July 2017

the Big Four – A study oF opACity

ACknowledgments
This report was written by Richard Murphy and Saila Naomi
Stausholm.
Richard Murphy is Professor of Practice in International Political
Economy at City, University of London. He is a UK charteredaccountant, was a founder of the Tax Justice Network and is directorof Tax Research UK.
Saila Naomi Stausholm is a PhD candidate in international political
economy at Copenhagen Business School, affiliated with the EU
Horizon 2020 “Combating Fiscal Fraud and Empowering Regulators”
Coffers project.

Contents
1. Key findings, p3
2. Introduction, p4
3. Background to the
Big Four, p6

Research funding for some of the work undertaken in the preparationof this report was provided by the GUE/NGL European United
Left/Nordic Green Left group of European parliamentarians, whose
support is gratefully acknowledged.

4. Research approach,p9Richard Murphy’s work on country-by-country reporting is undertaken
at City, University of London as part of the EU Horizon 2020 Coffers
project.

5. Big Four officelocations, p10

Richard Murphy and Saila Naomi Stausholm have asserted their rights
under the Copyright, Designs and Patents Act, 1988, to be identified
as the authors of this work.

6. Big Four staff
locations, p18

This report has been published by Tax Research LLP in association
with CITYPERC (City Political Economy Research Centre).

7. Big Four firmorganisation: a casestudy on KPMG, p23

Contact details for correspondence:
Professor Richard Murphy
Professor of Practice in International Political Economy
Director, Tax Research UK
Rm D520, Department of International Politics
School of Social Sciences
City, University of London
Northampton Square, London EC1V OHB
Email: richard.murphy@city.ac.uk
All photos used are purchased from Shutterstock.
Editing and layout by GUE/NGL.
Visit guengl.eu for more information.

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July 2017

8. Conclusions:managing the Big
Four, p28
9. Appendix: secrecy
jurisdictions, p34
10. Endnotes, p36

the Big Four – A study oF opACity

1. key FindingsTn delivers opacity on the actual scale of their opHE research noted in this report, which is thefirst ever study of the issues it addresses, erations and the rewards flowing from them.
suggests that:
These advantages can be secured by these firms
n The Big Four firms of accountants do not ac- because the regulation of auditing and the supply
curately report all the jurisdictions in which they of taxation services is devolved by the EU to memwork, although PwC come close to doing so. We ber states even though, as this report shows, thefound that they operate in 186 jurisdictions in all supply of three services is dominated by what appear, for all practical purposes, to be multinationalwith an average of 3.41 offices per jurisdiction;
corporations.
n The Big Four have offices in 43 of the 53 seWe suggest that in an era where transparency iscrecy jurisdictions identified in this report;
seen as fundamental to accountability it is inappron It is difficult to establish precisely how many of- priate for the world’s leading auditors to be almost
fices each of the Big Four firms have but what is wholly opaque on their operations and to provide
clear is that the size of their operations in a juris- no effective reporting on their own activities when
diction is not always proportional to its population they play a fundamental role in the regulation ofor GDP. The Big Four have more staff in Luxem- global capitalism.
bourg in proportion to the size of the local populaTo counter the risk that these structures impose
tion than in any other country; the Cayman Islands
on society we suggest that firms organised in thiscome second in this ranking and Bermuda third;way:n We have not been able to accurately locate alln Should be defined as being under common
the staff employed by the Big Four. In the case of
EY we were only able to identify where 83 per cent control, and so are single entities for group accounting purposes within the European Union;of their staff work;n A case study on the legal structure of KPMG
could not identify the legal ownership of its offices
in 55 jurisdictions;n Should be licenced as single entities for audit
and taxation purposes throughout the European
Union;n Despite the Big Four having central management organisations, the firms all claim to be networks of independent entities that are said to belegally unrelated to each other.

n Should be required in due course to separate
entirely their audit and other professional services
but until this is possible should be required to ringfence the two from each other worldwide as a condition of being licenced to provide such services inthe EU;We suggest that the structure adopted by the Big
Four firms of accountants, which at one level suggests the existence of a globally integrated firm andat another suggests that they are actually made up
of numerous separate legal entities that are notunder common ownership but which are onlybound by contractual arrangements to operatecommon standards under a common name, hasbeen adopted because it:n reduces their regulatory cost and risk;n Should, as a condition of those licenses, be required to prepare worldwide group consolidated financial statements which must be published on
public record;n Should ensure that those consolidated financial
statements include full public country-by-country
reporting.

n ring-fences their legal risk;n protects their clients from regulatory enquiries;

July 20173

the Big Four – A study oF opACity

2. introduCtion

T

HERE has been considerable debate about
secrecy jurisdictions in recent years, ignited
by leaks such as the Panama Papers. These
revealed the extent of tax avoidance and illicit financial flows by wealthy individuals, including
prominent political figures, and large corporations.
In light of this, questions are being raised on how
to improve regulation targeting tax avoidance andmoney-laundering strategies, as well as increasingtransparency of the places and actors who enable
and promote these strategies.
This report provides evidenceof the opacity that surrounds
the activities of the world’s Big
Four firms of accountants, who
it shows to be active in secrecy
jurisdictions. They are, in orderof size, Deloitte, PricewaterhouseCoopers or PwC, EY(until recently Ernst & Young),
and KPMG.

“

that auditing firms play a significant role in our
economy through the trust placed in them to reporton the truth and fairness of the financial statementsof firms to regulators and investors. The fact thatthey play an important role in tax havens, or secrecy jurisdictions as we prefer to call them2, justadds to curiosity about the activities of these firms.
Since the Global Financial Crisis of 2008 various
attempts have been made to improve the transparency of the world’s major corporations to assist
public understanding of therisks that they create and to
improve their accountability
for the activities that they undertake. One of these developmentshasbeen
country-by-country reporting,which demands that each
global entity accounts locallyfor the activity that it undertakes. The research in this report used part of themethodology of country-bycountry reporting to seek todetermine just where the Big
Four accounting firms are, how much use they
make of secrecy jurisdictions, what their local operations are called and how many people they employ in each place where they have an office. No
attempt was made to establish local financial results – the prospect of success was too limited as
the firms do not generally disclose this information.

our findings
suggest thatthe Big Four
firms are overrepresented insecrecy
As this report notes, thesefirms dominate the audit mar- jurisdictions

ket for all the world’s major corporations.
For
example,between them they audit all but two of the FTSE
100 companies registered in the UK, and all but 10of the FTSE 350 companies1. They are also economically significant in their own right: their combined sales revenue exceeded €120bn in 2016. Of
this sum €43bn was earned from audit and assurance services, almost €28bn from tax services and€49bn from consulting. Between them they employed 887,695 staff in 2016 whilst appearing tooperate, in our estimate, in 186 jurisdictions. It also
appears that they make exceptional profits: for example, the average Big Four partner in the UK
earned in excess of £500,000 (€625,000) in 2016.
Having noted the above, we have now made reference to much of the available financial data thatthese firms want the world to know about theirglobal operations. Such is their ability to create
opacity that they have been very successful at preventing further information about their operations
being made available for anyone to easily appraise.
Our interest in these firms is based on the fact

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July 2017

Substantial effort was required to find the data on
offices and personnel. This was not helped by thefact that none of the firms publish absolutely accurate lists of where they are located, although PwC
comes close. Deloitte and KPMG both appear to
make mistakes on this issue in their own Transparency Reports. In every case there was someunder-reporting.
Overall our results suggest that these firms operate 2,916 offices in 186 locations in the world, withan average of 3.4 offices in each jurisdiction where
they work. The firms say that they employ a totalof 887,695 staff in these locations; we found thatthe most by far were in the USA.

the Big Four – A study oF opACity
As a result of our work we were able to locate thejurisdictions where 808,176 (91 per cent) of thesepeople work using a variety of research methods.
Our lowest success rate (82.9 per cent) was for EY,
which appears to be by far the most secretive of
the firms.

costs on society at large. As a result we make fourrecommendations aimed at improving the transparency and accountability for these firms throughregulatory changes.
The first recommendation is that these firms be
split so that their audit and other activities (including tax) are separated in the future. Only if this happens can the very obvious conflicts of interest
currently inherent within them be addressed. During the transition to this split we recommend thatthe audit and other activities of these firms be ringfenced from each other worldwide as a conditionof the grant of audit licences to their EU based network members.

