GAO: Big 4 Holds 98% Market Share

A new GAO report finds the market for the biggest public-company audits is essentially monopolized by the four largest CPA firms. But the GAO said it detects little dissatisfaction among clients and no sign of price inflation.


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Here are excerpts from the report:

Continued Concentration in Audit Market for Large Public Companies Does Not Call for Immediate Action

Public and investor confidence in the reliability of financial reporting is critical to the effective functioning of the U.S. capital markets. Federal securities laws require that a company raising capital by issuing securities to the public have an independent public accountant perform an audit of the company’s financial statements to provide reasonable assurance about whether the financial statements are fairly presented. Since the 1980s, a small number of large U.S. accounting firms have traditionally performed audits for the vast majority of the public company market (when measured by the share of total audit fees collected).

Among the clients of these large firms are almost all of the largest U.S. companies. The small number of large accounting firms performing such audits has decreased as a result of mergers and the dissolution of one firm, falling from eight in the 1980s to four today. These four firms—referred to here as the largest firms—have thousands of partners, tens of thousands of employees, offices located around the world, and each had more than one thousand public company audit clients for 2006. The next four largest accounting firms—referred to here as midsize firms—operate nationally, and to some extent, internationally but have substantially fewer employees and partners, and each had less than 500 public company audit clients for 2006.4 All other accounting firms—referred to here as smaller firms—audit regional and local public companies and have fewer than 100 public company clients.

The 8 largest firms in the 1980s were Arthur Andersen LLP, Arthur Young LLP, Coopers & Lybrand LLP, Deloitte Haskins & Sells LLP, Ernst & Whinney LLP, Peat Marwick Mitchell LLP, Price Waterhouse LLP, and Touche Ross LLP. For the purposes of this report, the largest firms include Deloitte & Touche LLP, Ernst & Young LLP, KPMG LLP, and PricewaterhouseCoopers LLP. In our 2003 report on consolidation and competition, we referred to this group as the “top tier” based on revenue and staff size. In our mandated study on audit firm rotation, we defined Tier 1 as firms with 10 or more public company clients.

The largest firms each audited more than 1,200 public companies for 2006 according to Public Accounting Report. These firms are commonly referred to as the “Big 4” firms.

Laws and Regs Reshape Challenges

With the audit market concentrated among the four largest firms, concerns have been raised about the number of choices that companies have when selecting an auditor and the extent of competition in the market. In 2003, we conducted a study (mandated by the Sarbanes-Oxley Act) on consolidation that had occurred in the accounting profession. Our study followed the dissolution of one of the then-five largest accounting firms, Arthur Andersen. At that time, we found that although audits for large public companies were highly concentrated among the largest accounting firms, the market for audit services appeared competitive according to various indicators.

Given that several years have passed since the dissolution of Arthur Andersen and the passage of the Sarbanes-Oxley Act, which introduced reforms to public reporting and auditing, this report provides an update on the trends in the market for public company audits that we identified in 2003 in the market for public company audits. Among the changes affecting the audit market that have occurred since our last report are additional requirements for public companies and auditors to assess, report on and attest to companies’ internal control practices, restrictions intended to ensure the accounting firm’s independence that limit public companies’ ability to use their auditors for certain other services, and the creation of a new oversight body for accounting firms.

We prepared this report under the Comptroller General’s authority to conduct evaluations on his own initiative as part of a continued effort to assist Congress in reviewing concentration in the market for public company audits.

Specifically, this report examines
(1) the level of concentration in the market for public company audits and the impact of this concentration,
(2) the potential for increased capacity among midsize and smaller accounting firms to ease market concentration, and
(3) proposals that have been offered by others for easing concentration in the market for public company audits and the barriers facing midsize and smaller firms in expanding their market share for public company audits.

The midsize firms—BDO Seidman LLP, Crowe Chizek & Company LLC, Grant Thornton LLP, and McGladrey and Pullen LLP—each audited more than 100 but fewer than 425 public companies for 2006 and had around $1 billion in revenue or less according to Public Accounting Report.
5In addition, a large number of accounting firms have no public company clients.

To address these objectives, we collected data and analyzed changes in companies’ choice of auditors and in audit fees, computed concentration ratios and other measures of concentration. We developed an econometric model to evaluate how various factors, including the level of market concentration, could explain fees that public companies paid to their auditors.

Surveys, plus interviews

To obtain the views of public companies and accounting firms on audit competition and challenges, we conducted two surveys. First, we surveyed a random sample of 595 of more than 6,000 publicly held companies, some of which had recently changed auditors.8 Our sample included large public companies (those in the Fortune 1000); midsize public companies (those outside the Fortune 1000 with market capitalizations—the value of the total outstanding shares of stock—above $75 million); and small companies with less than $75 million in market capitalization.

Our response rate for this survey was 73 percent. Because our survey was based on a random sample of the population, it is subject to sampling errors. The likely range of these errors for any survey statistics is no greater than plus or minus 12 percentage points, unless otherwise noted. In addition, we surveyed representatives of all 434 U.S. accounting firms that audited at least 1 public company in 2006 and were registered with the Public Company Accounting Oversight Board (PCAOB). Our response rate was 58 percent. Results from our survey of accounting firms are limited to those midsize and smaller firms with five or more public company clients. Instead of surveying the four largest firms, we conducted separate structured interviews with representatives from each firm to obtain their views on the issues covered in the survey. This report does not contain all the results from the surveys, but the surveys themselves and a more complete tabulation of the results can be viewed at

We also interviewed staff from the Securities and Exchange Commission (SEC), PCAOB, Department of Justice (DOJ); academics; private consultants; trade associations; accounting firms; public companies; and insurance companies. To obtain information about the strengths and weaknesses of various proposals that have been offered to address concentration and the challenges that midsize and smaller firms face, we also held a roundtable discussion on July 10, 2007, involving 18 market participants, including representatives of accounting firms, public companies, investors, academics, and insurers. For more information on our scope and methodology.

