The gang of four

An article yesterday on Bloomberg News (not available on the web) confirmed what a PricewaterhouseCoopers executive told me last week: PwC, Deloitte, and Ernst & Young have all issued instructions to their partners and staff not to denigrate or poach the clients of KPMG. The Bush administration is seeking a settlement on charges related to KPMG’s sale of tax shelters, rather than seeking to press charges. Instead the individual partners are facing criminal charges. It was clear from the start that regulators such as the SEC had no interest in pursuing KPMG in the same way that they hounded Arthur Andersen. Moving from four to three top auditing firms would result in massive reputational damage for the audit profession, forcing clients and regulators to reassess the current cozy oligopoly. So the audit firms are acting extremely differently from when Arthur Andersen was in trouble, when the attitude – and actively encouraged behavior – was kick them when they were down. The question becomes, if neither regulators, clients, nor the Big Four themselves will allow any of them to disappear, what is the moral hazard? I believe the firms understand that they will do the best when their practices are pristine. But knowing you can get away with it is not the best foundation for good behavior.