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April 30, 2008

Watchdog denies action needed on audit concentration

There is no need to interfere in the increasingly concentrated upper echelons of the US audit market, according to a Government Accountability Office (GAO) report.

However, conclusions raised by the survey received a mixed response from mid-tier firm Crowe Chizek, who accepted some of the findings but challenged the conclusion that no mid-tier firms are equipped to audit big companies of up to $2 billion in revenue.

The GAO surveyed a random sample of nearly 600 large, medium and small public companies about their experiences with auditors. The watchdog also interviewed the Big Four and surveyed all other firms that audit at least one public company.

Although 60 percent of companies said competition was insufficient, the watchdog concluded there is a lack of consensus on how to reduce concentration and there doesn’t appear to be any significant adverse effects from the current situation. Sharply rising audit fees, the report stated, are due to additional work associated with increasingly complex accounting and auditing standards, as well as more demanding oversight requirements and staffing difficulties.

The report revealed that nearly all companies (98 percent) with revenues in excess of $1 billion were audited by the Big Four in 2006, which was also the case in 2002. In the next bracket of companies, with revenues between $500 million to $1 billion, 92 percent chose the Big Four in 2006, although this is a 3 percent decline compared to 2002. At the other end of the scale, only 22 percent of companies with revenues of under $100 million said they were audited by the Big Four, a large drop from 44 percent in 2002.

These findings clearly illustrate there is a very high level of concentration at the upper end of the US audit market. Despite this, the GAO report found no compelling reason to take action to improve choice. It explained that concentration had not affected audit quality, was not a significant factor of rising audit fees and there were capacity problems or a lack of interest among the next four largest firms in auditing large listed clients.

Crowe Chizek audit partner Rick Ueltschy told IAB the report sums up the market fairly well, although he believes it further highlights perception problems within the marketplace.

“First of all, I would state that the larger non-Big Four firms are capable of doing work above the $1 billion in revenue mark. So it’s not intuitively obvious that it was the right break point to call companies [above this revenue mark as] ‘the largest’,” he said. “We feel very comfortable about our ability to audit companies in the manufacturing and retail space well into a couple of billion dollars worth of revenue that would have a few worldwide locations and there are a lot of companies that are profiled like that.

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“I think that the concentration of the Big Four continues in spite of the fact that the mid-sized firms could handle the work of a large, large portion of those companies very capably. So the report’s overall conclusions about competitiveness are generally accurate except for that particular point, which I don’t think the report drew out.”

Ueltschy said he believes the report accurately describe drivers of cost in the marketplace, however claimed that fees could be reduced significantly if more companies in the $500 million to $1 billion category looked beyond the Big Four. “They would likely find that they would have the opportunity for significant cost savings,” he remarked. “It differs meaningfully depending on the nature of the client, but it would not be unusual for us to be 25 percent or more lower than a Big Four firm in industries with which we have familiarity.”

Arvind Hickman

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