by the next six firms vs the Big 4. The error rate tells me that the smaller firms get the smaller, riskier, more resistant to SOx clients who are also cost conscious. They had a longer way to go to become compliant than most larger companies. Larger companies that didn’t make it dumped their Big 4 firm and went to the next tier, as evidenced by the marginal companies still choosing BDO.

  4. I work at a non-big 4 national firn and am very disappointed by the quality, documentation, and caliber of partners. We did a much better job at PwC. I was proud of my work. Here, I feel like we are always cutting corners and driving the work by the budget. This happens at Big 4 I am sure, but there was a much greater emphasis on quality. We questioned our clients a lot more. I know Big 4 isn’t always the solutions but some of the lower tier firms are certainly not better.

  5. I work at a local firm, and am proud of my work. The quality is just as high as when I was with a Big 4.

  6. [...] and cognac pow-wow.  And I’m incredulous to see Jeremy Newman of BDO International still huffing and puffing a seemingly progressive and transparent patter with whomever will interview [...]

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