There is no need to interfere in the increasingly concentrated
upper echelons of the US audit market, according to a Government
Accountability Office report. Arvind Hickman
speaks with Crowe Chizek audit partner Rick Ueltschy about the
report’s findings.

A US government watchdog has cast doubts on whether a lack of
choice in the US audit marketplace warrants external intervention
by regulators. A new report, ‘Audits of Public Companies: Continued
Concentration in Audit Market for Large Public Companies Does Not
Call for Immediate Action’, which surveyed a large sample of US
listed companies, found that although the market is extremely
concentrated at the higher end, concentration is not having an
adverse effect on audit fee pricing.

The report will be welcome news to the Big Four, which dominate the
large listed US companies in the Fortune 1000. However, some
conclusions raised received a mixed response from mid-tier firm
Crowe Chizek, which accepted some of the findings but challenged
the conclusion that firms of its size are not equipped to audit big
companies of up to $2 billion in revenue.

The Government Accountability Office (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

No ill-effects

Although 60 percent of companies say competition was insufficient,
the watchdog concluded there is a lack of consensus on how to
reduce concentration and there do not appear to be any significant
adverse effects from the current situation.

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 say they
were audited by the Big Four, a large drop from 44 percent in

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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 immediate
action to improve choice. It explained that concentration had not
affected audit quality and was not a significant factor in rising
audit fees. Rising fees 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 also concludes that there are capacity problems, or a
lack of interest, among mid-tier firms in auditing large listed

Perception problems

Crowe Chizek audit partner Rick Ueltschy tells TA the
report sums up the market fairly well, although 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 says. “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.

“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 believes the report accurately describes drivers of cost
in the marketplace, however he claims 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
remarks. “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

Another contentious conclusion of the report is that mid-tier firms
have little interest in auditing larger entities that are typically
the domain of the Big Four. Ueltschy contends that although
Sarbanes-Oxley legislation has made it difficult for firms such as
Crowe Chizek to drastically expand resources, larger mid-tier firms
are attempting to wrest more market share from the Big Four.

“It is certainly our desire to expand our public company presence
and it is our desire to continue to therefore expand our capacity.
From time to time we feel like we’re kind of getting at the edge of
capacity but we have not yet faced a point at which we did not have
the capacity to handle the opportunities for new work,” he

“We would like to continue to expand the portion of the public
company audit market that we can play in. That doesn’t necessarily
mean that we feel the need to be able to get to the size where we
could audit General Electric… We want to continue to improve our
capabilities, expand the universe of companies that we are able to
audit, both in size and the number of specialised industries, and
be more of a broad competitor with the Big Four.”

US percentage of companies audited by the Big Four in terms of company size, 2002-2006