Of the 186 locations where the firms are found 43
were secrecy jurisdictions. This total represents 81
per cent of all secrecy jurisdictions identified for research purposes in this report. A total of 9.9 percent of the staff of the Big Four firms that we could
locate work in secrecy jurisdictions. The firm withthe largest secrecy jurisdiction representation by
number of locations is KPMG, which is present in
40. Our findings suggest that the Big Four firms are
Secondly, we suggest a reform aimed at improvover-represented in secrecy jurisdictions when theiring transparency because these firms do not pubpresence is weighted by either local population orlish accounts for their group of networked entities
the jurisdiction’s GDP. On average, the number of
as a whole at present. We suggest that these netstaff employed in an office in a tax haven was alworked groups of firms must
most double that for an office
be considered to be single
in a non-secrecy jurisdiction
entities under common consmall state.
trol for EU regulatory purWith regard to ownershipposes and so be required tostructures, a case study wasfile a single set of consoliundertaken on KPMG. This
dated financial statements forshowed that the ownership of
their global operations. This
its network members is not alwill require, at most, a minor
ways disclosed in the locations
change in the EU legal definiin which it is active.
tion of a group so that working under a common identity
It is our suggestion that thewith common, contractually
Big Four, and other networks
enforceable standards beof professional services firms,
comes a definition of a group
adopt an opaque ownership structure with the rewithin the financial services sector.
sult that they are unaccountable. It seems likelythat there are advantages to doing so beyond theThirdly, we suggest that the same firms be rebenefits that opacity itself provides.
quired to apply for a single licence to provide audit
and taxation services of any sort throughout the
The first of these advantages is to limit their regEU, as a condition of which they will be required toulatory risk. The structure they use means that theircomply with the accounting recommendations weactivity in each place only has responsibility to local
suggest.
regulators. This simplifies and limits these firms’ liabilities.
Fourthly, to support this regulatory process andto hold these networks of professional service firms
Secondly, by splitting themselves into legallyto account, we recommend that they be required
unassociated parts, these forms seek to limit their
to file full country-by-country reports on public
legal risk in the event of failure on the firms’ part.
record.
Finally, the splitting up of their operations means
The Big Four are key to the operation of globalthat these firms protect their clients from enquiry
capitalism but fail that responsibility. The recomby authorities from outside the particular jurisdicmendations this report makes would change thistion from which services are supplied.
so that they account for their actions in every loIn our opinion these firms’ limitations of risk, cation in which they operate.
whether for themselves or their clients, imposes
July 2017“these
networked
groups of firms
must be considered
to be single entities
under common
control5the Big Four – A study oF opACity

3. BACkground: the Big 4
In this chapter we provide background information on who the Big Four firms of accountants
are and what they do as well as providing information on the scale of their operations andthat of their competitors so that the significance of their role in the regulation of global
capitalism can be properly understood.
A. THE CONTExTT

HE Big Four are firms that are traditionally thought to be accountants, but the reality isthat they make most of their income from a broader range of activities including
auditing (or assurance services, as they prefer to call them), advisory services (which
covers a wide range of consulting and other services) and tax-related activities. The firms inquestion are Deloitte3, PricewaterhouseCoopers (PwC)4, KPMG5 and EY6 (until recently
known as Ernst & Young).
The reality is that the Big Four firms are central to the operation of global capitalism. This
form of capitalism is dependent upon the logic of shareholder capital being accountably
used by management, which is distinct and separate from those who own the enterprise,
and whose actions are reviewed by independent auditors. This system could not function
without the audit services that the Big Four firms provide. These firms are, then, quasiregulators at the heart of the global financial system and yet we know remarkably little about
them. This presents a clear paradox: the accountability of global capitalism is dependent
upon firms that enjoy significant opacity about their own operations.
This may not be significant in itself but for the fact that these firms are widely known tooperate in many secrecy jurisdictions. It is estimated that between US$7.6 trillion7 and $21
trillion8 of wealth is held in secrecy jurisdictions. If this is only possible because the apparent
depositories for this illicit wealth can secure the local tax and audit services of the Big Four
firms in the secrecy jurisdictions where these funds are reported to be located, then it
follows that the operations of the Big Four firms are at the heart of the tax-haven world. The
scale of their operations in these places needs to be known and properly regulated.
B. THE SIzE OF THE FIRMS
A summary of the global income of these four firms, broken down between their threemain activities, is as follows (reported in US dollars since that is the currency that they use
for reporting purposes9):
Table 1 – Income by acTIvITy

To illustrate the extent to which these four firms dominate the market, the next two largest
firms are BDO and Grant Thornton, which had global turnovers of $7.6bn and $4.8bn
respectively. The difference in scale between the Big Four and all their competitors is readily
apparent.

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the Big Four – A study oF opACity
The global spread of this income as reported by the firms is as follows:

Table 2 – Global sPread of Income

Sources: As above. Note: only PwC provides the breakdown noted in italics.

This global spread is also apparent when their staff numbers are considered. The firms report these
to be as follows:

Table 3 – Workforce by ProfessIon

Table 4 – Workforce Global breakdoWn

Sources: as above.

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the Big Four – A study oF opACity
To put this data in context, BDO have a global headcount of 67,73110 and Grant Thornton employ
42,000 people11. The Big Four are substantially bigger than their competitors in terms of staff.

C. THE OPACITY

It is important to note the above data, to a very large degree, provides all the available financial
information that these firms wish to supply to us. These firms do not publish accounts for theirorganisation as a whole because, as is noted later in this report, they claim that no such globalorganisation exists.
The consequence is that we do not know their global profits, nor do we know information
regarding their financial stability. It is also the case that country-by-country reporting, as explainedlater in this report, does not apply to their activities in its current form. What all of this means is thatthese firms enjoy levels of opacity denied to many of their multinational corporation clients. The
remainder of this report is, then, a study of opacity.

D. THE ExCEPTIONS, AND THE ExCEPTIONAL PROFITSThe exception to this opacity only arises locally where, if required by local law, local representativesof these firms publish their annual financial statements. As an example of this local reporting, thefollowing data is published by the UK Big Four member firms, each of which uses a limited liability
partnership structure and as a result is required to put their financial statements on public record:

Table 5 – Uk fInancIal daTa

This data can be interpreted as follows:

Table 6 – Uk ProfITs Per ParTner

Sources: See endnote12.

The rewards for partners in these firms are exceptional. The average staff cost includes social
security and pension costs and as such are likely to be at least 20 per cent greater than actual salary
payments. Even so, average salaries in each firm are at least double the UK average of £26,624 perannum13. This implies that the advantages these firms have, coupled with their global spread, lets
them earn exceptional profits without explaining much about how, where and why this happens.

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4. reseArCh ApproACh
In this chapter we summarise the research approach that we have adopted in this study andthe links to country-by-country reporting. The form this research has taken has been inspiredby the accounting requirements of country-by-country reporting, which is one of the initiatives
promoted to explain the use made of secrecy jurisdictions and other locations.

C

OUNTRY-BY-COUNTRY reporting was first proposed by civil society14 in 2003 and was
adopted by the OECD in 2015 as part of Action 13 of its Base Erosion and Profit Shifting
Action Plan15. Country-by-country reporting is also likely to be required by EU regulationin due course, although the precise form of this regulation is as yet unknown16. The full detailof what country-by-country reporting demands is not of concern here except to note that it
requires a multinational corporation to disclose for every jurisdiction in which it operates:
n That it has a presence in the jurisdiction;n What the names of its subsidiaries in that place might be;n What those subsidiaries do in the locations in question;n How many people it employs in that location;n Limited financial data including its sales, profits before tax, tax due and paid and net
investment.

We were aware, as already noted, that the financial data required for country-by-country
reporting purposes would not be available for the vast majority of locations in which the Big
Four firms had offices and pragmatically decided not to pursue this line of enquiry as a result.
We also assumed that data on what the Big Four might do in each location in which they
operate would be similar, as proved to be true during the countless visits we made during thisresearch to their remarkably consistent national websites wherever they are located aroundthe world. The other three variables, however, appeared worthy of investigation.
Precisely because all of the Big Four firms have been extensively engaged in lobbying andJuly 20179

the Big Four – A study oF opACity
advising on country-by-country reporting17 we decided that to use the criteria it suggests areappropriate as the best way to appraise the global scale of the Big Four and the disclosure
they make on this issue.
Our research then focused on:n In which jurisdictions the Big Four have offices;n How many offices they have in each such location;n How many staff they have in each jurisdiction;n What information they disclose on the ownership of their local operations.

5. Big 4 oFFiCe loCAtions
In this chapter we explain why it is important to know where each of the Big Four operates
the methods that we used to determine that and the conclusions that we draw whichsuggest:n The Big Four forms do not reliably report where they operate;
n They have a significant presence in secrecy jurisdictions;n This presence in secrecy jurisdictions is hard to justify based on the GDP or populationof the secrecy jurisdictions where they have offices;n It is likely as a result that their presence in these locations is very largely related to theoffshore financial services sector that is located in these places.
A. METHODOLOGYE

ACH of the Big Four firms provides an office directory on their website18. In each casethe directory indicates the country in which the firm works and then the individual officelocations within that jurisdiction. These directories were the starting point for our workin identifying the places in which the firms work.

