Deloitte. Price, Waterhouse, and Coopers. Ernst and Young. Klynveld, Peat, Marwick, and Goerdeler. The names of the green-eyeshade financial services firms—some now truncated (i.e., PwC, EY, KPMG)—still honor long-dead accounting partners, even as the so-called Big Four have in recent decades expanded well beyond the narrow field of auditing and accounting services.

The authors of The Big Four, Ian Gow and Stuart Kells, offer a great description of how truly dominant these four firms are on the audit side. They write, "Of the 500 companies in the S&P 500 index, 497 used a Big Four auditor in 2017." Gow and Kells both have the credentials to write this book: Gow previously worked at Andersen Consulting while Kells worked at Deloitte and then was a director at KPMG. (He also was a receiver on the Lehman Brothers bankruptcy.) Notwithstanding those connections, the book is a mostly critical look at the industry and the evolution of the firms. The authors were apparently compelled to write the book, at least in part, because "much of the extant history of the Big Four was commissioned by the firms themselves."

Infancy / Gow and Kells begin their tale with the Medici Bank of 14th and 15th century Italy, whose operations would have important parallels to the Big Four. Medici Bank was a network of partnerships operating as a far-flung network of branches and agencies throughout Europe, with each having an assigned geographic territory and defined services. This structure is not unlike the business model that the Big Four firms follow today. Profit-sharing and the "partner track" were also institutions at Medici that have found homes in the Big Four.

Centuries after the fall of Medici, the Big Four got their start in 19th century London. This was a chaotic era of hyper-growth in the accounting industry, which was (not surprisingly) followed by a period of consolidation:

In 1811 the London trade directories listed twenty-four accounting firms. Seventy years later they would list 840. Many of the men who were attracted to accountancy would quickly leave the field.

Among those who remained were Deloitte, Price, and Cooper, who started their practices mid-century. They occupied themselves primarily in sorting out business failures, what Gow and Kells describe as "a boon for accountants" that was more important than even auditing and bookkeeping in those early days.

Maturity / The Big Four reached maturity in the 20th century, becoming the types of operating entities that we are familiar with today. Among their features:

diversification of the firms' activities, particularly into "management consulting" or "advisory" services; cosying up with governments; benefiting from the "audit explosion" and the rise of the "audit society"; and, like modern Medici, spreading out internationally, with networks of branded franchises in which each national practice was a separate legal entity.

Fueling this massive growth was a new, reliable cash cow resulting from the 1929 stock market crash and the Great Depression: government accounting mandates under the Securities Act of 1933 and the Securities Exchange Act of 1934, especially the requirement for independently audited financial statements.

This was just part of the "complex relationship with government" that benefited the Big Four in the 20th century. Gow and Kells write:

The firms provided advice and services in support of infrastructure investment, health-care policies, defence procurement, the design of regulations, and nearly every other aspect of public administration…. At the same time, they spent millions lobbying bureaucrats and elected officials in order to shape the legal environment in which they operated. The firms were called upon to help write important pieces of commercial legislation.

Given the incentives to get involved in the legislative and regulatory processes, the lines between the work of the Big Four and "Big Law" became blurred, with thousands of lawyers on staff of the accounting firms. An even more significant trend in the industry began when Arthur Andersen (formerly a "Big" accounting firm; there once was a "Big Eight") entered the consulting business in the 1950s. Price Waterhouse (as it was then known) followed in 1963, applying the moniker "management consultancy services" to its growing army of consultants. One major benefit of this move was the smoothing out of the volatility of seasonal bookkeeping and audit work.

Adulthood / The Big Four have had their share of near-death experiences, oftentimes involving questions of quality of performance. The biggest breakdown did destroy a Big firm: Arthur Andersen (AA), which imploded in the wake of the Enron scandal. AA was convicted of obstruction of justice in the investigation of Enron, though that decision was later overturned by the Supreme Court. That reversal was too late for AA; in the interim between the initial verdict and the Supreme Court's ruling the firm suffered an enormous reputational hit and lost its ability to audit, its bread-and-butter business along with tax and consulting. Tens of thousands of Andersen employees had to transition elsewhere. Gow and Kells do not give much detail on the AA collapse, which is a little surprising given that it was such a singular event in the history of the Big accounting firms.

The authors also offer comments on the 2008 financial crisis, noting the Big Four's role in monitoring some of the firms that were at the center of the crisis:

Deloitte had audited Bear Stearns and Fannie Mae. KPMG had audited Citigroup. PwC had audited American International Group and Goldman Sachs. EY had audited Lehman Brothers.… Lehman, Bear Stearns and Northern Rock all received unqualified audit opinions before their collapse.

They offer some detail on the Lehman Brothers collapse and the use of Repo 105, which they describe as an "aggressive form of financial window-dressing." (See "Is There Value in Revisiting the Lehman Collapse?" Spring 2017.) They also highlight the over $100 million in settlements for EY, which was Lehman's auditor.

Another chapter in this section of the book delves into detail on "the audit expectation gap," the difference between what financial statement users believe the role of auditors is and what auditors themselves believe their role is. Typical of the auditors' view is John McDonnell of PwC, who led the firm's audit of Bank of Ireland, which saw its stock price collapse during the financial crisis: "Matters such as stability, capital adequacy and future prospects are outside the remit of accounting standards." Gow and Kells seem to agree:

Yet this might be one area in which the auditors' lamentations regarding the expectation gap have some merit. Predicting bankruptcy requires skills and information well beyond those required to audit financial statements.

Although The Big Four includes a few high-level references to failing firms, a much more detailed case study of one or more of the problem institutions would have been more illuminating.

Twilight / This final part of the book considers what life will be like for the Big Four going forward. Gow and Kells raise the possibility that many workplace trends may not only disrupt the Big Four's comfortable business model, but destroy it. The authors believe the flexibility of finding consultants in the "gig economy" outside of the Big Four, on websites such as Freelancer.com, is one such threat. Developments in big data, which allow competitors to be more agile in their auditing and consulting analysis, can bypass sampling and the Big Four's labor-intensive business model. Finally, competition from universities, nonprofit think tanks, government bureaus, and offshoring, along with antitrust challenges on the legal front, will likely chip away at the dominant position the Big Four have long held on auditing and advisory work. This final section of the book offers some unique insights.

Overall, the book is a compelling read. However, readers hoping for a deep dive into many of the questions about failings of the Big Four over the past 20 years will be disappointed by the limited discussion given to those major events.