The "strategic duplicity" of the Big Four
By Saila Stausholm
In recent years, the actions of multinationals have been subject to more political scrutiny and sometimes this puts them in a position where they need to send opposing signals to different clients.
In “Big 4 Offshore” a new open-access research study by me, Richard Murphy and Leonard Seabrooke, we term this ‘strategic duplicity’. This is a strategy that multinational firms can take on if they deal with controversial issues and clients with opposing interests.
In our paper we investigate the case of the Big Four accounting firms EY, Deloitte, PwC and KPMG. These firms are extremely important for the global economy, and their work for both governments and multinational corporations deserves scrutiny.
As state-authorised auditors, the Big Four have been assigned a central role in ensuring truth and transparency in the markets. At the same time, they have expanded their businesses far beyond auditing. Today they advise both companies and governments on everything from technology and efficient management to international regulation.
These firms have been perfecting the art of seeming different to different constituents, not least because of their sometimes conflicting cross-selling of services. This means that a Big Four employee may audit a firm and check that the firm lived up to all regulations and their colleague might later advise that firm on how to maneuver around regulations.
Most troublesome is the Big Four’s provision of tax advice to multinational corporations, using tax-haven subsidiaries to lower their tax rates. This controversial advisory service has led them to be caught up in scandals and it stands in contrast to their quasi-regulatory work as auditors, and as trusted advisors to governments.
The Big Four and tax havens
In our study, we mapped the scale of the Big Four’s activities globally, including in tax havens. The mapping revealed two important truths about how these organizations can play a role in organizing the tax minimization of multinational corporations.
First, we find that the Big Four have a large presence in the countries with low taxes and high secrecy. Comparing the staff numbers across countries relative to local population and GDP enables us to identify where Big Four may serve not just the local market, but multinational firms and super-rich clients looking for offshore services. Doing so shows that the places with the most employees relative to population or GDP include tax havens such as the Cayman Islands, Luxembourg, Bermuda, Malta, Cyprus, and the Channel Islands.
The top jurisdictions read like a who’s who of tax havens and this is no coincidence. These are places where offshore financial services are offered; meaning financial services offered to non-residents, often with the goal to protect assets from regulation and taxation in other markets.The Big Four have a large representation there, not because they serve the local market, but because they need a presence in these jurisdictions to help multinationals and the super-rich to minimize their taxes.
This mapping shows that if we want to end multinational tax avoidance, it is not enough to apply pressure on the countries which enable tax minimization. We also need to investigate and regulate the professionals who facilitate tax minimization, a large portion of which is represented by the Big Four.
But our mapping also reveals a second truth about how it is possible for the Big Four to provide these services: the strategic duplicity they employ across markets in signaling their transparency.
The important role they play as auditors, accountants and advisors to both governments and firms means their legitimacy and credibility is important. These strengths are potentially at stake when they are caught in scandals related to tax havens (paywall). So how are they able to continue working for both sides of the table – for governments and for tax-avoiding multinationals?
In our investigation into the geography of the Big Four, identifying the number of staff turned out to be extremely hard to do in a number of locations, and even impossible in some.
The places where information is most scarce are often the same ones used to minimise tax. The jurisdictions where there is a lack of data, for any of the four firms, include Andorra, Brunei, the Cook Islands, Liberia, Liechtenstein, Monaco, St. Vincent and the Grenadines, the Seychelles, and the Turks and Caicos Islands. The level of transparency, in other words, is not random, but correlates with measures of the extent to which the country can be used for tax minimization.
We interpret this ‘transparency arbitrage’ as a part of their fundamental organizational and strategic duplicity: by providing high transparency in some markets where they serve as auditors and advise governments, they signal accountability.
But to the clients who are interested in their work in tax havens, they signal the opposite, as these clients would probably feel more comfortable with discretion. These opposing signals and different virtues become clear when comparing across countries.
Potential to regulate
In recent years, the EU and OECD have introduced country-by-country financial reporting requirements for large multinational companies. But these rules do not apply to the accounting firms, because they are legally speaking not organised as multinational corporations but as networks of independent entities.
The Big Four market themselves as global organisations but are, in legal terms, composed of local partnerships. This means that outwardly they can appear as a unified brand, while avoiding being regulated as actual multinationals. This makes it possible for them to offer clients seamless services across borders, but it also means that responsibility can be fragmented. To regulators they can say: ‘We are only responsible for our local entity.’ To clients they can say: ‘We can help you globally.’
This could be amended to some extent by enforcing country-by-country reporting on the Big Four despite their structure. This could force the firms to disclose more about their activities and finances in each country. But greater transparency into the activities of the Big Four in tax havens would not necessarily be enough to stop them from providing tax minimization services.
Another potential for regulation is to break up the firms so that they would have the right incentives. This could be done by separating their audit businesses from their advisory and consultancy services. Independent auditors would then have a clearer incentive to uncover errors, fraud, and perhaps also aggressive tax planning.
Strategic duplicity beyond the Big Four
Geopolitical shifts and increasing polarization around social and economic issues have exacerbated the need for multinational firms to consider how they appear to different constituencies. For example, diversity, equity, and inclusion (DEI) strategies have come under political attack from the US government, even as they remain required elsewhere. Similarly, the anti-Environmental Social Governance (ESG) policies of the second Trump administration are having an impact on how green finance is being organized.
While some firms may choose to align with one political stance or another based on commercial interests or values, others may adopt a strategy of strategic duplicity, projecting different commitments to different audiences.
Increased geopolitical fragmentation means multinational firms will need to either publicly take a stance, or break up into different units – both very costly strategies. Here, strategic duplicity – whether on transparency, diversity, sustainability policies or other issues – will likely become a tool for multinationals to keep their cake while eating it too.
Saila Stausholm is a postdoctoral researcher at the Copenhagen Business School in Denmark.