For each country for which a firm said it had a location, we then tried to determine thenumber of offices that it had in the country in question. This was not always straightforward.
Firstly, the number appears to be fluid: the data noted in this report is that which we could
establish in March 2017. The data was different from that established by an initial survey in
September 2016. Secondly, whilst EY simply listed one address per city, Deloitte on
occasion listed many. This required some judgment on occasion to decide when there may
be duplicate entries per location. Both KPMG and PwC also exhibited that problem in somelocations. Lastly, when we found countries in which the firm did not list an office in its global
office directory (which was the case for all firms) we undertook web searches to determine
how many city locations there may be where there were offices in the jurisdiction in question.
In each case we also checked the claims made in the office directories in a number ofalternative ways. One was to check the Transparency Reports that each firm now produces
on a global, and sometimes local, basis. Some of these had differing lists of locations inwhich the firms worked, as noted below.
In addition, as part of our work on the number of staff employed by these firms in eachcountry in which they operate (see section four of this report) we also undertook extensive

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the Big Four – A study oF opACity
web-based searches of LinkedIn and other sites that provide information on this issue,
looking at information published by the firms themselves and also as reported in othermedia. Where such searches indicated discrepancies with the office directories that thefirms published we sought to investigate the issue until we could be sure as to whether thefirm had a real presence in otherwise undisclosed jurisdictions or not.
B. FINDINGS
We found that not one of the Big Four firms published a wholly reliable list of their offices,
as this summary of our findings shows:
Table 7 – offIces Per JUrIsdIcTIon

Give or take (and as we demonstrate, a degree of tolerance is required) the Big Four firms
operate in a total of 186 jurisdictions with an average of 3.41 offices in which they arelocated.
It is important to note that the firms’ claims noted above vary on occasion. KPMG fairly
consistently claims to have 152 offices19. Deloitte says20 it has 150 but lists just 140 in its
global office directory21 (albeit whilst making it clear that some jurisdictions are combined).
EY list 155 locations in its global office directory22. PwC says it is in 157 locations23.
Of these varying claims and the disparities that we note, PwC’s is most easily explained
and is due to the fact that it treats the Channel Islands as one jurisdiction when they are two(Jersey and Guernsey).
In other firms the discrepancies were greater. For example, in the case of KPMG we founda location (Gabon) where it says it operates but we can find no evidence of it having an
office there. We also found locations where KPMG does not suggest it has an operation inits 2016 international annual review but where it is, nonetheless, present based on evidence
from the web. In three cases (Afghanistan, Greenland and Cuba) these appeared to be
simple omissions from both its international annual review and the KPMG website ofinternational offices.
In contrast, the KPMG Antigua and Barbuda office was mentioned in the 2016 KPMG
international annual review but not on the KPMG international locations listing. The office inSyria managed the reverse, being included in the international locations website but not in
the 2016 international annual review. In addition a number of locations are not listed in
KPMG’s 2016 international annual review because of what appears to be confusion as totheir status. Hong Kong, Macau, Bonaire, Puerto Rico and some French territories appear tofall into this category although there appears to be no such concern with listing the UK’s

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the Big Four – A study oF opACity
Crown Dependencies as independent territories. The overall result is that we think KPMG
may operate in 161 locations and not the 152 it usually suggests.
We found similar issues with Deloitte. For example, Tanzania and the Palestinian Ruled
Territories (as Deloitte refer to them) are in the website listing of locations where Deloitte says
it has offices but are not in the international transparency report published by the firm eventhough they definitely appear to operate in both locations. In direct contrast, Rwanda,
Burundi, Turkmenistan, the Federated States of Micronesia, the Northern Marian Islands, theMarshall Islands and Palau are all listed by Deloitte in its international transparency report
but not on the Deloitte website of global office locations. This may be because – with the
exception of Rwanda, where there definitely is an office – the location is actually served fromanother jurisdiction and the presence referred to in the international transparency report may
be little more than a PO Box address.
Finally, to complete the identified differences, Deloitte definitely appears to operate in Syria,
Afghanistan, Bonaire and the Solomon Islands but these locations do not appear on thefirm’s website list of locations served or in its international transparency report. The result isthat we think they are in 157 locations, which is fewer than the transparency report suggests
but more than the website implies.
In the case of EY the issue is slightly more complicated because the firm is, in general,much more secretive than the other three firms. In this case we compared the global officelist the firm publishes on its website with our own
online research and the disclosure the firmmakes to the UK-based Institute of Chartered
Accountants in England and Wales, which
regulates its auditing activity in that country, of its
affiliated firms and where they operate24. The
comparison revealed one location (Myanmar)
which was disclosed for regulatory purposes but
not on the EY website.

“

give or take,the Big Four
firms operate
in a total of 186
jurisdictions withan average of 3.41
offices in which
they are locatedIt also revealed 11 locations where the local
firm was run from another location. For example,
EY Liechtenstein is recorded as being part of EY
Switzerland. There were, however, also offices
which were on the EY website list of locations
but for which there was no disclosure made to
the UK regulator, including offices in Afghanistan,
the Dominican Republic, Laos, Qatar, Equatorial
Guinea, Jersey, Guernsey, Aruba and Greenland.
Some of these may also be branch offices. For example, Jersey and Guernsey may be partof the UK operation of EY, but this is not clear from the disclosures made.
In addition, we were unable to determine whether there was an office in Ethiopia, for whichsome evidence existed, and Sint Marteen, which may be a branch address for which we
also found some evidence. This leaves some ambiguity about the number of locations inwhich EY may actually operate; the result we report is our best estimate based on theavailable evidence.
Based on our findings of where we best think these firms have offices the world map in
Figure 1 indicates the global presence of the Big Four. As is clear, the overwhelming majority
of countries in the world have at least three out of the four firms present, and all four arepresent in most countries.

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the Big Four – A study oF opACity
fIGUre 1 – bIG foUr Global Presence
Colours indicate how many of the Big Four firms are present in each country

Firms

0
1
2
3
4

Mere presence in a location can, however, be misleading. Figure 2 shows the number ofoffices by location:
fIGUre 2 – bIG foUr offIces by locaTIon
Colours indicate the number of offices Big Four firms have per country

Firms
not present
1-10
10-25
25-50
50-100100-200
200-324

The disparity between the two maps makes clear that the Big Four only have a limited
presence in many of the lower-income countries in the world.
Figure 3 further illustrates this point, showing the top 25 countries in terms of the number
of offices operated by the Big Four in aggregate. The USA tops this list and, as is clear, withthe exception of Malaysia, the jurisdictions where the Big Four have most offices are in theOECD and BRICS countries.
July 201713

the Big Four – A study oF opACity
fIGUre 3 – bIG foUr ToP JUrIsdIcTIons
top 25 jurisdictions by total number of offices

Figure 3 suggests on first glance that the presence of the Big Four firms is directly linked to thesize of the market in the place in which they operate. To test whether is the case we compared thenumber of offices to market size measured interms of population and GDP. The evidence thatemerged was clear: the number of offices the Big
Four operate in a jurisdiction is not proportional to
the size of a country or its economy. Figure 4
shows the number of Big Four offices in a jurisdiction per head of population:
fIGUre 4 – bIG foUr offIces vs PoPUlaTIon
top 25 jurisdictions relative to population size

It may be unsurprising that the Big Four are heavily represented in the largest economies and that
their presence in many of the world’s poorest jurisdictions is limited but their over-representationin Nordic counties requires explanation. In thesecountries, alone in the world it seems, these firms
provide services to the entire business community,
whatever its size, and as such are located in many
towns as well as major cities. So strong is thistrend that the Big Four firms have 23 offices between them in Iceland, a country of just 336,000
people.

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July 2017

With the exception of the Nordic states, for which
explanation has already been offered, the presenceof secrecy jurisdictions in this list is its most obvious characteristic. The implication is clear – the Big
Four firms are heavily over-represented in these locations in proportion to apparent local market size.

the Big Four – A study oF opACity
The same trend was apparent when we compared office presence with GDP with the exception
that, Iceland apart, the Nordic countries disappeared from the list and secrecy jurisdictions became even more prominent:

Table 8 – secrecy JUrIsdIcTIon Presence

fIGUre 5 – bIG foUr offIces vs GdP
top 25 jurisdictions by relative to gdp size

Overall the firms are in 43 secrecy jurisdictions
between them out of the list of 53 such locations
in total that we used for research purposes, as explained in the appendix to this report.

From these results it is apparent that the Big Fourare heavily over-represented in secrecy jurisdictions, as compared to what could be expectedfrom relying on GDP or population figures. Thissuggests that their presence in these places is related to the secrecy for transactions that these jurisdictions provide.
As a result we subjected these firms’ use of secrecy jurisdictions to further review. Using a tax
haven listing based on the secrecy component of
the Tax Justice Network Financial Secrecy Index(see the appendix to this report for further details)
we found the following data:the Big Four – A study oF opACity
Table 9 – bIG foUr offIces In secrecy JUrIsdIcTIons

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the Big Four – A study oF opACity
Table 9 – bIG foUr offIces In secrecy JUrIsdIcTIons (conTInUed)

C. CONCLUSIONSThe Big Four accounting firms are present in 186 countries worldwide.
Most of their activities, however, as evidenced by office and staff presence, seem to be in
the world’s larger economies.
That said, when controlling for the size of the economy (whether by population or GDP)
the Big Four firms are disproportionately active in secrecy jurisdictions.

