For large public companies, the  market remains highly concentrated, with the four largest accounting  firms auditing the financial statements of almost all large public  companies. While the current level of  concentration does not appear to be having significant adverse effect, the  loss of another of the larger firms would further increase concentration  and limit company choices and may affect price competition. In Concentrated Market, Some Companies Perceive Limited Auditor Choice

Many of the largest public companies—those in the Fortune 1000—told us  that they generally found the audit firm attributes they sought only in the  largest accounting firms, and as a result, many of these companies saw  their number of auditor choices as insufficient. Our survey of the audit committee chairs  of almost 600 public companies based in the United States showed that 86  percent of large public companies in the Fortune 1000 were not likely to  use a midsize accounting firm and that none were likely to use a smaller  accounting firm as a new auditor of record. According to our survey, about 80 percent of large  public companies said that they would have three or fewer accounting  firms (other than their current auditor of record) to choose from if they  needed to change primary auditors. Effects of Concentration on Fee Increases

The results of an econometric model we developed to assess the extent to  which various factors could be influencing audit fees in recent years also  indicated that factors other than concentration appear to explain audit  fees. Midsize and Smaller Firms Face Challenges Auditing Public Companies, and Growth in These Firms Is Unlikely to Ease Concentration in the Large Public Company Audit Market

Growth in the capacity of midsize and smaller audit firms is unlikely to  reduce concentration in the large company audit market, at least in the  near term, for two reasons. Second,  firms that do want to audit large public companies continue to face  challenges to expanding their public company practices. Smaller Audit Firms Are Taking Actions to Expand Their Market Share, but Challenges Remain

Many midsize and smaller firms have taken steps to reduce the challenges  that they face and have successfully expanded their share of the audit  market for small and midsize companies somewhat in recent years. Appendix I: Objectives, Scope, and Methodology

This work was conducted under the Comptroller General’s authority. Our  objectives were to study (1) the level of concentration among 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. Finally, we surveyed public companies and accounting firms about their  views on these topics. First, we surveyed a random sample of 595 publicly held  companies. On our survey of the over 400 U.S.  accounting firms that audit public companies, midsize and smaller  accounting firms responding also reported resigning as auditor of record  for risk mitigation reasons, specific issues with the client, or fees being  insufficient to cover audit costs. Company officials and others we interviewed also generally  said that overall audit quality had increased in recent years.
Why GAO Did This Study

GAO has prepared this 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. This report examines (1) concentration in the market for public company audits, (2) the potential for smaller accounting firms' growth to ease market concentration, and (3) proposals that have been offered by others for easing concentration and the barriers facing smaller firms in expanding their market shares. GAO surveyed a random sample of almost 600 large, medium, and small public companies on their experiences with their auditors. GAO also interviewed the four largest accounting firms and surveyed all other U.S. accounting firms that audit at least one public company. GAO also developed an econometric model that analyzed the extent to which various factors, including concentration and new auditing requirements, affected fee levels. To supplement this work, GAO interviewed market participants, including public companies, investors, accounting firms, academics, and regulators. This report makes no recommendations.

What GAO Found

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 audit fees rose significantly in recent years, market participants attributed these increases to expanding accounting and auditing requirements and higher costs for accounting firm personnel. GAO's model also found that factors other than concentration appeared to explain audit fee levels. Public company officials generally acknowledged that audit quality had increased. 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. Smaller accounting firms face various challenges in expanding to audit more public companies, although most are not interested in these clients. As a result, concentration in the audit market for large public companies is likely to continue. Large public companies that GAO surveyed said that smaller firms lacked the capacity and technical expertise they wanted in an auditor. Audit firms that GAO surveyed said that adding qualified staff and increasing their name recognition were the most significant challenges they faced in expanding their public company audit practices. Some have taken steps to increase their capacity by joining networks with other firms. Academics and business groups have put forth proposals to reduce audit market concentration and address challenges facing smaller accounting firms, 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. Given the lack of significant adverse effect of concentration in the current environment and that no clear consensus exists on how to reduce concentration, no compelling need for immediate action appears to exist.