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Report to the Senate Committee on Banking, Housing, and Urban Affairs 
and the House Committee on Financial Services:

September 2003:

ACCOUNTING FIRM CONSOLIDATION:

Selected Large Public Company Views on Audit Fees, Quality, 
Independence, and Choice:

[Hyperlink, http://www.gao.gov/cgi-bin/getrpt?GAO-03-1158] GAO-03-
1158:

GAO Highlights:

Highlights of GAO-03-1158, a report to Senate Committee on Banking, 
Housing, and Urban Affairs and the House Committee on Financial 
Services 

Why GAO Did This Study:

The largest accounting firms, known as the “Big 4,” currently audit 
over 78 percent of U.S. public companies and 99 percent of public 
company annual sales. To address concerns raised by this concentration 
and as mandated by the Sarbanes-Oxley Act of 2002, on July 30, 2003, 
GAO issued a report entitled Public Accounting Firms: Mandated Study 
on Consolidation and Competition, GAO-03-864. As part of that study, 
GAO surveyed a random sample of 250 public companies from the Fortune 
1000 list; preliminary findings were included in the July report. This 
supplemental report details more comprehensively the 159 responses we 
received through August 11, 2003, focusing on (1) the relationship of 
their company with their auditor of record in terms of satisfaction, 
tenure relationship, and services provided; (2) the effects of 
consolidation on audit fees, quality, and independence; and (3) the 
potential implications of consolidation for competition and auditor 
choice. 

What GAO Found:

Most of the 159 respondents said that they were satisfied with the 
current auditor, and half had used their current auditor for 10 years 
or more (see figure below). Generally, the longer a respondent had 
been with an auditor, the higher the overall level of satisfaction. 
Consistent with high levels of satisfaction, GAO found that, aside 
from former clients of Arthur Andersen, few respondents had switched 
auditors in the past decade. When they did, they switched because of 
reputation, concerns about audit fees, and corporate mergers or 
management changes. In looking for a new auditor, the most commonly 
cited factors the respondents gave were quality of service, industry 
specialization, and “chemistry” with the audit team. Finally, almost 
all respondents used their auditor of record for a variety of nonaudit 
services, including tax-related services and assistance with company 
debt and equity offerings.
 
Respondents had differing views about whether past consolidation had 
some influence on audit fees, but most believed that consolidation had 
little or no influence on audit quality or independence. Respondents 
commented that other factors—such as new regulations deriving from the 
Sarbanes–Oxley Act and changing auditing standards—have had a greater 
impact on audit price, quality, and independence. 

While half of the respondents said that past consolidation had little 
or no influence on competition and just over half said they had a 
sufficient number of auditor choices, 84 percent also indicated a 
preference for more firms from which to choose as most would not 
consider using a non-Big 4 firm. Reasons most frequently cited 
included (1) the need for auditors with technical skills or industry-
specific knowledge, (2) the reputation of the firm, and (3) the 
capacity of the firm. Finally, some expressed concerns about further 
consolidation in the industry and the limited number of alternatives 
were they to change auditors under existing independence rules. 


www.gao.gov/cgi-bin/getrpt?GAO-03-1158.

To view the full product, including the scope and methodology, click 
on the link above. For more information, contact Davi M. D'Agostino at 
(202) 512-8678 or d'agostinod@gao.gov.

[End of Section]

Contents:

Letter: 

Results in Brief: 

Background: 

Most Respondents Were Satisfied with Their Auditor, Had Long-term 
Relationships, and Used Their Auditor for a Variety of Services: 

Respondents Had Differing Views about Past Consolidation's Influence on 
Audit Fees but Most Agreed That It Had Little or No Influence on Audit 
Quality or Auditor Independence: 

Respondents Were Concerned That Limited Audit Choices May Create 
Problems: 

Appendixes:

Appendix I: Scope and Methodology: 

Appendix II: Annotated Public Company Survey: 

Appendix III: Summary of Written Comments to the Public Company Survey: 

Change in Audit Quality: 

Number of Auditor Options Available: 

