Rising Tensions: The Impact of Advisory Service Growth

The landscape of the accounting profession is undergoing significant changes as advisory services at the largest public accounting firms are surpassing traditional audit revenues. This shift has led to internal tensions within these firms and has caught the attention of global regulators. The rise of advisory services has outpaced assurance services, leading to concerns about auditor independence and audit quality.

The Big Four accounting firms—Deloitte, PwC, EY, and KPMG—have seen a significant increase in revenue from advisory services over the past two decades. This growth has been fueled by a shift in business models after the enactment of the Sarbanes-Oxley Act, which prohibited auditors from providing advisory services to audit clients. As a result, the Big Four began selling off their advisory service practices to comply with the new regulations.

However, the resurgence of advisory services in recent years has reignited tensions within these firms. Partners have been at odds over how to separate advisory services from assurance services, leading to failed attempts at restructuring. Additionally, stricter regulations in countries like the United Kingdom and Australia are mandating changes to ensure auditor independence and audit quality.

The impact of this shift is not limited to internal firm dynamics. Global regulators are closely monitoring the situation and taking action to address concerns about the dominance of advisory services. In the European Union, auditor rotation rules have been implemented to strengthen auditor independence, while in the UK, the Financial Reporting Council has ordered the operational split of assurance and advisory services at the Big Four by 2024.

Academic research has also highlighted the consequences of the rise of advisory services on audit quality. Studies have shown that a greater emphasis on advisory services can distract from the audit function, leading to potential risks for the profession.

Overall, the growing dominance of advisory services in the accounting profession is causing rising tensions internally and externally. The resolution of these tensions remains uncertain, but firms and regulators are actively working to address the challenges posed by this shift in the industry.