The new "Big Three"?

Just weeks after the US Supreme court reversed Arthur Anderson's conviction for obstruction of justice (too late; the company was also found guilty in the court of public opinion, from which there is no appeal), we now get news that KPMG is also facing a criminal indictment for obstruction of justice and the sale of abusive tax shelters. Shortly after Arthur Anderson's conviction, former Securities and Exchange Commission Chair Arthur Levitt said "I don't believe that Anderson is any worse than any of the other firms." Perhaps he was right, but not in the way he intended!

If KPMG falls, the Big Five accounting firms will be down to three: Deloitte, Ernst & Young, and Pricewaterhouse Coopers. Meanwhile demand for accounting and consulting services continues to rise in the wake of Sarbanes-Oxley. Will we see a new firm rise to join their ranks, or will America have a new "Big Three" now that Chrysler is foreign-owned?

Before and since the Enron collapse, Max Bazerman, George Loewenstein, and Kimberly Morgan have argued that this is a problem that will not go away until the US accounting system is fundamentally changed. They have suggested three key changes which would go a long way toward creating both the appearance and fact of auditor independance:

1. Auditing firms should only provide auditing services.
2. Auditing contracts should be of a fixed duration with fixed compensation, during which time the client cannot fire the auditor. At the end of the contract term, the auditor should not be rehired; rather, the major accounting firms should rotate clients.
3. Companies should be prohibited from hiring accountants who have worked on their audit engagement. (Sarbanes-Oxley established a one year "cooling off period" which is insufficient.)