Our initial population included over 6,900 U.S.-based public companies that traded on major exchanges (NYSE, NASDAQ, AMEX, OTCBB). Company estimates throughout the report do not include funds, trusts, nonoperating companies, or subsidiaries of another public company.
9According to these criteria, approximately 872 companies are large, 3,212 companies are midsize, and 2,822 companies are small.

While the small public company audit market is much less concentrated, the four largest accounting firms continue to audit almost all large public companies. According to GAO’s survey, 82 percent of large public companies—the Fortune 1000—saw their choice of auditor as limited to three or fewer firms, and about 60 percent viewed competition in their audit market as insufficient. Most small public companies reported being satisfied with the auditor choices available to them.

Although the market for small public company audits has become much less concentrated since 2002, the continuing concentration in the market for larger public companies limits these companies’ auditor choices but does not appear to have significantly affected audit fees.

According to our analysis, the largest accounting firms audit 98 percent of the more than 1,500 largest public companies—those with annual revenues of more than $1 billion. In contrast, midsize and smaller firms audit almost 80 percent of the more than 3,600 smallest companies—those with annual revenues of less than $100 million.

75% of smallest pubic companies say their choise is ‘sufficient’

Larger public companies we surveyed indicated that the industry expertise and technical capability that they sought in an auditor generally meant that their choices were limited to the largest accounting firms. According to our survey of a random sample drawn from a population of more than 6,000 public companies, almost 60 percent of large companies indicated that the number of accounting firms from which they could choose was not adequate, although some company officials described taking steps to ensure that they would have at least one alternative firm they could use under the more restrictive auditor independence rules.

In contrast, about 75 percent of the smallest public companies saw their number of auditor choices as sufficient. While audit fees have increased significantly in recent years, many market participants that we interviewed attributed fee increases to additional audit work and expanded accounting and audit requirements and higher costs to hire, train, and retain qualified staff. In addition, the econometric model we developed to evaluate the relationship between market concentration and audit fees indicated that factors other than concentration appeared to explain the recent fee increases.

The level of market concentration also does not appear to be affecting audit quality as many of our survey respondents and those we interviewed said that audit quality had improved, which some attributed to the Sarbanes-Oxley Act. Although the current level of concentration does not appear to be having significant adverse effect, public company officials and others we interviewed indicated that a merger or the failure of one of the largest firms would further reduce companies’ auditor choices and could potentially result in higher audit fees and fewer choices. The various federal organizations that have a role in overseeing activities in the audit market, including SEC, PCAOB, and DOJ, are prepared to take various actions to help minimize the disruption to the market if further concentration occurred.

The concentration in the large public company audit market is also unlikely to be reduced in the near term by midsize and smaller accounting firms because a significant majority is not interested in auditing large public companies and those that are interested face various challenges in expanding their capability to do so.

Over 70 percent of midsize and smaller accounting firms indicated that they were not attempting to obtain large public company clients. Approximately 90 percent of large public companies we surveyed cited lack of capacity as a reason why they would not consider using midsize or smaller firms as their auditor. As a result, many of these firms would have to greatly expand their staffing and geographic capabilities to serve such companies. However, the most frequent impediment to expansion cited by accounting firms responding to our survey was difficulty finding staff. Smaller firms also saw their lack of name recognition and reputation as preventing them from obtaining more large public company clients. Other difficulties that some accounting firms cited in obtaining more public company clients included limited access to capital and difficulty complying with multiple state licensing requirements. Some firms have taken steps to address such challenges, such as mergers or joining networks.

Various proposals by academics and business groups have been put forth to reduce the risks of current and further audit market concentration and the challenges facing midsize and smaller accounting firms, but each proposal also has disadvantages. For example, some have suggested that requiring one or more of the largest firms to spin off a portion of their operations to create more than four firms with the capacity to audit large public companies could ease current concentration.

However, market participants we spoke with raised concerns that splitting up these firms could reduce their economies of scale and the depth of expertise that currently allow the largest firms to effectively and efficiently audit large companies. Some have also put forth proposals to reduce the risk of further concentration that could arise if one of the largest firms leaves the market as the result of a large litigation judgment or a regulatory action. Proposals to reduce this risk include placing caps on auditors’ liability and having regulators or others take enforcement actions only against responsible partners or employees rather than the firm as whole.

However, some of the academics and others we spoke with saw such liability caps and enforcement limitations as potentially reducing the incentives for auditors to conduct quality work. Other proposals have been offered to help midsize and smaller firms expand their market share, thus potentially easing concentration. These proposals include allowing outside ownership of these firms in order to provide capital to expand their operations, creating a group of accounting and auditing experts to provide needed expertise to smaller auditing firms, and establishing a professionwide accreditation program to help these firms overcome some of the name recognition and reputation challenges they face. However, while each action could offer benefits, market participants generally saw these proposals as having limited effectiveness, feasibility, and benefit.

‘No compelling need to take action’

In light of limited evidence that the currently concentrated market for large public company audits has created significant adverse impact and the general lack of any proposals that were clearly seen as effective in addressing the risks of concentration or challenges facing smaller firms without serious drawbacks, we found no compelling need to take action. As a result, this report does not include any recommendations.

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