Regulators Clueless on Big Four Failure

What would happen if PricewaterhouseCoopers, Ernst & Young, Deloitte & Touche, or KPMG were to collapse?

"None of us has a clue what to do if one of the Big Four failed," maintained William McDonough, chairman of the Public Company Accounting Oversight Board, in public remarks earlier this week, according to the Financial Times.

Speaking at a conference in New York sponsored by the American Law Institute and the European Corporate Governance Institute, McDonough noted that he was relieved when the Department of Justice and KPMG reached a settlement last month regarding the firm's tax-shelter practice.

The potential for a major accounting firm to fail has become a heightened worry ever since Arthur Andersen was virtually driven out of business in 2002, when it was convicted for its role in the Enron scandal. The conviction was overturned by the Supreme Court earlier this year, though far too late to preserve Andersen's effectiveness as a major audit firm.

Huge problems would be created if the ranks of the largest accounting firms were to shrink from four to three, especially because Sarbanes-Oxley auditor-independence rules require that companies retain one firm for audit work and another for consulting and advisory services.

Simply merging the fifth-largest through eighth-largest firms wouldn't work, McDonough reportedly added; even in combination, such a firm would not match the capabilities of the Big Four.