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The Corner Newsletter, September 5, 2019: Open Markets Institute Featured in Washingtonian Magazine – The Problems of the Big 4 Accounting Firms

Welcome to The Corner. In this issue, we discuss problems that the Big Four accounting firms pose and share a feature magazine piece on Open Markets.

September 6, 2019  |  by Open Markets

Washingtonian Magazine Features Open Markets Institute, Barry Lynn in “The New Trustbusters”

Just after the second anniversary of the founding of the Open Markets Institute, Washingtonian magazine published “The New Trustbusters,” highlighting Open Markets’ story and progress in making antitrust and competition policy a central issue today. In a feature for Washingtonian’s September print issue, Senior Writer Luke Mullins covers Executive Director Barry Lynn’s path to understanding the damaging effects that concentrated corporate power can have on markets and broader society. The article dives into the years-long struggle by Lynn and Managing Editor and Policy Director Phil Longman to help policymakers see antitrust’s importance to democratic government and the country’s corporate concentration problem.

Lynn and Open Markets are at the “center” of antitrust’s contemporary resurgence, Mullins writes. “Lynn argues that only by reviving a lost tradition of antitrust enforcement can we unwind the corporate monopolies that have divided the country into haves and have-nots, captured our political system, and imperiled our democracy.”

You can read the article in newsstands and see the cover photo here.

Concentration, Conflicts-of-Interest Plague Accounting Oligopoly

Citing ongoing and systemic conflicts-of-interest, regulators and politicians in the UK, India, and Australia have been calling for the “Big Four” accounting firms (KPMG, Deloitte, PwC, and Ernst & Young) to be broken up.

India’s Ministry of Corporate Affairs recently proposed instituting a cap on the revenue that Big Four firms can earn from offering non-audit services to firms they also audit. And UK officials have gone further by calling for “full legal separation” to force the Big Four to break their audit and consulting arms into separate businesses. Speaking earlier this spring, Labor Party MP Rachel Reeves said a major break-up would deliver “unquestionable independence, better quality, a proper audit culture, and transparent pricing. This is a prize well worth striving for.”

These developments come at a time when a similar debate is brewing in the U.S. Congress. A House Financial Services subcommittee hearing in June focused on ways to strengthen regulatory oversight of the accounting sector. Recent proposals by lawmakers have sought to strengthen the authority of the Public Company Accounting Oversight Board (PCAOB), the regulator tasked with ensuring audit quality. Rep. Sylvia R. Garcia, D-Tex., has proposed the creation of an official whistleblower program at the PCAOB to protect staff from retaliation for reporting internal ethics violations. And Rep. Ayanna Pressley, D-Mass., has proposed legislation to ensure all PCAOB hearings, notices, orders, and motions, be made available to the public unless regulators request otherwise.

Many experts say, however, that the U.S. must do much more to rein in abuses by the Big Four. Loss of competition due to horizontal mergers are part of the problem, they say. In the 1990s, instead of the “Big Four,” the “Big Eight” divided the markets (Arthur Andersen, Arthur Young, Ernst & Whinney, Deloitte Haskins & Sells, Peat Marwick Mitchell, Touche Ross, Coopers & Lybrand, and Price Waterhouse). Today, after successive rounds of mergers, large businesses have fewer options about where to take their business. The “Big Four,” handle over 90 percent of the audits for large accelerated filers (firms with over $700 million in publicly held shares).

But just as troubling as the loss of competition is the conflict of interest within the remaining firms, which have increasingly turned to lucrative consulting services. Lynn Turner, former Chief Accountant at the Securities and Exchange Commission, says it’s important to make sure that accounting firms don’t also do consulting, because of the inherent tension between conducting rigorous audits in the interest of the investing public and chasing consulting fees.

“Every time we’ve ever gone into a recession, we always, always have blow-ups with the firms,” says Turner, often as a result of “really lousy audits” that have failed to point out critical material weaknesses in the internal controls of major companies. Today, he continues, “The problem is at least as bad, if not worse, than in 2008 after the crash, when millions of people suffered in part as a result of these auditing failures.” Absent action, he says “this will happen again.”

