GAO Finds Big4 Audit Share is a Whopping 98%

The US Government Accountability Office just released a very interesting report on the state of the Audit industry as it relates principally to the Big4 audit firms and their smaller-sized competitors. This is a complex area and the GAO study attempts to address many of the intricate dimensions, including questions such as:

What share do the Big4 firms have of top companies?
How much choice do client companies really have while choosing auditors?
Why do large companies generally select one of the Big 4 firms?
Why don't the smaller accounting firms step into the big league?
What would happen if a Big4 firm exited the marketplace?
Should a Big4 firm break-up and what will this mean?
Why are audit fees rising?
How does Sarbox play into audit firm performance and concentration?

Now's here an amazing finding - Big 4 firms (PwC, D&T, E&Y and KPMG) audit an astounding 98% of 1,500 largest public companies with sales over $1 billion. 60% of 6,000 companies surveyed said that there wasn't enough choice in selecting auditors. The Herfindahl index, which measures concentration in a sector, for the audit market was 2,300 - the Department of Justice indicates that any number over 1,800 is highly concentrated.

Not surprisingly, concentration is high and choices are low - all indicators that things are as tight as they can get and any further concentration will mean structural and regulatory changes in the marketplace. That is to say, that while no one is expecting a reduction to Big 3, it will cause a number of governmental agencies to work in concert to mitigate the situation. Several actions to prevent these are mentioned in the report.

There's much more in the 120 page report, which we will address in future postings.