New research: The Big Four adapt their transparency depending on who is watching
The world’s four largest accounting companies appear open in one country and closed in another. This inconsistency may undermine trust in the profession and ultimately harm the global economy – argues the CBS researcher behind a new study
Over the past decade, Deloitte, PwC, EY and KPMG have transformed from traditional auditors into global advisory companies with extensive business interests. Today they assist both governments and multinational companies on complex economic issues.
However, this development comes with a downside. The degree of transparency varies significantly depending on where in the world they operate and who is watching.
A new study published in Contemporary Accounting Research describes this phenomenon as transparency arbitrage, which is the strategic adaptation of how much information one chooses to reveal.
According to Saila Stausholm, postdoctoral researcher at the Department of Organization at CBS and lead author of the article, the study is highly relevant for the public, as the Big Four function as semi-public institutions.
“As state-authorised auditors they have been assigned a central role in ensuring truth and transparency in markets. At the same time, they have expanded their business far beyond auditing. Today they advise both companies and governments on everything from artificial intelligence and economic policy to accounting standards and international tax arrangements,” explains Saila Stausholm.
The Big Four’s dual role challenges trust
“ If they appear open in one country but closed in another, it undermines their credibility everywhere. ” Saila Stausholm
Postdoctoral researcher at the Department of Organization at CBS
Their position makes them structurally important organisations whose interests and governance have societal consequences, notes Saila Stausholm:
“If they appear open in one country but closed in another, it undermines their credibility everywhere. Especially since we know that their work in less transparent jurisdictions is often linked to tax avoidance, which has real and damaging effects such as increased inequality and weakened public finances.”
The study is based on an extensive mapping of the corporate structures of the Big Four across countries and jurisdictions.
The researchers analysed publicly available company data and registries to understand how the companies organise their activities in low-tax jurisdictions and use cross-border structures to reduce transparency.
When addressing authorities, investors and the public in Europe, the Big Four emphasise openness and accountability. On their Danish websites, for instance, information about governance, diversity and corporate structure is easily available.
But the same companies appear far more secretive in other countries, particularly in so-called offshore jurisdictions such as Bermuda and the Cayman Islands. In these places, even basic information such as the number of employees or the composition of management may be missing.
According to the researchers, this is no coincidence. The jurisdictions where information is most limited are often the same ones used to minimise tax.
Potential for regulation
In recent years, the EU and OECD have introduced country-by-country reporting requirements for large companies. However, these rules do not apply to the accounting companies, as they are formally organised as networks of independent entities rather than as multinational corporations.
According to Saila Stausholm, this complex structure is key to understanding the varying levels of transparency.
“The Big Four market themselves as global organisations, but in legal terms they are made up of local partnerships, which means they can present themselves as a single global brand while avoiding being treated as true multinational companies,” she explains and adds:
“The structure offers flexibility. It allows them to provide seamless services across borders, but it also fragments responsibility. To regulators they can say, ‘We are only responsible for our local entity.’ To clients they can say: ‘We can support you globally.’”
The study suggests that new rules could require accounting firms to disclose more information about their activities and finances in each country, however, greater transparency alone may not solve the issue. The researchers therefore point to another possible step: separating auditing from advisory and consulting services. Independent auditors would then have a clearer incentive to identify errors, fraud and potentially aggressive tax planning.
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Contact
Saila Stausholm
Postdoctoral Researcher, Department of Organization
Copenhagen Business School (CBS)
+45 3815 2951
sas.ioa@cbs.dk
Martine Mengers
Journalist, Copenhagen Business School (CBS)
+45 41852625
mm.slk@cbs.dk
Facts: The Big Four
The four global accounting firms – Deloitte, EY (Ernst & Young), KPMG and PwC (PricewaterhouseCoopers) – together employ more than one million people worldwide. In addition to auditing, they provide advisory services in tax, finance, technology and strategy.
Facts: How the researchers conducted the study
Method:
Systematic review of company websites in all countries, including analysis of geographical location, number of employees and ownership structures.
Purpose of the study:
To examine how global accounting companies can offer contradictory services. The researchers find that they can do so by projecting different signals to different audiences – for example, about organisational transparency – a practice they call transparency arbitrage.