“

From these results it isapparent that the Big Four are
heavily over-represented insecrecy jurisdictions, as compared
to what could be expected fromrelying on gdp or population
figures. this suggests that theirpresence in these places is related
to the secrecy for transactions thatthese jurisdictions provide

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the Big Four – A study oF opACity

6. Big 4 stAFF loCAtions
In this chapter we extend our analysis of the Big
Four firms by seeking to determine where their staff
are located to provide a better indication of thescale of their activities in each jurisdiction in which
they work. As a result we suggest:n While we can locate a majority of the staff foreach of the Big Four firms we are unable to do soentirely for any firm;n There are a significant number of locations
where we are unable to determine the number ofstaff present for each firm. In most of these cases
the numbers involved will be relatively small;n The number of people employed by the Big
Four firms in secrecy jurisdictions appears disproportionate to local need;mation on the number of people employed by thefirm.
When no data was available on a firm’s website
we checked its LinkedIn page instead; there werea surprising number of occasions when firms thatappeared deeply secretive on their own web pages
were remarkably candid with data on LinkedIn.
These combined sources we describe as primarydata for research purposes.
When neither the web page nor the direct
LinkedIn description gave us the staff numbers, wesought alternative sources, noted below as secondary. These included newspaper articles, descriptions from top employer awards, job listings,
Facebook pages and the personal resume of an
HR official.

n It appears that staff employed in these locaFinally, if none of these type of sources could betions are largely engaged in meeting the needs offound, but the company provided data in a range
clients not located in those secrecy jurisdictions.
on LinkedIn, we resorted to using the mid-point in
the range they suggested appropriate - meaningthat if, for example, a LinkedIn listing for the firm
A. METHODOLOGY
suggested it had between 51 and 200 employees,
werecorded it as having 125. This, inevitably,
HE number of offices that a firm maintains ina location is clearly one indicator of the scale means our findings are approximate in someof its operations, but not a wholly adequate cases.
one since an office could in principle be just a few
The proportion of staff we were able to locate forpeople, or a large-scale operation. In fact, we each firm by the different means noted above were
found offices of fewer than 10 people when under- as follows:
taking our research, and others with thousands. As
a result we researched the total number of staff fIGUre 6 – ProPorTIon of offIces WITh sTaff daTa
employed by each firm in each jurisdiction in which
they worked on the basis that this would be a better indicator of the scale of its activities.

T

In many cases the local web page of a firm provided the information that we needed on the number of staff (and sometimes partners) engaged in ajurisdiction. When this data was not available we
tried to secure the necessary information on employee numbers in the firms’ transparency reports,
sustainability reports, annual reports or in the recruitment material they publish.
Success here was sporadic: for example, in one
case where staff numbers were not listed anywhere else, a recruitment video opened with infor-

18

July 2017

As is apparent, we had by far the greatest difficulty in locating EY staff. It seems that they have amore secretive approach to personnel matterscompared to the other firms.

the Big Four – A study oF opACity
B. FINDINGS
By taking advantage of different sources, wewere able to locate a significant proportion of the
global staff number for each firm. The number ofstaff we have been able to allocate to jurisdictions
for each firm is as follows:

The proportion of total Big Four employees relative to population size, however, reveals a very different picture, as was the case with the analysis of
office presence. Figure 8 shows the top 25 jurisdictions according to the ratio of employees topopulation in a jurisdiction. Again, secrecy jurisdictions are prominent on this list.

Table 10 – ProPorTIon of offIces WITh sTaff daTa

fIGUre 8 – ToP 25: emPloyees To PoPUlaTIon sIze

More broadly, our findings showed that 43 percent of total Big Four staff worldwide are situatedin the G7 economies. The top 25 locations fornumbers of employees in aggregate are as follows:
fIGUre 7 – ToP 25: ToTal nUmber of emPloyees“

secrecy jurisdictions areprominent on this list of
the top 25 jurisdictions
according to the ratio of
employees to population in ajurisdiction

19

July 2017

the Big Four – A study oF opACity
If the number of staff of the Big Four firms in aggregate is compared with GDP in a location
the top 25 jurisdictions are as follows:
fIGUre 9 – ToP 25: nUmber of sTaff vs GdP

These rankings show very clearly the same pattern that officenumbers revealed: while most of the Big Four staff are located in thelargest economies, these firms seem to have disproportionately more
staff – and therefore presumably disproportionately more activity – incountries that are known to be secrecy jurisdictions. Bolivia is asurprising exception: Deloitte apparently have more than
2,000 staff in the country.
As discussed above, this over-representation is
not explained by the size of the market as proxiedby population and GDP. As a result we presume
that it is the secrecy provided by these places that
prompts the Big Four to have such a strong
presence within them.

20

July 2017

the Big Four – A study oF opACity
A further analysis of our results is as follows:
Table 11 – ProPorTIon of sTaff In secrecy JUrIsdIcTIons

Table 11 shows that whilst we were successful in finding most of the staff of the Big Four
firms, many jurisdictions did not have this information available anywhere. The implication isthat these places are likely to have relatively small offices. From the staff numbers that wehave we are able to estimate that around 10 per cent of the Big Four firms’ employees arelocated in secrecy jurisdictions.
Looking at the number of staff per office reveals this pattern in terms of non-secrecy
jurisdictions and secrecy jurisdictions:
Table 12 – sTaff Per offIce In secrecy vs non-secrecy JUrIsdIcTIons

Table 12 shows that while the average number of offices per secrecy jurisdiction islower than in non-secrecy jurisdictions, these offices are more heavily staffed, as theaverage number of staff is much higher across all four firms.
To make sure we were not biasing our findings against smaller countries (which we
considered to be those jurisdictions with populations of less than 3 million) we also
tested the data for all such places, representing 112 locations in total of which 40
were secrecy jurisdictions.
July 201721

the Big Four – A study oF opACity
The following was found:
Table 13 – sTaff In smaller coUnTrIes & secrecy JUrIsdIcTIonsAs Table 13 shows, the small size of many secrecy jurisdictions does not explain therelative over-representation of the Big Four firms. While the average number of offices isslightly lower in non-secrecy jurisdiction small countries, the number of staff per office issignificantly larger in the small countries with high secrecy.
The difference in the pattern of operations is apparent: there are more, but smaller, offices
in non-secrecy jurisdiction locations. We suggest that this is because they are likely toservice local need rather than an international clientele.
D. CONCLUSIONS
Our research could not, despite the effort expended, locate all the staff of the Big Four
firms. We were as a result unable to determine the true scale of their operations in many
countries in which they operate.
We were, however, able to conclude that these firms are heavily over-represented insecrecy jurisdictions and the Nordic countries. Around 10 per cent of their staff are locatedin secrecy jurisdictions.
It is unlikely that local business can justify this scale of activity in secrecy jurisdictions.
Indeed, the 579 employees we can identify that Deloitte, PwC and KPMG engage between
them in Cayman (no figure was available for EY) may represent at least two per cent of thatisland’s working population. It is very unlikely that local demand could justify such a
concentration of accounting expertise.

“

it is unlikely that local business can justify
this scale of activity in secrecy jurisdictions.
indeed, the 579 employees we can identify
that deloitte, pwC and kpmg engage between
them in Cayman may represent at least
two per cent of that island’s working population

22

July 2017

the Big Four – A study oF opACity

7. Big 4 Firm orgAnisAtionA CASE STUDY ON KPMG
In this chapter the organisational structure of which is again a UK private company limited by
KPMG (which was the subject of a case-study) is guarantee, for PwC30 and yet another such comconsidered. As a result we suggest:pany, Ernst & Young Global Limited31 for EY32.

n KPMG has an organisational structure that islegally based in Switzerland but operationally located in the Netherlands;n This international organisation is made up of
58 firms; it would appear that the member firms inother countries are sub-licensees of these 58 firms,
although further information on this structure is notavailable;n The identity of the KPMG firm operating in 55
jurisdictions could not be determined. These weremainly in smaller locations. They had 91 offices between them;

The use of these similar structures is not bychance: UK companies limited by guarantee havea particular appeal for these networks for three reasons. Firstly, such companies are, in effect, mutual
entities, and are often used by charities or nontrading clubs and societies for this reason. Because membership does not result in a right toreceive income, changes of ownership rarely giverise to capital gains tax charges, meaning that the
tax situation when there are membership changes
is simple.

Secondly, if a company is organised in this way it
is easy to argue that the firm does not trade but
n The result is that it is not possible to be sure just undertakes mutual activities on behalf of thefrom the readily available information published by members that should not then be subject to UK
KPMG precisely how the firm is structured and tax. These companies appear to take advantage
what the legal identify of its affiliated entity in which of this opportunity.
location where it operate might be.
Thirdly, as a result, the accounting disclosures requiredby UK law are minimal: the latest PwC acA. BACKGROUND AND METHODOLOGY
counts for the noted company only just extend
HE structure of the Big Four firms is an issue onto a second page. The whole structure is, therethat has been quite surprisingly under-re- fore, very convenient for these firms. A UK base,searched. We too did not, unfortunately, have UK law, and very convenient UK tax arrangements
the time or resources to address this issue in- can all be taken advantage of and yet almost nothdepth. Instead a review of the structure of KPMG ing need be disclosed as to what these companies
has been undertaken to illustrate the issues that really do.
may need to be addressed by a broader study25.
Despite this KPMG does not use such a comIn the process passing reference is made to the26pany. In its case the coordinating entity is a Swiss
structures of Deloitte, PwC and EY .
cooperative33 called KPMG International CooperaAll the Big Four firms of accountants have broadly tive. Bloomberg34 suggests that this entity is regsimilar structures. Each has a central organising istered at the KPMG office in zurich35. Other
body that appears to control its intellectual prop- sources suggest that it is registered in the Swisserty, licence members of the network and enforce Canton of zug36.
common standards. Three of the Big Four locate
Based on the survey undertaken for this report
the company responsible for this activity in Lonevery single KPMG firm mentions this Swiss entity
don.
on its website. The relationship is also described
The companies in question are Deloitte Touche in the Transparency Reports that some of thoseTohmatsu Limited27, a UK private company limited KPMG firms publish. For example, the KPMG firmby guarantee that regulates the Deloitte network28; in Luxembourg says in its Transparency Report (inPricewaterhouseCoopers International Limited29,

T

July 201723

the Big Four – A study oF opACitya statement remarkably similar to those in many the entirely typical Luxembourg Transparency Reother such reports) that37:
port41, already noted, says:““

