The Big Four: Can't Touch This?

Updated from 7:17 a.m. EDT

Have the Big Four become too big to fail?

That's the question accounting experts and policymakers are pondering as the Department of Justice reportedly mulls whether to indict accounting giant KPMG over alleged solicitation of illegal tax shelters.

Such an indictment could inevitably lead to a meltdown at KPMG akin to what happened to Arthur Andersen after its own indictment -- the loss of thousands of jobs, a major upheaval in auditing relationships and a further narrowing of a market that many analysts believe already lacks sufficient competition.

"It's an awkward spot," says Jack Ciesielski, publisher of the Analyst's Accounting Observer, an industry newsletter. If the government lets KPMG off with a light punishment, it might encourage more bad behavior by the company or other audit firms. On the other hand, he adds, "If they go ahead and gut it, I'm not sure they've done anyone any favors."

But the debate over how to deal with KPMG has broader implications as well. Since the Enron and WorldCom scandals earlier this decade, the federal government and other regulators have put in place a series of reforms, including the landmark Sarbanes-Oxley Act, that have stepped up the scrutiny of accounting firms and the audits they conduct.

The question is whether those reforms go far enough. Some accounting analysts don't believe they do. They want new rules to ensure even greater transparency and independence at the Big Four -- or a forced breakup that would ensure more competition.

"People are not focusing on what the real issue is: That you don't have enough [competition] at the four," says Lynn Turner, former chief accountant at the Securities and Exchange Commission and the head of research at proxy adviser Glass Lewis. "If the firms get to thinking they are untouchable, what will be the quality of their work going forward?"

The Final Four

The concerns about competition in the accounting space and how to deal with bad actors follows a consolidation over the last 20 years that narrowed the number of top firms from eight to five -- and then down to four after Arthur Andersen's indictment.