Sufficiency of the Number of Options: 

Willingness to Use Auditor of Competitor: 

Minimum Number of Firms Necessary: 

Optimal Number of Firms: 

Suggestions for Increasing Competition: 

Additional Comments: 

Appendix IV: GAO Contacts and Staff Acknowledgments: 

GAO Contacts: 

Staff Acknowledgments: 

Tables:

Table 1: Respondents That Had Switched Auditors Since 1987: 

Table 2: Explanations for Changes in Audit Quality: 

Table 3: Explanations for the Number of Auditor Options Available: 

Table 4: Number of Auditor Options Available: 

Table 5: Explanations of Why a Company Would or Would Not Choose the 
Auditor of a Competitor: 

Table 6: Explanations of Minimum Number of Firms Necessary: 

Table 7: Explanations of Optimal Number of Firms: 

Table 8: Suggestions for Taking Action to Increase Competition: 

Table 9: Additional Comments: 

Figures:

Figure 1: Length of Relationship with Current Auditor: 


Figure 2: Satisfaction with Current Auditor, by Tenure: 

Figure 3: Factors Cited in Choosing a New Auditor: 

Figure 4: Views on Change and Impact of Past Consolidation on Audit 
Fees:

Figure 5: Views on Changes in and Impact of Past Consolidation on Audit 
Quality: 

Figure 6: Views on Changes in and Impact of Past Consolidation on 
Auditor Independence: 

Figure 7: Reasons Cited for Not Using a Non-Big 4 Firm: 

Abbreviations: 

GAAP: generally accepted accounting principles:

GAAS: generally accepted auditing standards:

SIC: Standard Industry Classification:

SEC: Securities and Exchange Commission:

Letter September 30, 2003:

The Honorable Richard C. Shelby 
Chairman 
The Honorable Paul S. Sarbanes 
Ranking Minority Member 
Committee on Banking, Housing, and Urban Affairs 
United States Senate:

The Honorable Michael G. Oxley 
Chairman The Honorable Barney Frank 
Ranking Minority Member 
Committee on Financial Services 
House of Representatives:

The number of public accounting firms widely considered capable of 
providing audit services to large national and multinational public 
companies decreased from eight (the "Big 8") in the 1980s to four (the 
"Big 4") today.[Footnote 1] These four firms currently audit over 78 
percent of all U.S. public companies and 99 percent of public company 
annual sales. The Big 4 also dominate the market for audit services 
internationally. On July 30, 2003, we issued a report on the impact of 
this consolidation on competition and audit services provided to large 
national and multinational companies (as mandated by the Sarbanes-Oxley 
Act of 2002).[Footnote 2] This supplemental report details more 
comprehensively the responses we received through August 11, 2003, to a 
survey of a random sample of Fortune 1000 companies on their 
experiences with their auditors of record.[Footnote 3] Specifically, 
our objective was to obtain the views of the chief financial officers 
of large national and multinational public companies on (1) the 
relationship of their company with their auditor of record in terms of 
satisfaction, tenure of the relationship, and services provided; (2) 
the effects of consolidation on audit fees, quality, and auditor 
independence; and (3) the potential implications of consolidation for 
competition and auditor choice.

We drew a random sample of 250 of the largest publicly held companies 
from the 2003 list of the Fortune 1000 companies produced by Fortune, a 
division of Time, Inc., after removing 40 private companies from this 
list. Of the 250 companies surveyed, we received responses from 159 
companies, or 64 percent; all of whom used a Big 4 firm as their 
auditor of record. The response rates for individual questions varied, 
depending on how many respondents answered each question. Because of 
the limited level of participation in the survey, the responses 
discussed in this report reflect only the views of the public companies 
that responded to the survey and are not projected to the entire 
population of public Fortune 1000 companies. Appendix I discusses our 
survey methodology in detail. A copy of the questionnaire, annotated to 
show the respondents' answers to each question, is included as appendix 
II. In addition, nearly 94 percent (149 of 159) of the respondents 
provided narrative comments on at least one of the key questions about 
their experiences with their auditors of record. Included as appendix 
III, these narrative comments provide valuable insight into how the 
respondents interpreted key questions and amplify the respondents' 
views and experiences.

