CORPORATE CRIME REPORTER
Audit
Firms Too Few to Fail?
25 Corporate Crime Reporter 12, March 14, 2011
First came too big to fail.
Now comes too few to fail.
When the Attorney General of New York moved against Ernst & Young for its role in the collapse of Lehman Brothers, the first two words that popped up were – Arthur Andersen.
Andersen was one of the remaining big five audit firms – until it collapsed following a criminal proceeding against it in the wake of the Enron fiasco in 2001.
And then there were four – Ernst & Young, PricewaterhouseCoopers, Deloitte Touche Tohmatsu, and KPMG.
The American Antitrust Institute has long been concerned about concentration in the audit industry.
The Institute points out that the remaining four firms “are huge privately owned international networks that employ over 600,000 worldwide.”
“Each firm earns $20 billion a year or more. They audit the financial statements of nearly all of the world’s public companies with annual sales over $250 million and, arguably, are the only audit firms able to do so.”
The Institute is concerned “the small number of large accounting firms already limits the choice of auditors available to large companies and that loss of another major firm could lead to increases in audit fees – which could be borne by clients and their shareholders or ultimately passed on to consumers in some form.”
“Moreover, the possibility of another Andersen-like departure inhibits the enforcement options of regulators, who generally are reluctant to take dramatic action for fear of causing further shrinkage of the number of firms.”
Among the recommendations being floated to address the concentration – nationalization or breakup of the existing Big Four firms, building up the second-tier, medium-sized firms through divestiture of Big Four clients, award of government audit contracts to medium and small firms, steps to reduce the “perception bias” against non-Big 4 firms, and removal of restrictions on ownership of accounting firms and the partnership business model to encourage new firms to enter the business and to stimulate growth and consolidation of smaller firms.
The Big Four have sought passage of liability limitation laws in recent years, pointing out the possibility that further shrinkage in the industry could occur from the cumulative effect of adverse decisions in massive lawsuits.
The Institute suggests that “if liability limitations are to be considered, they should be linked to voluntary divestiture of clients by the Big Four in negotiations with second tier firms or networks of smaller firms.”
“Although mandatory divestiture may be considered a drastic action, it may be more palatable today in light of the government bailouts of major banks and financial institutions in the past several years, along with partial nationalization of General Motors,” the Institute says.
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