Following significant mergers among the Big 8 in the 1980s and 1990s and  the dissolution of Arthur Andersen in 2002, market share among the  accounting firms became more concentrated and dominated by the Big 4. The resulting firm became the largest firm nationally (and  internationally). Large Public Company Audit Market is a Tight Oligopoly

By any measure, the large public company audit market is a tight oligopoly,  which is defined as the top four firms accounting for more than 60 percent  of the market and other firms facing significant barriers to entry into the  market. In the large public company audit market, the Big 4 now audit over  97 percent of all public companies with sales over $250 million, and other  firms face significant barriers to entry into the market. Consolidation Does Not Appear to Have Impaired Price Competition to Date

Despite the high degree of concentration among accounting firms, with  four firms auditing more than 78 percent of all public companies and 99  percent of all public company sales, we found no evidence that price  competition to date has been impaired. Given the significant changes  that have occurred in the accounting profession since the mid-1980s, we  were also unable to isolate the impact of consolidation from other factors. Although audit fees are generally a relatively small percentage of a public  company’s revenue, recent evidence suggests audit fees have increased  significantly since 2000 and there are indications they may increase further  in the future. Some companies  indicated that most of this increase has occurred in the last few years. Linking Consolidation to Audit Quality and Auditor Independence Is Difficult

Although we identified no research directly studying the impact of  consolidation among the accounting firms on audit quality or auditor  independence, we did find limited research that attempted to measure  general changes in audit quality and auditor independence, and we  explored these issues with market participants and researchers. Moreover, the possible reduction in the number of accounting  firms willing to audit public companies in the wake of the passage of  Sarbanes-Oxley could further impact the availability and cost of capital for  some smaller companies, particularly companies for whom the accounting  firms may doubt the profitability of the audit engagements. First, smaller  firms generally lack the staff resources, technical expertise, and global  reach to audit large multinational companies. Observations

The audit market is in the midst of unprecedented change and evolution. Fourth, Big 4 market share concentration,  particularly in key industries, may warrant ongoing and additional analysis,  including evaluating ways to increase accounting firm competition in  certain industries by limiting market shares. As a result, we clarified the language provided in this  report. 107- 204) and as agreed with your staff, our objectives were to study (1) the  factors leading to the mergers among the largest public accounting firms in  the 1980s and 1990s; (2) the impact of consolidation on competition,  including the availability of auditor choices for large national and  multinational public companies; (3) the impact of consolidation on the  cost, quality, and independence of audit services; (4) the impact of  consolidation on capital formation and securities markets; and (5) the  barriers to entry faced by smaller firms in competing with the largest firms  for large national and multinational public company clients. Not applicable – did not employ Arthur Andersen  2. Please enter a number.
Why GAO Did This Study

The audit market for large public companies is an oligopoly, with the largest firms auditing the vast majority of public companies and smaller firms facing significant barriers to entry into the market. Mergers among the largest firms in the 1980s and 1990s and the dissolution of Arthur Andersen in 2002 significantly increased concentration among the largest firms, known as the "Big 4." These four firms currently audit over 78 percent of all U.S. public companies and 99 percent of all public company sales. This consolidation and the resulting concentration have raised a number of concerns. To address them, the Sarbanes-Oxley Act of 2002 mandated that GAO study (1) the factors contributing to the mergers; (2) the implications of consolidation on competition and client choice, audit fees, audit quality, and auditor independence; (3) the impact of consolidation on capital formation and securities markets; and (4) barriers to entry faced by smaller accounting firms in competing with the largest firms for large public company audits.

What GAO Found

Domestically and globally, there are only a few large firms capable of auditing large public companies, which raises potential choice, price, quality, and concentration risk concerns. A common concentration measure used in antitrust analysis, the Hirschman-Herfindahl Index (HHI) indicates that the largest firms have the potential for significant market power following mergers among the largest firms and the dissolution of Arthur Andersen. Although GAO found no evidence of impaired competition to date, 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. Existing research on audit fees did not conclusively identify a direct correlation with consolidation. GAO found that fees have started to increase, and most experts expect the trend to continue as the audit environment responds to recent and ongoing changes in the audit market. Research on quality and independence did not link audit quality and auditor independence to consolidation and generally was inconclusive. Likewise, GAO was unable to draw clear linkages between consolidation and capital formation but did observe potential impacts for some smaller companies seeking to raise capital. However, given the unprecedented changes occurring in the audit market, GAO observes that past behavior may not be indicative of future behavior, and these potential implications may warrant additional study in the future, including preventing further consolidation and maintaining competition. Finally, GAO found that smaller accounting firms faced significant barriers to entry--including lack of staff, industry and technical expertise, capital formation, global reach, and reputation--into the large public company audit market. As a result, market forces are not likely to result in the expansion of the current Big 4. Furthermore, certain factors and conditions could cause a further reduction in the number of major accounting firms.