🔊 ANTI-MONOPOLY RISING:

  • Over 30 state attorneys general will announce an antitrust investigation into Google next Monday, The Washington Post reported on Tuesday. The Post was “unclear” on whether Facebook and Amazon would be other subjects of potential future investigations as well as on what role the Justice Department would play in the investigation and the announcement.
  • Illinois joined 15 other states plus the District of Columbia on Tuesday in their lawsuit challenging T-Mobile’s $26 billion acquisition of Sprint. Illinois Attorney General Kwame Raoul said that a combined T-Mobile and Sprint would mean “few choices, higher prices, less innovation, and lower quality service” for consumers.
  • Sens. Richard Blumenthal, D-Conn., and Amy Klobuchar, D-Minn., sent a letter to the Justice Department (DOJ) calling for an investigation into claims that Live Nation is “flouting” a 2010 DOJ consent decree by retaliating against concert venues that do not use Live Nation’s ticketing business. Live Nation entered into the consent decree with the DOJ as a condition of its merger with the then-leading ticket provider, Ticketmaster. Blumenthal and Klobuchar called the ticketing industry “broken” and “bad for consumers” and suggested looking into extending the conditions of the decree past its July 2020 expiration.
  • Sens. Thom Tillis, R-N.C., Marsha Blackburn, R-Tenn., Christopher Coons, D-Del., Dianne Feinstein, D-Calif., and Reps. Jerrold Nadler, D-N.Y., Doug Collins, R-Ga., Adam Schiff, D-Calif., and Martha Roby, R-Ala., sent a letter to Google CEO Sundar Pichai about YouTube’s Content ID system potentially favoring larger copyright holders over smaller companies. They wrote that the system, designed to allow copyright holders to prevent copyrighted material from appearing on YouTube, is “difficult or impossible” for smaller firms to use.
  • The European Union said on Wednesday that it was looking into whether Facebook’s announced Libra cryptocurrency breaks antitrust laws. EU Competition Commissioner Margrethe Vestager explained, “We’re looking at whether those proposals create risks for competition, so we can be ready to act swiftly if an intervention were to prove necessary.”
  • France’s antitrust head Isabelle de Silva wants to investigate Big Tech’s use of online payment systems. In an interview with Bloomberg, de Silva said that products like Apple Pay pose major competition concerns: “It could amount to existing dominant market power being strongly enhanced.”
  • Apple co-founder Steve Wozniak, in an interview, said he favors “looking into splitting up companies. I wish Apple on its own had split up a long time ago and spun off independent divisions to far-off places and let them think independently – the way HP did when I was there. I think that big tech has gotten too big and is too powerful a force in our lives, and has taken our choice away.” Read Open Markets’ statement “applauding” Wozniak for his statement, observing that “Silicon Valley itself” is concerned about the power of platform monopolists like Apple, here.

📝 WHAT WE’VE BEEN UP TO:

  • Phil Longman, in a book review for the Washington Monthly,  criticized Duke professor Philip M. Napoli’s book Social Media and the Public Interest: Media Regulation in the Disinformation Age on several grounds. This includes being too vague about how the public would regulate social media platforms and for “embrac[ing] much deeper government regulation of the press.” Longman calls the proposal “a dark vision” and cautions, “Before we embrace the notion that saving democracy requires abridging free speech, perhaps we should consider other tools, such as applying traditional antitrust and other competition policies to ensure that social media is no longer dominated by corporate Goliaths. An even simpler but potentially transformative move would be to outlaw the use of personal data for targeted advertising.”
  • Sandeep Vaheesan published an article in the Maryland Law Review titled “Accommodating Capital and Policing Labor: Antitrust in the Two Gilded Ages.” In the article, Vaheesan describes how enforcers and judges have used antitrust law against worker collective action and to favor “the power of large-scale business.” A “renewal of antitrust,” Vaheesan writes, ”in accordance with the expressed purposes of Congress, would help remedy the inequities of the New Gilded Age and create a more just society.” Vaheesan also wrote a similar piece for ProMarket.
  • Sally Hubbard spoke on Vox’s new podcast, “Land of the Giants,” about why enforcers should sue Amazon for violating antitrust laws. Hubbard said that Amazon’s power is clear because sellers and brands on the platform think that they have no choice but to accept Amazon’s terms. “If you talk to Amazon sellers, they’re living in fear. I’ve spent the last two or three years talking to Amazon sellers who have been wronged and cut off … [W]ith a flip of a switch their whole livelihoods are gone,” Hubbard explained.
  • Sally Hubbard spoke to Politico about the media industry’s reliance on tech platforms and the numerous efforts the press has made to take back ownership of its content. Hubbard said, “I think the bargaining power between any individual publisher and a tech platform is just too vast.”
  • Sandeep Vaheesan commented on Jalopnik’s finding that Uber and Lyft on average take one-third of the revenue from each driver’s trip. Vaheesan said, “This is really fascinating and troubling, … [and] supports the argument that their business model is built on large scale labor exploitation.” The study was based on a review of over 14,000 fare receipts.
  • Matt Stoller spoke to Bloomberg about both the strategy and success of Alphabet’s private investment arm and why its “spray and pray” method has given it enormous insight and influence over the technology industry. “Deal flow gives you a lot of insight into what other people are doing in the market,” Stoller said, “It’s just one more tool that they have to exert power.”

📈 VITAL STAT:

14

Number of days it would take YouTube to pay off the $170 million fine the Federal Trade Commission and New York Attorney General Letitia James levied yesterday on the video site for illegally gathering data on children, based on 2018 estimates. Democratic Commissioners Rohit Chopra and Rebecca Kelly Slaughter wrote dissenting statements expressing deep concerns with the adequacy of the settlement.

Chopra, observing that the “terms of the settlement were not even significant enough to make Google issue a warning to its investors,” said that the FTC’s decision “reinforce[d] my concerns that the Commission brings down the hammer on small firms, while allowing large firms to get off easier.”

Read Open Markets’ statement calling the fine “grossly inadequate” here.

📚 WHAT WE’RE READING:

  • “That Beloved Hospital? It’s Driving Up Health Care Costs”(The New York Times, Elisabeth Rosenthal): Why containing out-of-control healthcare costs has to include taking on powerful hospitals – the “elephant in the room” according to Rosenthal – and why many Democratic presidential candidates seem reluctant to do so.
  • The Dialysis Duopoly Spends Big to Protect Profits in California” (The American Prospect, Alexander Sammon): Why DaVita and Fresenius, the two main providers of kidney dialysis services, are spending millions lobbying in California against a bill that could make dialysis more affordable for patients across the state.
  • “Amazon’s Next-Day Delivery Has Brought Chaos and Carnage to America’s Streets – But the World’s Biggest Retailer Has a System to Escape Blame” (BuzzFeed, Caroline O’Donovan and Ken Bensinger) andThe Human Cost of Amazon’s Fast, Free Shipping(The New York Times, Patricia Callahan): Two exceptional investigations tell of the tragic consequences of Amazon’s unceasing pressure to deliver goods at blistering speeds. One cause? A fleet of ostensibly independent delivery corporations who do business almost exclusively with Amazon and who, the reports show, likely break labor and traffic laws.

 

Written by Barry Lynn, Phil Longman, and Udit Thakur

Edited by Barry Lynn, Phil Longman, Udit Thakur, Claire Kelloway, Ram Sharma, and Matt Buck.

Image credit: Roman Valiev via iStock.

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In America today, wealth and political power are more concentrated than at any point in our country’s history.

The Open Markets Institute, formerly the Open Markets program at New America, was founded to protect liberty and democracy from these extreme -- and growing -- concentrations of private power.

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