Audit Firms: Audit Market

The large listed audit market is dominated by the Big Four accounting firms; this has led to concerns about the lack of competition and choice in the audit market. With only four possible firms, because of reputation and expertise, to choose from there might be a lack of competition. The high degree of concentration in the audit market became obvious when the Price Waterhouse and Coopers & Lybrand merged in 1998 (Big six to Big five) and the demise of Arthur Andersen in 2002, following its involvement in the Enron Scandal (Big Five to Big Four).

There is a genuine concern about the impact of concentration in the audit market and, in particular, the potential impact of a major firm failure on capital markets. The problem would for sure become very serious significantly if the Big 4 audit firms were to become a Big 3.

The Big Four audit firms audit all but one of the FTSE 100 companies. In the perception of most large listed companies, the Big Four are better placed to offer two key components of the audit product: value-added services on top of the audit itself, and insurance against catastrophes and reputational risk. The Big Four are also perceived to have greater capacity and international coverage to deliver the third key component: the technical audit itself (Oxera, 2006, p.1). Reputation is an important driver of choice, favoring the Big Four, whether this is based on real or perceived differences.

For mid-tier firms there are various entry barriers. They lack the expertise, manpower and funding to compete with the Big Four firms. Big Four firms have

•                a credible reputation with large companies, their investors and other stakeholders.
•      appropriate resources and expertise in place to carry out large company audits,   including relevant sector-specific skills.
•     an effective capability to secure timely and reliable audit opinions on overseas subsidiaries for audits of companies with significant international operations.

Additional Thoughts

Large accounting networks are necessary to perform quality audits of the financial statements of multinational companies. Most stakeholders agree that additional choice in the audit market would be beneficial but should this be left to market forces or should regulatory measures be adopted? Taking away or limiting a company’s ability to choose its best provider would not enhance objectivity, skepticism, or the public interest. Reforms should be made to encourage more natural competition in the audit market such as reforms that govern firms’ access to capital, reform of regulation around auditor liability, reforms to apply ban on restrictive big four clauses in audit proposals. Measures that are designed to artificially limit the scope and outreach of existing large global networks are inappropriate and will likely to limit a company’s choice of auditor, reduce competition and restrict continuous quality improvement.