The independent member firms of the KPMG
KPMG is the registered trademark of KPMG
network (including KPMG Luxembourg, SoInternational and is the name by which the
ciété coopérative) are affiliated with KPMG Inmember firms are commonly known. The
ternational, a Swiss cooperative which is a legal rights of member firms to use the KPMG name andentity formed under Swiss law.
marks are contained within agreements with
KPMG International.
KPMG International carries on business activities
for the overall benefit of the KPMG network of
In these agreements, member firms commit
member firms but does not provide professional themselves to a common set of KPMG Values.
services to clients. Professional services to clients Under agreements with KPMG International, memare exclusively provided by its member firms.
ber firms are required to comply with KPMG International’s policies and regulations including quality
The structure is designed to support consistency
standards governing how they operate and howof service quality and adherence to agreed values
they provide services to clients. This includes havwherever in the world the member firms operate.
ing a structure that ensures continuity and stability
One of the main purposes of KPMG Internationaland being able to adopt global and regional strateis to facilitate the provision by member firms of highgies, share resources, service multinational clients,
quality Audit, Tax and Advisory services to their
manage risk, and deploy global methodologies andclients. For example, KPMG International estabtools. Each member firm takes responsibility for its
lishes and facilitates the implementation and mainmanagement and the quality of its work.
tenance of uniform policies and standards of workand conduct by member firms and protects and
The report goes on to list the sanctions available
enhances the use of the KPMG name and brand. for use by KPMG against non-compliant member
firms. The resulting paradox is readily apparent:
The implication is clear: there is a unity within thisKPMG is structured as if it is made up of individual
structure and yet at the same time there is a conmember firms and yet each of these has to operate
siderable degree of separation within the firm. Thatto common standards that are rigorously enforced.
this separation may not be as stark as the legal
wording implies is suggested by the job titles of
There are also common financial interests: KPMG
those working for the global operation, such as firms, for example, share a common captive pro‘Global Head of Audit’ and ‘Global; Head of Advi- fessional indemnity insurance operation (whose losory’38. These suggest a degree of coordination in cation has not at present been identified). Despite
such activities that is contrary to the impression of this, all is also not apparently equal within thea diversely controlled firm39. The substance of the KPMG organisation. As the same Luxembourg
firm may not, in other words, be what the form im- Transparency Report notes when discussing theplies.
KPMG governance structure:
There is other evidence of this conflict between
the substance and form of the firm. For example,
the actual operational structure of KPMG may be
a little more complex than the published statements suggest: it appears that the functional control of KPMG internationally actually rests in the
Netherlands. This is the international address provided for KPMG International supplied by the UKbased KPMG LLP as part of its regulatory filings40.
Despite this, remarkably little attention or publicity
is given to this operation. The 2016 KPMG global
annual review gives no hint, for example, of a contact address for this head office operation, despite
which it appears to have considerable power. As

24

July 2017“

The key governance and management bodies of KPMG International are the Global
Council, the Global Board, and the Global
Management Team.

The Global Council focuses on high-level governance tasks and provides a forum for open discussion and communication among member firms. It
includes representation from 58 member firms thatare ‘members’ of KPMG International as a matterof Swiss law. Sub-licensees are generally indirectly
represented by a member.
This reference to there being 58 core members
is intriguing. It makes clear that there are tiers of

the Big Four – A study oF opACity
membership within the KPMG structure that are name was tested during the course of the review
not at all apparent to the public. It also suggests of the website of each member firm undertaken asthat KPMG’s operations in more than 100 coun- part of this work.
tries may actually be operated under sub-licence
The work undertaken identified a KPMG presfrom other jurisdictions, although which operations
ence in 161 countries involving at least 738 offices.
have which status is not clear.
KPMG usually suggests it has 152 locations43.
This two-tier structure may be particularly impor- Reconciliation of these claims was not a straighttant when considering KPMG’s secrecy jurisdiction forward exercise.
operations. These do not appear to play any sigAs noted in Chapter 5, one country (Gabon) idennificant part in KPMG’s governance structure. For
tified as having an office by the 2016 KPMG inter42
example, the current global board has what apnational annual review website does not appear topear to be firm representatives from the USA, UK,have a KPMG office44.
Netherlands, Switzerland, Mexico, Republic ofKorea, Japan, Italy, Ireland, India, Germany,
Other countries (Afghanistan45, Greenland46, andFrance, China, Brazil and Australia. Canada repre- Cuba47) where KPMG appears to definitely havesents the Americas board, Singapore the Asia Pa- operations are not mentioned in either the 2016 incific board and Spain the European and Middle ternational annual review website or in the KPMG
Eastern board. Four other representatives repre- international locations listing48.
sent the rest of the firm, with members representAntigua and Barbuda49 is mentioned in the 2016
ing Africa, the Middle East and South Asia, Central
and Eastern Europe and the Commonwealth of In- international annual review website but not on thedependent States that were formerly part of the KPMG international locations listing.
USSR.
Syria50 manages the reverse status: being in the
Two things are apparent as a consequence. The international locations website but not in the 2016
first is that some firms appear to be more equal international annual review website.
than others, as the licencing arrangement referred
to above implies. The second is that secrecy jurisdiction locations appear to be largely absent fromthese governance structures. This may imply thatthe regulation of these sub-licenced KPMG practices is undertaken from non-secrecy jurisdiction
locations. This may be a precedent for the regulation of activity in these locations by other parties.
B. FINDINGS
I. FIRM LOCATIONS

Six locations are not listed in the 2016 international annual review because of what appears to
be confusion as to their status. Hong Kong,
Macau, Bonaire, Puerto Rico and some French territories appear to fall into this category although
there appears to be no such concern with listing
the UK’s Crown Dependencies independently.
It would be of obvious benefit if KPMG was able
to consistently decide and disclose where it operates because this does not happen at present.

Our findings on where KPMG is located are sumThe suggestion that each KPMG operation was
marisedas follows:
independent from those others bearing a similar
fIGUre 10 – kPmG nUmber of offIces

offices
not present
1-10
10-20
20-40
40-60
60-81

July 201725

the Big Four – A study oF opACity

II. FIRM OWNERSHIPIn the case of 106 websites, each representing a
different national firm, a named local entity was
identified as the local KPMG firm, it then being
stated that KPMG International, based in Switzerland, was the international organisation of which it
was a member. The firms in question represented
648 (87.7 per cent) of KPMG offices and 95.2 percent of all KPMG staff.
In the case of KPMG Azerbaijan the local operation was managed by a firm located in another jurisdiction. KPMG Azerbaijan Limited is a company
incorporated in Guernsey51.

tional Cooperative, a Swiss cooperative which is alegal entity formed under Swiss law (“KPMG International”).
Notwithstanding the legal ownership structure,
KPMG International and/or the legal partners do
not manage or exercise control over the management of KPMG or extract profit from KPMG.
There also appear to be a number of regionalfirms. KPMG East Africa, which is incorporated in
Mauritius, operates a number of KPMG offices.
The offices in a group of mainly Dutch Caribbean
locations also appear to be under common control. The small KPMG office in the British Virgin Islands appears to control the KPMG office in St
Lucia.

The structure of some operations where ownership is stated is not always clear. A case in point is
Whether the offices of KPMG in the Channel IsKPMG India, where the website52 makes clear thatlands
are one or two firms is not clear: one seems
ownership is by an Indian partnership but wheretobelikely. The operation of some of the KPMG
53
the Transparency Report says:
Offices in the Balkans is undertaken by locally loKPMG is a partnership firm registered under cated companies but these are then subsidiaries
the Indian Partnership Act 1932. The two legal of a company called KPMG CEE Limited, a compartners in KPMG are two companies incor- pany incorporated in Cyprus.
porated in the Netherlands: KPMG International InMore importantly, in 55 locations the website
vestments BV (a wholly owned subsidiary ofdoes
not say what entity is representing KPMG in
KPMG International Cooperative) and KPMG Adthe
jurisdictionin which an office is located. In
visory NV (a company which is part of the KPMG
these
cases
the
website almost invariably refers toEurope LLP group of companies). However, boththewebsitebeing
operated by KPMG Internationalsuch companies hold the interests in KPMG ultibut
with
no
local
entitybeing identified.
mately for, and at the direction of, KPMG Interna-“

26

July 2017

the Big Four – A study oF opACity
These locations represent 91 offices (12.3 percent of the total) but just 4.8 per cent of identified
staff, although it should be noted that there is amuch higher incidence of being unable to identify
staff working in these locations than in those inwhich ownership can be determined.