Results in Brief:

Most of the public companies responding to the survey (respondents) 
said they were satisfied with their current auditor, half had used 
their current auditor for 10 years or more, and almost all used their 
auditor of record for other nonaudit services. More than three-quarters 
of the respondents said that they were satisfied with their 
relationship with their current auditor of record. We also found an 
association between audit tenure and satisfaction. That is, the longer 
respondents had been with their current auditors, the more satisfied 
they were. Company-auditor relationships averaged 19 years, ranging 
from less than 1 year to 94 years. Although 61 of the 159 respondents 
had switched auditors since 1987, 37 of the 61 were former clients of 
Arthur Andersen (Andersen) that had switched since 2001. Aside from the 
dissolution of Andersen, other reasons cited for changing auditors 
included concerns about auditor reputation, concern about the fees 
charged for audit and attest services, mergers and other ownership or 
management changes, and the desire to obtain a "fresh perspective." 
When looking for a new auditor, most respondents said quality of 
services, the auditor's reputation, industry specialization or 
expertise, and the engagement team's chemistry or perceived ability to 
work with the company were of "great" or "very great" importance. 
Almost all the respondents used their auditor of record for a variety 
of services besides audit and attest, such as tax-related services and 
assistance with company debt and equity offerings.

Respondents had differing views about whether the past consolidation of 
public accounting firms had some influence on audit fees, but most 
believed that it had little or no influence on audit quality or auditor 
independence. Although most (93 percent) respondents indicated that 
audit fees had increased over the past decade, they were split evenly 
between those who thought that the consolidation among the largest 
public accounting firms had an "upward influence" on audit fees and 
those who thought that it had "little or no influence" (47 percent 
versus 46 percent). More than twice as many respondents believed that 
audit quality increased over the past decade than decreased (44 percent 
compared to 18 percent) and a majority (63 percent) believed that 
accounting firm consolidation had little or no influence on changes in 
audit quality. Rather than consolidation, some respondents cited other 
reasons for changes in audit quality, such as new regulations resulting 
from the Sarbanes-Oxley Act and a change in the audit partner in charge 
of their audit.[Footnote 4] Similarly, while many respondents (59 
percent) agreed that independence had increased over the past decade, 
72 percent of respondents believed that the past consolidation had 
little or no influence on auditor independence.

While a majority of respondents believed that past consolidation had 
little or no impact on competition, many were concerned that the 
limited number of choices they have for audit services might create 
problems, given that 88 percent of the respondents said that they would 
not consider using a non-Big 4 firm for audit and attest services. The 
reasons they cited for choosing a Big 4 over a non-Big 4 firm included 
industry and technical expertise, reputation, and geographic presence. 
While over half of the 158 respondents said that the options their 
company currently had were adequate, some companies expressed concerns 
about having too few alternatives if they were to change auditors. 
Respondents cited multiple reasons to explain their concerns about 
limited choices among the Big 4, including auditor independence rules 
and their companies' need for certain industry expertise. Moreover, a 
large majority (86 percent) of respondents said that they would prefer 
a market with more than four big firms. Many of these respondents also 
commented that they did not want to see further consolidation within 
the Big 4. However, almost two-thirds of all respondents said that they 
would not suggest any actions, such as government intervention, to 
increase competition in the provision of audit and attest services for 
large national and multinational companies.

Background:

Since the Securities Act of 1933 and the Securities Exchange Act of 
1934 established the principle of full disclosure--requiring public 
companies to provide full and accurate information to the investing 
public--public accounting firms have played a critical role in 
companies' financial reporting and disclosure. While officers and 
directors of a public company are responsible for the preparation and 
content of financial statements that fully and accurately reflect the 
company's financial condition and the results of its operations, public 
accounting firms, which function as independent external auditors are 
expected to provide an additional safeguard. The external auditor is 
responsible for auditing companies' financial statements in accordance 
with generally accepted auditing standards (GAAS) to provide reasonable 
assurance that a company's financial statements are fairly presented in 
all material respects in accordance with generally accepted accounting 
principles (GAAP).

