The GAO has issued a report, Public Accounting Firms--Mandated Study on Consolidation and Competition. Its observations were far more startling than its findings.

That doesn't mean the findings aren't interesting such as the statement, "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." Or the one that, "[S]maller 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."

These conclusions should not surprise anyone, since by 2002, the Big Four was auditing 78 percent of public companies and 99 percent of the public companies if you go by total sales. That should be coupled by the fact that 88 percent of public companies surveyed by the GAO indicate they would not consider using a non-Big Four firm for audit and attest services.

The GAO's observations begin with an expressed need for agencies to evaluate and monitor the effect of the existing level of concentration on the price and quality of audits.

The second one is more telling, dealing with the issue of what, if anything, can or should be done to prevent further consolidation of the Big Four. In that regard, the GAO talks about the voluntary or involuntary exit of a Big Four firm and the need for contingency plans by regulatory and enforcement agencies and possible governmental intervention.

The third one involves balancing the firms' and individuals' responsibilities when problems occur. My favorite sentence in the report deals with that issue. It reads, "However, it is equally important that concerns about the firms' viability be balanced against the firms' believing they are 'too few to fail' and the ensuing moral hazard such a belief creates."

The fourth observation deals with a concern that there is virtually no competition between the Big Four when it comes to auditing public companies in certain industries.

The fifth and final major observation is a kind of throw-up-your-hands on how to get smaller firms more involved in auditing the major public companies.

So what do I conclude?

  1. Sarbanes-Oxley was a response to a belief that the current system of auditing public companies is broken.
  2. Large public company auditing is a "tight oligopoly" (those are the GAO's words).
  3. The system isn't fixed yet and the impact of the restrictions of Sarbanes-Oxley can't be predicted.
  4. There is the distinct possibility that it will get much worse before it gets better.

Ultimately, the government might have to come up with a drastically different system for auditing public companies.

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