strophic liability arising as a result of a successful
professional negligence claim or from a colossal
regulatory failing – may not prove to be a risk for
the whole organisation because of the structureused. As an example, the $456 million fine imposed on KPMG in the USA in 2005 for criminal
tax violations55 did not appear to have conseThe largest of these offices where ownership is quences for other member firms in the international
unclear is in Brazil; there appears to be a general organisation. There is, then, some evidence that
culture of secrecy that is quite marked in South this structure works for this ring-fencing purpose.
American affiliates.
There is another reason why the structure
The fact that KPMG does not disclose who all of adopted may be of significant value to the whole
its member firms are means that large parts of the organisation. The structure adopted allows each
KPMG network appear to be publicly unaccount- member firm to argue that it only has liability to its
able, which is unacceptable for an organisation of own clients and to its own regulators. But this also
its global significance.
means it can ring-fence disclosure to regulators
outside its own jurisdiction, whether for tax or otherIII. USE OF PARTNERSHIP STRUCTURES
purposes.
The tradition within the accountancy profession
As a result the maintenance of client confidentialis that firms are organised as professional partnerity in the face of regulatory
ships. This, however, has been
investigation is much easiersubject to fairly rapid regulatory
tosecure for two reasons.
and cultural change in many jurisThe
first is that if there is only
dictions since around the turn ofanobligation
to local regulathe century. This research sugtors; the risk of cross-bordergested that a partnership strucinvestigation of almost any
ture is still in use in just 21 KPMG
sort is reduced. Secondly,
locations representing 62 offices,
this diversified structure
or just 8.4 per cent of all offices.
means
that a client of one
Unlimited liability for auditors appartof
KPMG
may well not
pears to be receding.
be a client of another part ofIV. IMPLICATIONSKPMG. As a result the
chance that an enquiry can
KPMG is a paradox. For marketbe safely replied to with theing and public perception purassurance that no broader
poses it appears to wish it to bedata is held is greatly inbelieved that it is a deeply concreased.
ventional, centrally controlled andremarkably homogenous organiGiven the need for uniforsation. However, it then goes on
mity in standards in the opto suggest that its national opereration of an international
ations are subject to separate ownership, although firm of auditors, advisers and tax specialists thethe identities of many of these separate entities are adoption of a legally diversified structure for a firm
not publicly disclosed. The implications of this cho- must suggest that there are very strong reasonssen structure are, however, profound.
for doing this when there is in almost every other54
marketa near-universal adoption of centralised
As KPMG LLP’s UK regulatory filings suggest,modelsofownership, management and control.
the maintenance of a local operation means that
regulatory obligations can be geographically curWe suggest that the three above-noted reasons –tailed. The firm is only registered to provide serv- of limiting regulatory and legal liability risk whilstices in the UK, Jersey, Guernsey, the Isle of Man, ring-fencing client activity from enquiry – provide
Japan and the USA. This saves on costs.
an explanation for the use of non-standard structuresby the Big Four firms of accountants whilst
Legal risk is also ring-fenced by the chosen structure: in principle the failing of one member firm – also suggesting that a change in regulation iswhether for financial reasons due to operational dif- needed if greater accountability is to be demanded
ficulties or, perhaps more likely, as a result of cata- from these firms.

“

limiting
regulatory andlegal liability
risk whilst also
ring-fencing client
activity fromenquiry provide an
explanation for
the use of nonstandard structures

July 201727

the Big Four – A study oF opACity

8. ConClusions:
mAnAging the Big FourIn this chapter we suggest that the Big Four firms
operate a structure that at one level suggests theexistence of a globally integrated firm whilst actually being made up of numerous separate legal entities that are not under common ownership but
which are bound by contractual arrangements tooperate common standards under a common
name because this structure:n reduces their regulatory cost and risk;n ring-fences their legal risk;“n Those consolidated financial statements
should include full public country-by-country
reporting.
A. DISCUSSION
Like all systems global capitalism cannot survive
without regulation. The absence of regulation incapitalism does not create ‘free markets’. Market
failures create opportunities for abuse that denies
free access to markets, permits excess profit, misallocates capital, encourages
monopolies, permits undetected fraud and denies consumers choice. None ofthese outcomes are sociallyor economically beneficial.

Auditors play a
critical role inn provides opacity on the true
globalscale of their operations and thecapitalism. they
rewards flowing from them.
We presume that these benefits alone decide if theoutweigh the cost of organisingaccounts of athe firms in this way.
To counter the risk that these company are true
structures impose on society we and fairsuggest that:n protects their clients from
regulatory enquiries;n Firms organised in this way be defined as being
under common control, and so are single entities
for group accounting purposes within the European Union;
n These firms should be licensed as single entities for audit and taxation purposes throughout theEuropean Union;

Auditors play a critical rolein global capitalism. They
alone decide if the accounts(or financial statements) of acompany are true and fair. In
the process of undertaking
this task auditors also have aduty to examine whether or
not the books and records of the company are sufficient to support this purpose. Whilst doing sothey are not explicitly tasked with looking for fraud,
but if a fraud is likely to create risk for the firm as awhole it is expected that they should identify it. The
important point for the current purpose is that noone else, tax authorities included, has this routine
access to company data.

n These firms should be required in due course
The auditor’s role is, then, unique. Appointed by
to separate entirely their audit and other profes- the management of the company and paid from its
sional services but until this is possible should be resources, an auditor’s duty is to the company’s
required to ring-fence the two from each other shareholders. In some situations, when solvency isworldwide as a condition of being licenced to pro- at risk, that duty can go further: the auditor canvide such services in the EU;
also have a duty to creditors. That duty quite explicitly
extends to tax authorities, who are often
n As a condition of those licences they should bemajor
creditorsof many companies.
required to prepare worldwide group consolidated
financial statements which must be published on
This duty is also implicit in another aspect of the
public record;
auditor’s work. As this report has shown, tax advice constitutes a major part of the income of the28

July 2017

the Big Four – A study oF opACity
largest four audit firms in the world. Some of that
income will be earned for providing advice on how
to structure transactions for tax purposes, usuallywith the intention of minimising liabilities. To the extent that liabilities are minimised by reducing therisk that the company inadvertently breaks the law
this activity is of real social value and to be encouraged56.

amining the accounting profit of the entities inquestion57. If that assurance is not true and fairthen the corporate tax base is at risk. Auditors
have an implicit duty to make sure that this is not
the case.
This implicit obligation, however, highlights a paradoxical situation. Auditors are in the most extraordinary and unique position of being both regulatorsand simultaneously providers of commercial advice
on the abuse of legal systems in the current systemof global capitalism.

When, alternatively, that advice deliberately seeks
to exploit uncertainties, ambiguities and inconsistencies in the law of a country, or between the lawof countries, and in the process seeks to exploit
As many have pointed out for a considerable pethe secrecy that some jurisdictions provide, this acriod of time58, this creates conflicts of interest thattivity moves from being socially useful to sociallyneed to be addressed. The obvious solution is toharmful, even if the law is not broken.
split audit firms from those providing any otherThat harm comes from the creation of the risk services. If that cannot be achieved in the shortthat tax liabilities may not be appropriately stated. term the tax and other activities of these firms haveThis risk, which may well be quite deliberately hid- to be firmly ring-fenced from each other worldwide
den from view, arises to the company itself, its ad- if an audit licence is to be granted to a network
visers (in the event that they are sued), the member in the EU: anything less leads to conflicts
investors in the company who are unacquainted of interest that in any other regulatory environment
with the risk that they might be assuming, and to would be considered wholly unacceptable.
society at large as a result of the resulting unpaid
The fact is that auditors are appointed as a result
tax.
of a legal requirement to a task whose function isThis unpaid tax can result from the interaction of prescribed by law and which confers both exceptax and accounting. Audit firms state that their tional legal privilege and the opportunity to earnclients’ accounts are true and fair. Tax systems rely substantial profit. This function is, however, reguupon this assurance: there is not a corporation tax lated nationally. This basis for regulation issystem in the world that does not start its assess- premised on the legal fiction that each company
ment of company profits subject to tax without ex- within a multinational corporation is a separate

the Big Four – A study oF opACity
legal entity capable of being audited largely within
the jurisdiction in which it is incorporated – eventhough the whole economic nature of the multinational corporation, and the consolidated accounts
it produces, reflect the fact that such organisations
are in fact single entities that are managed as such,including with regard to risk – and that the subdivisions into separate corporate
entities within them is solely forlegal and management convenience. The very existence ofconsolidated accounts, which
are in a legal sense works offiction because there is no actual entity that undertakes thetransactions that they record,
recognises the conflicts inherent in all aspects of accounting(including that for tax) between
legal form and economic substance.

depend in managing the risks within global capitalism, enjoy enormous opacity around the workthat they do, who actually does it, where they doit, and for what reward.

In our opinion this is an inappropriate situation.
The price of being a regulator must be that you be
regulated. The price of being a regulator tasked
with delivering accountability
must be that you be transparent wherever you work. We expect this in the state sector andwe should expect the same ofthose appointed as a result oflegal requirement. It follows
then that when the truth andfairness of tax and accounting
can only be determined by audits, those firms given the opportunity to earn exceptional
profits from providing audit
services must themselves be
subject to the highest degree
The accounting professionof scrutiny, including being reghas largely resolved these parulated internationally as theadoxical conflicts in favour of
economic substance. Consolidated financial state- global entities they in fact are.
ments are evidence of that. So too is the accountThe world is now realising that the real scale ofing requirement that the legal form of many leasetax and accounting risk can only be appraised oncontracts be ignored for accounting purposes.
a country-by-country basis and that this local apWe suggest that if this process of ignoring legal proach must be reconciled to a global understandform is appropriate for accounting then it is also ing of what entities do as a whole. We share thatappropriate for the process of regulating auditors. view. As a consequence we think that it is only on
Ddespite the fact that the legal form of many of the a country-by-country reporting basis that fully recworld’s largest auditors allows them to claim that onciles with their global results that the risk that thethey are a network of independent entities without Big Four firms and their smaller competitors create
legal commitment to each other, this should be ig- be properly appraised.
nored for regulatory purposes and EU law should
The Big Four are only able to operate in the way
be changed to give effect to this proposal.
that they do because regulation permits it. Two
As we show in this report, the reality is that the regulations are at fault. One is with regard to audit
Big Four firms all have entities that coordinate, reg- regulation. The regulation of auditors (and tax praculate and manage the activities of the firms that titioners) is devolved within the European Union. Asvery obviously work together under a common the 2014 Directive on this issue says59:
name for a common purpose to service clients that
Each Member State shall designate the comthey very often have in common. As we have also
petent authority to be responsible for approvshown with our case study of KPMG, it is not clear
ing statutory auditors and audit firms.
that all firms are equal within these networks. Nor
is it even apparent who all the firms within those
The structure used exploits this to devolve the
networks are, let alone where they operate.
regulation of the Big Four to many different authorities. This clearly does not work: the claim by the
The consequence is that the world’s auditors,
Big Four firms that they are networks of separate
who play a critical role on which we all at present
entities gets around this regulation and prevents“

we suggestthat if thisprocess ofignoring legal form
is appropriate foraccounting then it
is also appropriate
for the process ofregulating auditors“

30

July 2017

EU-wide registration of these firms.

regulation is to be effective.

