The Big Four - Accounting firms under scrutiny | DW Documentary

The big four accounting firms Ernst Young, KPMG, PwC, and Deloitte, are noted for their influence on market economies, auditing corporate financial statements. The Wirecard scandal in Germany highlighted failures in their auditing processes as they failed to uncover fraud over many years. This raises questions about their effectiveness and the systemic issues within auditing. Meanwhile, ordinary investors like Thomas Haggert were misled, losing savings invested in seemingly secure firms like Wirecard.

The concept of statutory audits was introduced during the Great Depression in 1931 to ensure transparency and prevent financial misreporting. The big four firms, a result of mergers and expansions, dominate the audit industry. Despite their role, these firms have been criticized for failing to detect major frauds like Wirecard, suggesting potential systemic issues in their auditing practice.

Auditors are legally required to verify annual financial statements with professional skepticism. Yet, they often miss errors in financial statements, possibly due to conflicts of interest since companies hire and pay their auditors. Furthermore, the firms offer both audit and consultancy services, which muddies their independence, as audit quality is potentially compromised by their consultancy profits, leading to conflicted interests within corporate auditing practices.

Consultancy now constitutes a majority of income for the big four firms. This dual role raises conflicts of interest, as firms may prioritize lucrative consulting agreements over independent auditing, potentially affecting audit quality and independence. This conflict has historical precedence such as Enron's scandal that led to Arthur Andersen's collapse, highlighting the risks of overlapping audit and consultancy functions.

Efforts to reform the auditing system, such as separation of audit and consultancy practices, faced considerable political lobbying, diluting proposed EU reforms. Countries like Germany introduced reforms with exceptions, allowing auditing firms to act as consultants to their audit clients, perpetuating potential conflicts of interest within the industry's structure.

The influence of big four firms extends to legislative processes as they provide consultancy and have ties with governmental institutions. This positioning makes them highly influential, often allegedly impacting legislation to their advantage. Such instances raise questions about the integrity and independence of the auditing process and regulatory oversight.

In cases like Wirecard, auditors from EY failed to act decisively despite internal doubts about the company's integrity, continuing to issue unmodified opinions. Investigations revealed that auditors may have ignored warning signs, eroding trust and resulting in reputational damage. The practice of supporting consulting revenues seems to have overshadowed the auditing mandate, compromising firm independence.