The Final Four: GAO supports Chennai lobby's worry?
August 6, 2003
Meeting of Minds on Big Four:
This is one reportthat should gladden the hearts of the Chennai Accountants Lobby. The General Accounting Office (GAO) which is the audit, evaluation and investigative arm of United States Congress haswarned against accounting industry concentration, says a Reuters report that is highlighted by Ralph Nader’s Citizenworks (www.citizenworks.org) in its latest news letter.
The Reuters report says that after the demise of Arthur Andersen, only four big accounting firms remain -- PriceWaterhouseCoopers, Ernst&Young, KPMG, and Deloitte&Touche. They are jocularly referred to as the Final Four, and according to the GAO report account for 78% of all public companies.
The report suggests that with the industry increasingly concentrated, there is potential for a few big companies to abuse their market power: “The significant changes that have occurred in the profession may have implications for competition and public company choice, especially in certain industries, in the future.”
The report also suggested that it is difficult for smaller firms to break into the public company audit market because of lack of expertise, reputation, and global reach.
The articles quotes the GAO report saying, ‘thanks to rapid consolidation that has shrunk the accounting industry to just four large firms, regulators must weigh carefully the impact of potential sanctions against them in the marketplace’.
The GAO, says Reuters, “also warned that concern over the disruption from destroying an accounting firm should be balanced against allowing the top firms from believing they are ‘too few to fai.’"
According to Reuters, " The study comes as regulators seek to impose a six-month ban on Ernst & Young [ERNY.UL] accepting new clients, just a year since then Big Five accounting firm Andersen collapsed after the Justice Department indicted the entire firm for obstructing justice in the Enron Corp. investigation”.
So far, the consolidation which has turned the audit market for large public companies into an oligopoly, has not shown any evidence of hurting competition, the report found.
But given the unprecedented changes that have rocked the normally docile profession following a spate of scandals, the reported suggested it may be worth looking at preventing further consolidation and maintaining competition.
In fact, the Hirschman-Herfindahl index -- a common concentration measure used in antitrust analysis -- showed that the potential for significant market power among the top accounting firms had been steadily rising over the years, the GAO said.
However, the GAO found little evidence to link past consolidation to changes in audit fees, quality of the audits and the independence of the auditors. But it did warn that the changes in the audit market meant that past behavior was not necessarily an indication of the future.
Finally, the GAO found that smaller accounting firms faced significant barriers such as lack of expertise, global reach and reputation to break into the large public company audit market, making the expansion of the Big Four unlikely.
To read the report, visit the GAO’s website at http://www.gao.gov . The report is GAO-03-864, released on July 30.