The second regulation that is exploited is that on
what constitutes a group for accounting purposes,
which is also set by the European Union. The 2013
directive on the issue of financial statements requires the production of group accounts by aparent undertaking that controls subsidiary undertakings60. Control is the key word in this context.
Sub-paragraph 31 of the preamble to the 2013 Directive61 says that control should be based onholding a majority of voting rights, but that “control
may also exist where there are agreements with fellow shareholders or members” and that “in certain
circumstances control may be effectively exercised
where the parent holds a minority or none of theshares in the subsidiary”. It also says that “Member
States should be entitled to require that undertakings not subject to control, but which are managed
on a unified basis or have a common administrative, managerial or supervisory body, be included
in consolidated financial statements”.

B. RECOMMENDATIONS

It should also be noted that there are weaknesses
in the EU’s proposed new system for beating tax
abuse promoted by tax advisers. This proposal62
will require that advisers report tax schemes thatmay potentially be abusive. The arrangements inquestion do not, however, recognise networked
firms as single entities or extend the obligations ofEU member firms to their network partners outside
the EU’s territorial limits. Both are essential if the

Bearing these regulatory abuses in mind we
make four recommendations.
RECOMMENDATION 1
First, we recommend that in due course, andmaking provision for a transitional period during
which change can take place, all audit firms be required to be entirely separate from those selling
any other service. Only in this way can the conflictsof interest inherent in the current structure of the
Big Four firms of accountants and other, smaller
but similar networks, be eliminated. During thetransition to this outcome the audit and other functions of these firms need to be entirely ring-fenced
from each other within the operation of the firms inquestion. Inspection of the effectiveness of thisring-fencing throughout the network should be aconsideration for the grant of an audit licencewithin the European Union.
RECOMMENDATION 2
The second recommendation is aimed directly at
improving transparency. We suggest that despite
the fact that the legal form of many of the world’s
largest accountancy practices allows them to claim
under existing regulations that they are a networkof independent entities without legal commitment
to each other that this should be ignored for regu-

July 201731

the Big Four – A study oF opACity
latory purposes.

should be able to place conditions on the grant oflicences to curtail activities that are not considered
to be undertaken in the public interest, whether
they are directly related to audit or taxation or not,but where they might imperil the registered firm’s
reputation and ability to deliver professional services of a standard that the public should expect.
This could, of course, include participation in the
promotion of tax havens, the sale of tax advice andother such activities.

This could be achieved within the EU’s existing
definition of the control required to create a groupof companies as noted above if it was made clearthat a professional services firm that is a memberof a network of firms associated by legally enforceable contractual arrangements that provide for the
sharing of a name or marketing, professional standards, clients, support services, finance or professional indemnity insurance arrangements isdeemed to be a member of group of companies RECOMMENDATION 4(whatever its own legal form) that operates under
Fourthly, to support this regulatory process andcommon control even if there is no common ownto hold these networks of professional service firms
ership. This situation has, as noted above, alreadyto account we recommend that the professional
been anticipated by the 2013 Directive on financial
networks subject to these arrangements be restatements.
quired to file full country-by-country reports,
Note that this recommendation would survive any adapted to meet the particular needs of this sector,
split in these firms between audit and other serv- on public record. The required disclosure should
ices: this recommendation should apply to net- be:works of professional firms of all types. The largest
A set of global consolidated financial statements
EU-based entity within that network would then be
for all the entities associated with it by common lideemed to be the parent entity for these purposes
cence arrangements intended to regulate its use
unless another member accepted that obligation.
of a common name, network or standards whether
That parent entity would then be required to fileor not those entities are for the purposes of current
consolidated accounts for the worldwide organirelevant local accounting or legal requirements
sation of which it was a member on public record.
considered to be under common control;
Failure to do so would result in a denial of licences
to provide audit and taxation services throughout
The names of those entities joining or leaving thethe EU.
common licence arrangement during the course of
the year; the reason for their doing so and the
RECOMMENDATION 3
name of the jurisdiction in which they had a licence
Thirdly, we suggest that any network of profes- to operate;sional services firms impacted by our first recomThe following country-by-country reporting data
mendation be required to apply for a single licence(which must reconcile with the previously noted
to provide audit and taxation services of any sort
global consolidated financial statements) for eachthroughout the EU member states. This can be
jurisdiction, without exception, in which taxable acquite easily achieved within existing EU regulatory
tivity reflected in those financial statements arises:
frameworks by making clear that the firm is the network and not the individual operating entity thatn The name of the jurisdiction;
happens to supply services in a member state. The
n The name of the associated entities trading in
implication of this recommendation with regard totax is that all abusive tax schemes promoted by that location;
the firm that impact on the tax revenues of any EU
n The beneficial ownership of the entities in quesmember state should be reported whether sold by tion;a network member within or outside the EU.
n The names of the directors, partners or other
When granting that licence the regulator tasked persons tasked with management of those entiwith oversight for this purpose should be allowed ties;
to take into consideration, and make enquiriesn The third party sales of those entities on a conabout, the activities of that network wherever theyoccur in the world. In the process the regulator solidated basis by jurisdiction split between audit,

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July 2017

the Big Four – A study oF opACity
tax and consulting sources;n The intra-associated entity sales;n The number of full-time-equivalent employees
in the jurisdiction;n The cost of employment of those full-timeequivalent employees;
n The number of partners, directors or other persons with management responsibility engaged in
the jurisdiction with a note as to their total combined remuneration and whether that cost is included in total salary expense, or not;n The profit before tax;
n Taxes due on profits for the period;n Taxes on profits paid in the year;n Total capital employed in the jurisdiction at theclose of the period;n What professional indemnity insurance cover
are in place to protect against claims arising;n The names of the agencies responsible for regulating the entities operating in the jurisdiction;n Details of the licencing arrangements in operation throughout the associated network as awhole including:n In which jurisdiction the principle entity that
grants the right to membership of the associatednetwork is located;
n How that principle entity is owned and controlled;n Who serves on the board that controls thatprinciple entity and how they are appointed;“

to hold these
networks ofprofessional
service firms to accountwe recommend that the
professional networks
subject to thesearrangements berequired to file fullcountry-by-country
reports, adapted tomeet the particularneeds of this sector, on
public record
during the course of the year.
Such reporting does not resolve all the issues thatarise in regulating the operation of the Big Four accounting firms and their smaller competitors butwhat it does make clear is:n Who these firms are;n Where they are;n How they are managed;n Who they are managed by;n Where the balance of economic significancen The terms of the licences issued by the principle entity to the operating entity in each jurisdiction lies within these entities;
in which the network has an operation includingn The scale of their tax-haven activities;
those licence arrangements that cover multiple jun What resources these firms have available torisdictions and those that grant a licence that inmanagetheir own risk.
turn permits sub-licences to be granted, and how
those arrangements are structured in practice;With this data and the changes that we recommend
EU-based regulators will be able to maken Which organisation(s), if any, regulate the prinmore
informed
decisions when granting licences
ciple entity;
to the Big Four and other international networks ofn The fines, penalties or professional misconduct professional services firms to better control therulings made against member firms in the associ- risks that they pose to society as a result of the acated network, specifying the jurisdiction involved tivities that they undertake.

July 201733

the Big Four – A study oF opACity

9. Appendix:
seCreCy JurisdiCtions
There is no definitive list of tax havens, or secrecy jurisdictions, on which all authorities
agree. In our opinion the best-researched source is the TJN Financial Secrecy Index, mostrecently published in 201563. The research is based on a rigorous analysis of official data
and detailed survey work as well as econometric analyses.
For the purposes of our work all of those locations with secrecy scores of 65 and above inthe 2015 Financial Secrecy Index have been treated as secrecy jurisdictions. These are as
follows, with the number of Big Four offices in each being shown:

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the Big Four – A study oF opACity
Jurisdiction

financialsecrecy scorefinancial secrecy
index ranking

In addition the following locations are all considered based on widespread evidence tohave significant secrecy jurisdiction characteristics and as such are also included in our list
for these purposes:

This makes a total of 53 jurisdictions that have been recognised as secrecy jurisdictions
for the purposes of this report.

