The Big 4 Audit Firms and the Public Interest: Public Oversight & Audit Firm Governance

This dissertation examines public interest aspects of the Big 4 firms that for decades have dominated the audit profession. Their professional claim to serve the public interest through their core activity of auditing financial statements has constantly been questioned in the aftermath of unexpected collapses of prominent companies. During the period of this research project, the collapses of Carillion in the UK and Wirecard in Germany are additional prominent examples of collapses triggering strong public reaction and regulatory response. Since the collapse of the fifth global audit firm Arthur Andersen in 2002 following accounting scandals in the US, the audit profession has lost its professional autonomy and been subject to public oversight, recognizing that the remaining Big 4 firms are of systemic importance to the capital markets, and their conduct of audits are too important to be left to the profession alone. Recent research contributions investigating the effects of public oversight have indicated potential negative consequences of the regulators´ inspection activities producing an antagonistic environment (Dowling et al., 2018; Johnson et al., 2019), and even comparing the inspection process to a trial in which the regulator performs all roles as prosecutor, judge and jury (Westermann et al., 2019). This environment is further suggested to produce a compliance-driven and self-protective behaviour and promote focus on documentation and standardization (Dowling et al, 2018; Humphrey et al, 2013; Johnson et al, 2019; Westermann et al, 2019).
In addition to implementation of public oversight, regulation has been introduced in the UK and the Netherlands (NL) requiring independent non-executives (INEs) to be part of the governance structures of the Big 4 in their respective jurisdictions. Effectively, this new regulation poses the question whether the survival of the Big 4 firms globally have become too important to be left to the partners of the Big 4. The responsibility of the INEs, as external to the firms and the audit profession, is to promote the public interest commitments of the firms through their participation in governance activities within the firms. Their primary responsibility relates to the audit firm, but they also have accountability towards the regulators. The overall purpose of this dissertation is to investigate these new arrangements through qualitative, empirically based research applying several relevant theoretical lenses. The dissertation consists of three papers with the aim of contributing to the understanding of recent regulatory initiatives and their potential for contributing to the public interest claims of the Big 4.