Public accounting firms offer a broad range of services to their 
clients. In addition to traditional audit and attest and tax services, 
firms also offer consulting services in areas such as information 
technology. Although all of the Big 4 firms continue to offer certain 
consulting services, three of the Big 4 have sold or divested portions 
of their consulting businesses.[Footnote 5] Following the 
implementation of Sarbanes-Oxley, SEC issued new independence rules in 
March 2003, which place additional limitations on management consulting 
and other nonaudit services that firms could provide to their audit 
clients. Sarbanes-Oxley also requires auditors to report to and be 
overseen by a public company's audit committee, which consists of 
members of the company's board of directors who are required to be 
independent. The external auditor also interacts closely with the 
company's senior management, including the chief financial officer.

Most Respondents Were Satisfied with Their Auditor, Had Long-term 
Relationships, and Used Their Auditor for a Variety of Services:

Most of the survey respondents said they were satisfied with their 
current auditor. Moreover, half of the respondents reported that they 
have had the same auditor of record for 10 or more years.[Footnote 6] 
Respondents gave various reasons for changing auditors, including 
concerns about their auditor's reputation and fees. They also told us 
what factors would drive their decision in choosing a new auditor. 
Almost all respondents said that they used their auditor of record for 
more than audit and attest functions, including tax-related services 
and assistance with company debt and equity offerings.

High Degree of Client Satisfaction and Auditor Tenure:

Overall, 80 percent (127 out of 158 respondents answering this 
question) of the respondents said they were "very" or "somewhat" 
satisfied with their current auditor of record, while 12 percent (19 of 
158) said that they were very or somewhat dissatisfied, and 8 percent 
(12 of 158) said they were neither satisfied nor dissatisfied. 
Similarly, of the 135 respondents that provided the year they first 
employed their auditor of record, half of them said they had retained 
their auditor of record for 10 years or more. The average tenure was 19 
years, ranging from less than 1 year to 94 years. When the 37 public 
companies that switched from Andersen because of Andersen's dissolution 
were excluded, the average tenure increased to 25 years, and the 
percentage of public companies that had retained their auditor for 10 
years or more increased to 68 percent. Figure 1 shows the length of the 
relationship these respondents had with their current auditor.

Figure 1: Length of Relationship with Current Auditor:

[See PDF for image]

[End of figure]

We found that there was an association between the length of the 
company-auditor relationship and satisfaction. That is, the longer the 
relationship between a company and its auditor, the more likely that 
the company was satisfied with its auditor of record. As figure 2 
shows, 94 percent (30 of 32) of companies with auditor tenure of more 
than 30 years were very or somewhat satisfied with their auditor, 
whereas 70 percent (28 of 40) of companies using their current auditor 
for 1 year or less said they were very or somewhat satisfied with their 
auditor.

Figure 2: Satisfaction with Current Auditor, by Tenure:

[See PDF for image]

[End of figure]

Sixty-one of the respondents reported that they switched auditors since 
1987. Of those 61, 37 were former Andersen clients that switched within 
the last 2 years as a result of Andersen's dissolution, five were 
former Andersen clients that switched over 2 years ago for reasons 
other than Andersen's dissolution, and 19 were other respondents that 
switched from another Big 4 or non-Big firm since 1987, as shown in 
table 1. The respondents who were clients of Andersen and had to change 
auditors within the last 2 years as a result of Andersen's dissolution 
were somewhat less satisfied with their current auditor than a separate 
group of 19 respondents that had switched from another Big 4 or non-Big 
4 firm since 1987. Of the 37 former Andersen clients, 25 respondents 
indicated that they were satisfied with their current auditor of 
record, seven said that they were dissatisfied with their current 
auditor, and five said they were neither satisfied nor dissatisfied. Of 
the 19 other respondents that switched from other firms since 1987, 
proportionally more (16 respondents) said they were satisfied with 
their current auditor of record, while only one was somewhat 
dissatisfied and two were neither satisfied nor dissatisfied. While 
this suggests that clients leaving Andersen because of its dissolution 
are less satisfied with their current audit arrangements than other 
firms that had changed auditors in the past, it is important to note 
that the 37 respondents who were former Andersen clients also had the 
shortest tenures with their current auditors, which may in part explain 
their lower satisfaction.

