Auditing Chaos: PwC's Structure Is a Time Bomb Waiting to Explode

 

PwC is the Titanic of accounting firms, and if it doesn’t rethink its governance fast, it’s heading straight for an iceberg of irreversible damage. In plain English, the decentralized structure of PwC is outdated and unfit for today’s global marketplace—if they don't centralize control, their next scandal could make Evergrande look like child's play.

PwC’s governance might just be accounting for trouble. When a company’s name becomes synonymous with fines, scandals, and dodged oversight, it's clear that something larger than spreadsheets is in disarray. PwC, once proud of its founder Edwin Waterhouse's integrity in unearthing 19th-century frauds, has shifted into a modern behemoth riddled with governance issues. Waterhouse's sleuthing days feel far away when we look at the record $62 million fine slapped on PwC's Chinese affiliate, PwC Zhong Tian, for "concealing or even condoning fraud" in Evergrande’s accounts—a debacle that inflated revenues by $80 billion before its 2021 collapse. It begs the question: can PwC continue to thrive under its decentralized structure, or has its empire grown too unwieldy for its leaders to manage?

PwC is not alone in this mess. The so-called “Big Four”—PwC, Deloitte, EY, and KPMG—have become goliaths in the auditing world, overseeing nearly all of America’s and Europe’s blue-chip companies. But with great power comes great responsibility—or, in this case, a great ability to dodge it. Between 2010 and 2023, PwC alone faced $450 million in fines and settlements related to botched audits and misconduct in various countries. Not to be outdone, their rivals have faced at least 28 multimillion-dollar fines since 2019 alone. These giants, it seems, are not being scrutinized enough, despite their ballooning influence.

Here’s the rub: the very structure that propelled PwC to global dominance may be its Achilles heel. Its decentralized model, which functions more like a network of independent national partnerships than a unified entity, has become too complex for proper oversight. With 1.5 million employees across the Big Four, each country operating as its own fiefdom, it's no surprise that partners are chasing deals instead of focusing on what really matters—audit quality. As one former big-four employee in China recalled, “You don’t make partner because you are a good auditor. You make partner because you close deals.”

This model has enabled rapid growth but also invites chaos. In 2023 alone, PwC hired 130,000 people—nearly doubling its 2002 headcount. Such a hiring spree looks impressive on paper but spells trouble in practice. Many of these hires are young professionals just looking for a reputable name to slap on their resumes before moving on. With a turnover rate of nearly 94,000 employees in the same year, fewer have a vested interest in preserving PwC’s integrity. How can a firm claim to maintain quality when its workforce is a revolving door of fresh faces?

The Evergrande scandal, which led to China’s punitive fine, is emblematic of the dangers of PwC’s fractured governance. In emerging markets, where regulatory oversight is weaker, PwC's decentralized model faces even greater risks. Employee churn is higher, and corporate oversight is more lax. Add in the temptation for bad behavior, and you have a recipe for disaster. Yet this isn’t just a China problem—Hong Kong’s accounting watchdog is conducting its own investigation, and the fallout may spread to other regions.

In response to the Evergrande debacle, PwC’s new global boss, Mohamed Kande, admitted that the firm’s work “fell well below our high expectations.” But apologies ring hollow when the system that produced these failures remains unchanged. PwC needs to move beyond cosmetic fixes like sacking six partners and parachuting in a crisis manager from London. What it truly needs is a rethinking of its entire governance model.

Some argue that the decentralized structure is dictated by law—most countries require accountancies to be domiciled locally and owned by citizens. But laws aren’t the only issue. PwC has become an unwieldy beast, distracted by its fast-growing consulting arms. This creates a conflict of interest that undermines its ability to focus on auditing. A 2022 attempt by EY to split off its consulting business might have shown the way forward, but internal resistance caused the plan to crumble. Nonetheless, such a split may be inevitable if the Big Four are to survive.

The push for governance reform isn’t just coming from inside the firms. Regulatory bodies are waking up to the threat posed by these oversized entities. Tom Rodenhauser of Kennedy Intelligence points out that it’s a wonder there haven’t been more scandals. He’s right. When you have a network this large, spread across so many regions with little centralized oversight, it’s amazing that the walls haven’t come crashing down yet. The Evergrande scandal could just be the tip of the iceberg.

PwC and its rivals would do well to take a page from other industries. Large multinationals have long understood the need for strong central governance and clear lines of accountability. For PwC, this means rethinking its governance structure. It could start by simplifying its business, perhaps by spinning off the consulting arm and focusing single-mindedly on audit quality. It also needs to bring in more serious outside oversight—something that regulators can help with by relaxing rules barring auditors from having independent directors with ties to their clients.

For now, PwC's leadership seems content with making changes at the margins. But history tells us that patchwork fixes won’t solve the problem. The decentralized model that worked in the 20th century is buckling under the weight of the modern global economy. If PwC doesn’t act soon, the next scandal could be even bigger, and the fines, even more crippling. And unlike in the past, when Edwin Waterhouse built his reputation on sniffing out fraud, today’s PwC may be better known for its ability to create it.

As the Big Four stumble from one scandal to the next, one thing is clear: they’ve outgrown their current structures. PwC needs to rethink its governance before the next Evergrande hits. After all, what’s the use of being a giant if all it leads to is a bigger mess? And who knows, maybe one day PwC will audit itself into oblivion—at least that would be a clean break.