PwC is being sued for $5.5bn (£4.2bn), reportedly the biggest total yet for an accounting negligence case, for failing to spot a fraud between the owner of mortgage corporation Taylor Bean & Whitaker (TBW) and executives at Colonial Bank, both of which went under in 2009. PwC audited the latter's parent, Colonial BancGroup. On the other side, PwC's lawyers have been clear that it had no relationship with TBW, and concerning the bank parent that "even a properly designed and executed audit may not detect fraud".
The size of the damages that are being pursued are enough to pose a fatal threat to PwC, according to one sector expert. The obvious precedent is the death of Arthur Andersen, the auditing firm tied up in the collapse of Enron at the turn of the millennium. In contrast to banks and insurance companies following the crash, there has been little done in the interim to improve the solvency of the big four in the face of a major litigation hit. Jim Petersen, author of Count Down: The Past, Present and Uncertain Future of the Big Four Accounting Firms, says little has happened since then to protect one of the big four from a similar shock.
Events in Florida should not be viewed in isolation. This country's accountancy majors face a raft of investigations over their auditing of companies that have run into financial trouble, from PwC and BHS - not forgetting Tesco (TSCO) in recent years - to KPMG and Quindell. But on Mr Petersen's reading, the issues that face the big audit model run much deeper than any of these particular cases.
Those challenges include "unbearable professional liability litigation exposure", expectations of faultless assurance, a poor relationship with regulators, the paucity of insurance coverage for those professional liabilities and a basic lack of attention paid to the central 'pass or fail' conclusion by market participants. Nor will the companies' global spread protect them: were an auditor's US arm to fail, for example, it could render them unable to serve their international clients, and could see a flight of partners unwilling to produce rescue capital for the group.
What would happen if one of the big four were to go under? "If one of them goes down, it doesn't go four to three, it goes four to zero," argues Mr Petersen. The dominance of one or other of the accountancy majors in certain countries - PwC here at home, or KPMG in Germany - would make it difficult for others to fill the gap, he argues, as would rules on auditor independence, while smaller firms do not have the spread to serve international clients. In this scenario, a substantial proportion of multinationals would not be able to issue audited reports, leaving regulators and markets with little choice but to allow trading on the basis of unaudited performance statements. This could leave the 'big audit' model, the basis on which investors trust what they think they know about a company, in tatters.
There are other options. Big data promises much for the automation of the industry. Perhaps legislators and regulators will need to reassess the professional liability taken on by auditors in their work, or the certainty that is expected of their conclusions. Perhaps they will, as suggested by Mr Petersen, relax the rules around which ancillary services auditors can provide. These would improve the shock absorption of the industry, which would be in the market's interest, but would not solve the problem of consolidation.
The faster growing consultancy revenues could provide some comfort to the big four over the longer term. As for audit, its time of trial is now. Facts alone are wanted in life, but assurance is a risky business.