Table 1: Respondents That Had Switched Auditors Since 1987:

Categories of companies that switched auditors: Former Andersen clients 
that switched within the past 2 years because of Andersen's dissolution 
in 2002; Satisfied with current auditor: 25; Dissatisfied with current 
auditor: 7; Neither satisfied nor dissatisfied: 5; Number of switching 
companies: 37.

Categories of companies that switched auditors: Former Andersen clients 
that switched from Andersen from 1987 through 2000, for other reasons; 
Satisfied with current auditor: 3; Dissatisfied with current auditor: 
0; Neither satisfied nor dissatisfied: 2; Number of switching 
companies: 5.

Categories of companies that switched auditors: Respondents that 
switched from other Big 4 or non-Big 4 firms (not Andersen) from 1987 
through 2003; Satisfied with current auditor: 16; Dissatisfied with 
current auditor: 1; Neither satisfied nor dissatisfied: 2; Number of 
switching companies: 19.

Categories of companies that switched auditors: Total; Satisfied with 
current auditor: 44; Dissatisfied with current auditor: 8; Neither 
satisfied nor dissatisfied: 9; Number of switching companies: 61.

Source: GAO.

[End of table]

Respondents Cited Varied Reasons for Changing Auditors and Factors for 
Selecting a New Auditor:

Respondents gave a variety of reasons for switching, including concerns 
about the reputation of their auditor, the need to retain an auditor 
that could meet companies' new demands, concerns about the level of 
fees charged for audit and attest services, and increased demands 
resulting from a corporate merger or change in company ownership. Four 
respondents said their relationship with their former auditor was no 
longer working, and another respondent cited a disagreement over an 
accounting policy that resulted in the switch. While none of the 
respondents said their company had a mandatory rotation policy, two 
respondents said their companies switched auditors to obtain a "fresh 
perspective" and "as a form of good governance.":

When we asked the respondents what factors would drive their decision 
if they had to choose a new auditor, they most often cited "quality of 
services offered" as a factor of "very great" or "great" importance (99 
percent or 157 
of 159).[Footnote 7] The second most highly rated factor was 
"reputation or name recognition of the auditor" (83 percent or 132 of 
159), followed by "industry specialization or expertise" (81 percent or 
128 of 159).

Figure 3: Factors Cited in Choosing a New Auditor:

[See PDF for image]

[End of figure]

Almost All Respondents Used Auditors for Nonaudit Services:

Ninety-four percent (149 of 159) of respondents obtained other services 
from their auditors in addition to audit and attest services. We asked 
respondents if their auditor provided any of the three following 
categories of services: tax-related, assistance with company debt and 
equity offerings, and "other services." Only 10 companies, or 6 
percent, reported that their auditor of record provided them with only 
audit and attest services. Respondents for the remaining 149 companies 
said they used their auditor of record for one or a combination of 
other services. Specifically, 87 percent (130 of 149) said their 
auditor provided tax-related services, such as tax preparation and 71 
percent (106 of 149) said they received assistance with company debt 
and equity offerings. Thirty-seven percent (55 of 149) said they 
received other services, such as merger and acquisition due diligence, 
internal control reviews, or tax planning assistance.

Respondents Had Differing Views about Past Consolidation's Influence on 
Audit Fees but Most Agreed That It Had Little or No Influence on Audit 
Quality or Auditor Independence:

Respondents had differing views about the impact of past consolidation 
among the largest accounting firms on audit fees, but most agreed that 
it had little or no influence on audit quality or auditor independence. 
While 93 percent (147 of 158) of respondents said that their audit fees 
increased over the past decade, they were almost evenly divided about 
whether past consolidation of the largest accounting firms had a 
"moderate upward" or "great upward" influence (47 percent or 75 of 158) 
or little or no influence (46 percent or 72 of 158). See figure 4.

