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๐๏ธ Online Travel: AI is Coming
โIt takes 20 years to build a reputation and five minutes to ruin it.โ 1
In 2002, Arthur Andersen, once a pillar of the accounting world, learned this lesson the hard way. Involvement in the Enron scandal shattered its credibility, leading to the firm's demise and the end of the โBig Fiveโ era.
From the ashes of this scandal, the remaining four accounting firmsโDeloitte, PwC, EY, and KPMGโsolidified their dominance, becoming the unchallenged titans of the accounting industry.
Today, they audit most of the largest public companies and employ over 1.5 million people worldwide. I used to be one of them, as a PwC auditor. ๐ค
In the past decade, their revenue has soared, proving that big can get even bigger. But this growth comes at a cost. Expanding their consulting and advisory segments has led to conflicts of interest and numerous violations of regulations meant to ensure audit independence.
How do they make money?
๐ Audit: This core service involves independently verifying a company's financial statements to ensure accuracy and compliance with accounting standards.
๐ Assurance: Extending beyond basic audits, this includes processes, internal control, cybersecurity assessments, and fraud investigations.
๐ Consulting: This high-growth segment is where the Big Four flex their strategic muscles, offering advice on everything from mergers and acquisitions to digital transformation.
โ๏ธ Enterprise Software Sales: The Big Four play a crucial role in the enterprise software market by leveraging their industry knowledge and client relationships to recommend and implement solutions that align with business goals. They often partner with major software vendors and earn commissions or referral fees on successful sales.
๐ฐ Risk and Tax advisory: The Big Four help businesses navigate compliance, regulations, and tax laws.
Let's dive into the fascinating rise of the Big Four, exploring their diverse roles and the potential implications of their extraordinary size.
Today at a glance:
Deloitte: Pulling Away.
PwC: $1 Billion On Gen AI.
EY: Project Everest 180.
KPMG: Smart Audit Technology.
Deloitte: Pulling Away
๐ผ Key Facts:
Headquarters: London, UK.
456,000+ employees in FY23.
Operates in over 150 countries and territories.
Serves nearly 90% of the Fortune Global 500 companies.
๐ FY23 Revenue Breakdown:
Total revenue grew 15% Y/Y in local currency to $65 billion.
Consulting was the fastest-growing segment, rising 19% Y/Y to $34.5 billion.
The second fastest was Risk Advisory, growing 18% Y/Y to $5.1 billion.
Audit & Assurance was 31% of overall revenue, down from 51% in 2013.
๐ Recent Insights:
Deloitte is heavily investing in AI and digital transformation, boosting consulting (strategic development and digital transformation) and risk advisory (cyber risk, compliance).
The company has been the fastest-growing Big Four, more than doubling revenue in the past decade, with growth accelerating in the past three years.
Deloitte's acquisition of smaller consulting firms like HashedIn (cloud), Terbium Labs (cybersecurity), Keytree (SAP), AE Advisory (energy investment banking), and End Point (public health) has been a key growth strategy.
PwC: $1 Billion On Gen AI
๐ผ Key Facts:
Headquarters: London, UK.
364,000+ employees in FY23.
Operates in 151 countries and territories.
Serves 87% of the Fortune Global 500 companies.
๐ FY23 Revenue Breakdown:
Total revenue grew 10% Y/Y to $53.1 billion.
India has been the fastest-growing region, up 24% Y/Y.
Advisory was the fastest-growing segment, rising 13% Y/Y to $22.6 billion.
Assurance made up 35% of overall revenue, down from 46% a decade ago.
๐ Recent Insights:
PwC is investing heavily in AI and tech, recently launching a $1 billion generative AI initiative with Microsoft, aiming to enhance efficiency and service offerings.
PwC will become the largest customer and first reseller of OpenAI's enterprise product as part of a new deal.
The firm focuses on the financial services industry (28% of revenue), serving most global banks and insurers, making it a leader in this sector.
EY: Project Everest 180
๐ผ Key Facts:
Headquarters: London, UK.
395,000 employees in FY23.
Operates in 150 countries and territories.
Serves 84% of the Fortune Global 500 companies.
๐ FY23 Revenue Breakdown:
Total revenue grew 14% Y/Y in local currency to $49 billion.
Consulting was the fastest-growing segment, rising 22% Y/Y to $16.1 billion.
Assurance was 31% of overall revenue, down from 42% a decade ago.
๐ Recent Insights:
EY has invested $1.4 billion to create its own AI platform and Large Language Model (LLM) called EY.ai EYQ.
The firm abandoned its ambitious "Project Everest" plan to split its audit and consulting businesses in 2023 due to partner disagreements, despite regulatory concerns. It led to a 5% cut of the workforce.
EY is doubling down on growing its business through strategic acquisitions, such as the recent purchase of Nuvalence, an IT consulting firm with over 140 employees focusing on AI transformation.
The firm has faced criticism for its role in the Wirecard accounting scandal, which revealed a nearly $2 billion hole in its accounts, raising serious questions about its audit practices and risk management.
In 2022, EY was fined $100 million by federal regulators because hundreds of employees cheated on ethics exams (you canโt make this up).
KPMG: Smart Audit Technology
๐ผ Key Facts:
Headquarters: Amstelveen, Netherlands.
273,000+ employees in FY23.
Operates in 143 countries and territories.
Serves 82% of the Fortune Global 500 companies.
๐ FY23 Revenue Breakdown:
Total revenue grew 8% in local currency terms to $36 billion.
Advisory services were the fastest-growing segment, with a 10% increase.
Audit was 35% of overall revenue, down from 44% in 2013.
๐ Recent Insights:
KPMG is focusing on digital transformation and expanding its capabilities in data analytics, artificial intelligence, and cybersecurity.
The firm continues to invest in and enhance KPMG Clara, its cloud-based audit platform that leverages data and analytics to deliver more efficient and insightful audits.
KPMG has faced regulatory scrutiny and fines in the UK related to its audit practices (such as Carillion or The Works), highlighting the ongoing challenges in maintaining audit quality and independence.
Whatโs Next?
The Big Four stand as titans of the accounting world, driving innovation and shaping industry standards with their vast resources and global reach. Their investments in AI and digital transformation signal a new era of possibilities.
Yet, with great power comes great responsibility. The revenue share of Audit and Assurance is shrinking in favor of Consulting. Conflicts of interest, regulatory scrutiny, and maintaining audit independence are critical challenges they must navigate.
As they forge ahead, the specter of Arthur Andersen looms as a cautionary tale of ambition unchecked. Striking the delicate balance between growth and integrity is paramount, lest history repeat itself in a catastrophic encore.
Itโs not clear yet if their growing influence will prove to be an asset or a liability.
Thatโs it for today!
Stay healthy and invest on!
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Author's Note (Bertrand here ๐๐ผ): The views and opinions expressed in this newsletter are solely my own and should not be considered financial advice or any other organization's views.
Quote from Warren Buffett - Berkshire Hathaway Letter (2014).
Hi, quick question. Why do you say PwC audited FTX? Not true unless you know something no one else knows.