July 201735

the Big Four – A study oF opACity

endnotes
1. https://www.frc.org.uk/our-work/publications/professional-oversight/key-Facts-and-tr ends-2016.pdf page 50
accessed 17 may 2017

pleinwork/employmentandemployeetypes/bulletins/uklabourmarket/may2017#average-weekly-earnings accessed 24
may 2017

2. see appendix 1 for more information on those places
we consider to be secrecy jurisdictions.

14. http://visar.csustan.edu/aaba/proposedAccstd.pdf accessed 25 may 2017

3. see https://www2.deloitte.com/uk/en.html accessed 30
April 201715. see https://www.oecd.org/ctp/transfer-pricing/beps-action-13-country-by-country-reporting-implementation-package.pdf accessed 25 may 2017

4. see https://www.pwC.com/ accessed 30 April 2017
5. see https://home.kpmg.com/xx/en/home.html accessed
30 April 2017
6. see http://www.ey.com/ accessed 30 April 2017
7. gabriel Zucman at page 39 in ‘the hidden wealth ofnations’, 2015, university of Chicago press
8. James henry for the tax Justice network in 2012 at
http://www.taxjustice.net/wpcontent/uploads/2014/04/price_of_offshore_revisited_120722.pdf
9. https://www2.deloitte.com/content/campaigns/global/
global-report/index.html
deloitte 2016 global impact reporthttps://www.pwC.com/gx/en/about/global-annual-review2016.html
global Annual review 2016
https://home.kpmg.com/xx/en/home/campaigns/2016/12/in
ternational-annual-review.html#financials_financials-globalrevenue
2016 kpmg international Annual review
http://www.ey.com/gl/en/about-us/our-globalapproach/global-review/global-review-2016-facts-and-figures
ey global review 2016
All accessed 1 may 201710. https://www.bdo.ee/en-gb/news/2016/bdo-global-revenues-rise-to-us$-7-6-billion accessed 24 may 201711. https://www.grantthornton.com/about-us/firmfacts.aspx accessed 24 may 201712. deloitte, may 2016 financial statements at
https://beta.companieshouse.gov.uk/company/oC303675/filing-history; pwC https://www.pwC.co.uk/annualreport/assets/2016/pdf/annual-report-2016-financial-statements.pdf ;ey,https://www.pwC.co.uk/annualreport/assets/2016/pdf/annual-report-2016-financial-statements.pdf ; kpmg https://assets.kpmg.com/content/dam/kpmg/uk/pdf/2016/12/annual-re
port-2016.pdf all accessed 24 may 2017
13. Figure correct for march 2017 as per
https://www.ons.gov.uk/employmentandlabourmarket/peo-36

July 201716. see http://ec.europa.eu/finance/companyreporting/country-by-country-reporting/index_en.htm#cbcrtax accessed 14 June 201717. see for example deloitte
https://www2.deloitte.com/global/en/pages/tax/articles/country-by-country-reporting-faqs.html , pwC
http://www.pwC.com/gx/en/services/tax/publications/taxtransparency-and-country-by-country-reporting.html , ey
http://www.ey.com/gl/en/services/tax/cross-borderadvisory/ey-managing-country-by-country-reporting-requirements and kpmg
https://home.kpmg.com/xx/en/home/services/tax/regionaltax-centers/eu-tax-centre/country-by-country-reporting.html
all accessed 25 may 201718. deloitte,
https://www2.deloitte.com/uk/en/footerlinks/global-office-directory.html, pwC, https://www.pwC.com/gx/en/about/office-locations.html , ey,
http://www.ey.com/uk/en/ourlocations , kpmg
https://home.kpmg.com/xx/en/home/about/offices.html all accessed 24 may 201719. https://home.kpmg.com/xx/en/home/about/overview.
html accessed 28 may 201720. https://www2.deloitte.com/us/en/pages/about-deloitte/articles/about-deloitte.html accessed 28 may 201721. https://www2.deloitte.com/uk/en/footerlinks/global-office-directory.html accessed 28 may 201722. http://www.ey.com/uk/en/ourlocations accessed 28
may 2017
23. https://www.pwC.com/gx/en/about/officelocations.html 28 may 2017
24. it is not clear why ey publish this list as it does not appear to be a regulatory requirement, but it has done so for anumber of years.
25. kpmg was chosen as it has more secrecy jurisdiction
offices than any other firm.
26. this whole issue will now be looked at in more depth
over the next two years by academics at City, university oflondon and Copenhagen Business school as part of the eu
horizon 2020 funded Coffers project.
27. https://beta.companieshouse.gov.uk/company/07271800/filing-history accessed 27 may 2017: the2017 accounts give no hint of the company’s rolethe Big Four – A study oF opACity
28. https://www2.deloitte.com/content/campaigns/
global/global-report/index.html accessed 27 may 2017https://www.facebook.com/kpmg-Afghanistan-ltd444836895624397/ both accessed 2 may 201729. see https://beta.companieshouse.gov.uk/company/03590073/filing-history accessed 27 may 2017. theuk accounting requirements for this company are now solimited that it just files two pages of data as its annual accounts for the year to 30 June 2016. in 2009 it was six.

46. https://home.kpmg.com/xx/en/home/about/offices/nuuk-greenland-1.html accessed 2 may 201747. https://home.kpmg.com/bq/en/home/misc/office-locations-dutch-caribbean-suriname.html accessed 2 may 201730. see https://www.pwC.com/gx/en/about/corporategovernance/network-structure.html accessed 27 may 201748. https://home.kpmg.com/xx/en/home/about/offices.html
accessed 2 may 201731. https://beta.companieshouse.gov.uk/company/04328808/filing-history accessed 27 may 2017. perhaps refreshingly only ey chose not to go for the absolute
minimum possible level of disclosure in their 2016 annual
accounts, although that does not mean much insight is obtained as a result.

49. see https://www.linkedin.com/companybeta/10108457/?pathwildcard=10108457 accessed 2 may
201750.
https://home.kpmg.com/xx/en/home/about/offices/damascus-1.html accessed 2 may 201732. http://www.ey.com/gl/en/about-us/our-global-approach/global-review accessed 27 may 201751. https://home.kpmg.com/az/en/home/about.html accessed 2 may 2017

33. the term is used loosely here: it means a mutual entity
run solely for the benefit of its members and is likely to workin very similar way to the uk companies limited by guarantee used by the other Big Four firms.

52 https://home.kpmg.com/in/en/home/careers.html accessed 2 may 201734. see https://www.bloomberg.com/profiles/companies/1710Z:sw-kpmg-international-cooperative/switzerlnad
accessed 2 may 201753. https://home.kpmg.com/content/dam/kpmg/
pdf/2016/06/india-transparency-report-2016.pdf accessed
2 may 201735. see https://home.kpmg.com/xx/en/home/about/offices/zurich-1.html accessed 2 may 201754. http://www.auditregister.org.uk/Forms/
officelist.aspx?id=2548845&displaytext=Firm%20detail%20(offices)&parenttext=All%20Firms accessed 2 may
2017

36. see https://en.wikipedia.org/wiki/kpmg accessed 2
may 2017

55. https://www.irs.gov/uac/kpmg-to-pay-456-million-forcriminal-violations

37. see https://assets.kpmg.com/content/dam/kpmg/lu/
pdf/lu-en-transparency-report-2016.pdf pages 28 – 30 accessed 2 may 201756. see david Quentin’s important work on this issue,
which underpins the reasoning of this whole section on tax
advice and the benefits and harms arising from it, at
http://www.davidquentin.co.uk/risk-mining_the_public_exchequer.pdf

38. https://home.kpmg.com/uk/en/home/about/leadershipgovernance.html accessed 27 may 2017
39. titles taken fromhttps://home.kpmg.com/content/dam/kpmg/iar/internationalannual-review-2016.pdf accessed 2 may 2017
40. see
http://www.auditregister.org.uk/Forms/officelist.aspx?id=2548845&displaytext=Firm%20detail%20(offices)&parenttext=All%20Firms accessed 2 may 201757. see https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2633997
58. see, for example, the work of prof prem sikka on thisissue at http://visar.csustan.edu/aaba/pinstripemAFiA.pdf
accessed 14 June 201759. see Article 3a at http://eur-lex.europa.eu/legal-content/en/txt/?uri=celex%3A32014l0056 accessed 14 June
2017

41. An almost identical statement will be found in the international transparency report for 2016, see
https://assets.kpmg.com/content/dam/kpmg/xx/pdf/2016/12/i
nternational-supplementary-report-2016.pdf accessed 2 may
2017

60. see Article 2(9) at http://eur-lex.europa.eu/legal-content/en/txt/?uri=celex%3A32013l0034 accessed 14 June2017

42. https://home.kpmg.com/xx/en/home/about/overview/leadership.html accessed 27 may 201761. http://eur-lex.europa.eu/legalcontent/en/txt/?uri=celex%3A32013l0034 accessed 14
June 2017

43. For example, https://home.kpmg.com/de/en/home/about/at-a-glance.html accessed 2 may 201762. see http://europa.eu/rapid/press-release_ip-162354_en.htm accessed 14 June 2107

44. https://home.kpmg.com/xx/en/home/campaigns/2016/12/international-annual-review.html#financials
accessed 2 may 201763. see http://www.financialsecrecyindex.com/introduction/fsi-2015-results accessed 17 may 201745. see https://www.linkedin.com/companybeta/2833736/?pathwildcard=2833736 andJuly 201737