Magazine for Senior Financial Executives: The big, bad big four – Auditing

The big, bad big four – Auditing – consolidation resulting in higher fees

Kris Frieswick

AUDIT-FIRM CONSOLIDATION and–in the case of Arthur Andersen–extinction will result in higher fees, along with less competition, says a recent study by the General Accounting Office. But midsize companies, according to some finance executives, are already feeling the pinch.

“If we were to do an auditor search again today, we might not solicit bids from the Big Four,” says the finance chief of a technology firm that recently switched from one Big Four auditor to another. The CFO, who asked not to he named, fearing auditor retaliation, says that with only four major firms left, midsize companies can’t get a good deal on auditing. “There is still plenty of competition among the Big Four for big accounts, but we’re not a top-tier account for them; we’re a take-it-or-leave-it account.”

Another problem, he says, is that Big Four firms are so risk-averse that they often turn down new business. And that’s what really hurts the ability of small and midsize firms to achieve competitive Big-Four audit pricing. In fact, the GAO study predicts that increased risk aversion will begin to affect the ability of larger companies to convince the Big Four to bid for their business.

Of course, there are second-tier auditors, but the report finds that most lack the industry knowledge, geographic presence, and reputation to bid successfully for large accounts. One problem, the study indicates, is the lack of a middle ground: there’s a big gap between the Big Four and the second tier.

To make sure the Big Four doesn’t turn into the Big Three, the GAO report also suggests a return to previous enforcement standards in which partners and employees, rather than entire firms (as was the case with Arthur Andersen), are sanctioned for wrongdoing. “It is important that regulators and enforcement agencies continue to balance the firms’ and the individuals’ responsibilities when problems are uncovered and to target sanctions accordingly,” the study notes.

Earlier this year, the Securities and Exchange Commission announced a new enforcement model in which it planned to hold an entire audit firm responsible for a partner’s actions.


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