BIG FOUR PUBLIC CLIENT PORTFOLIOS: IS THE RISK DISPERSED?

Abstract

We examine the Big Four public client portfolios to determine if there appears to be homogeneity of business risk—an overall firm risk of loss arising from accepted clients—across the four accounting firms’ public company portfolios. If a varying risk profile exists among the firms, then the potential for another “Enron” event resulting in a failing firm may be more likely. Using the Audit Analytics’ proprietary Accounting Quality and Risk Matrix data for almost 4,200 clients, our results find statistical support for one of the Big Four being dissimilar than the others due to its existing long-term client base and its more recent client acquisitions. This result is consistent with one firm taking a unique risk profile relative to the other large firms. This provides a cautionary note to regulators and investors as any further reduction in the Big Four may have a significant negative impact on the capital markets assurance function.