No Action Needed for Public Co. Audit Market Dominance

January 14, 2008 ( - The Government Accountability Office (GAO) recently concluded the lack of significant adverse effect of concentration in the current public company audit market and no clear consensus on how to reduce concentration indicates no compelling need for immediate action.

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

Although audit fees rose significantly in recent years, GAO’s model found that factors other than market concentration appeared to explain audit fee levels. Market participants attributed fee increases to expanding accounting and auditing requirements and higher costs for accounting firm personnel. Public company officials generally cited an increase in audit quality levels.

“Although current concentration does not appear to be having a significant adverse effect, the loss of another large firm would further reduce large companies’ auditor choice and could affect audit fee competitiveness,” the GAO said in its report.

Smaller accounting firms face various challenges in auditing more public companies, but most are not interested in these clients, so concentration in the audit market for large public companies is likely to continue. Large public companies surveyed by the GAO said smaller firms lacked the capacity and technical expertise they wanted in an auditor.

Audit firms surveyed said adding qualified staff and increasing their name recognition were the most significant challenges they faced in expanding their public company audit practices. Some said they have taken steps to increase their capacity by joining networks with other firms.

While academics and business groups have put forth proposals to address these challenges and reduce audit market concentration – including capping auditors’ liability and creating an office to share technical expertise – market participants raised questions about the overall effectiveness, feasibility, and benefit of these proposals, and none were widely supported, the report said.

The GAO prepared its report under the Comptroller General’s authority as part of a continued effort to assist Congress in reviewing concentration in the market for public company audits. The small number of large international accounting firms performing audits of almost all large public companies raises interest in potential effects on competition and the choices available to large companies needing an auditor.

The GAO surveyed a random sample of almost 600 large, medium, and small public companies on their experiences with their auditors, interviewed the four largest accounting firms, and surveyed all other U.S. accounting firms that audit at least one public company.

To supplement the study, the GAO interviewed market participants, including public companies, investors, accounting firms, academics, and regulators.

The GAO’s report is here .