Figure 4: Views on Change and Impact of Past Consolidation on Audit 
Fees:

[See PDF for image]

[End of figure]

More respondents said that audit quality had increased over the past 
decade rather than decreased, but the majority of them did not believe 
that past consolidation of the largest accounting firms influenced 
these changes. Specifically, 44 percent (69 of 158) of the respondents 
said that audit quality had increased, while 18 percent (29 of 158) 
said quality had decreased and 37 percent (58 of 158) said there had 
been little or no change. However, 63 percent (100 of 158) of the 
respondents believed that consolidation of the largest firms had little 
or no influence on the quality of audit and attest services their 
companies received (see fig. 5).

The respondents provided other reasons for changes in audit quality, 
including changes in audit partner, new regulations and audit 
standards, and technical expertise of the audit team. Several 
respondents cited the importance of the assigned audit partner to 
overall audit quality. One respondent noted, "The partner in charge is 
critical [to audit quality]." Another respondent said audit quality 
improved because of "more personal involvement of the audit partner." 
Other respondents believed that changes in audit quality were due to 
changes in audit methodologies and the Sarbanes-Oxley Act. According to 
one respondent, "The change in the depth and quality of the audit 
process is due to a more rigorous regulatory and litigation environment 
and not to audit firm consolidation." Another respondent noted, 
"Following the Sarbanes-Oxley Act and Andersen's downfall, other firms 
are increasing the level of work they do and the depth of the audit." 
Finally, we received comments about the skills and experience of the 
audit team. One respondent wrote, "Answers to accounting questions take 
too long and quality of staff is poor. Fundamental audit practices are 
gone." Another respondent similarly commented that the "level of 
experience seems to have declined, contributing to lower quality, [and] 
partners supervise more jobs." However, that same respondent also noted 
that since his company had changed auditors, the "level of experience 
has improved.":

Figure 5: Views on Changes in and Impact of Past Consolidation on Audit 
Quality:

[See PDF for image]

[End of figure]

Finally, 59 percent (94 of 158) of the respondents indicated that their 
auditor had become more independent over the past decade, while 1 
percent (2 of 158) said that their auditor had become less independent 
and 38 percent (60 of 158) said that there had been no change in their 
auditor's independence. However, 72 percent (114 of 158) of the 
respondents also said that past consolidations of the largest 
accounting firms had little or no influence on auditor independence 
(see fig. 6). The remaining views varied, with 16 percent (26 of 158) 
of respondents believing that the consolidations had a negative 
influence on auditor independence and 8 percent (12 of 158) saying that 
it had a positive influence. Some of the respondents commented that 
audits had been positively affected by SEC's new independence 
requirements, while one respondent said that the new rules had not 
significantly enhanced auditor independence.

Figure 6: Views on Changes in and Impact of Past Consolidation on 
Auditor Independence:

[See PDF for image]

[End of figure]

Respondents Were Concerned That Limited Audit Choices May Create 
Problems:

Respondents raised concerns about the future implications of 
consolidation, especially about possible limitations on audit firm 
choice. A significant majority of respondents said that their companies 
would not use a non-Big 4 accounting firm for audit services, which 
limited their choices. While most respondents said that they would be 
able to use another Big 4 firm as their auditor of record if they had 
to change, they also said that they would prefer more large firms from 
which to choose. Moreover, they raised concerns that further 
consolidation among the largest accounting firms would result in too 
few choices. Yet, despite those concerns, most respondents favored 
allowing market forces to dictate the level of competition in the 
market for audit and attest services.

Respondents Preferred Big 4 Firms over Non-Big 4 Firms for Audit 
Services:

Eighty-eight percent (139 of 158) of respondents indicated that they 
would not consider using a non-Big 4 firm for audit and attest 
services. As shown in figure 7, nearly all the respondents cited three 
factors as being of great or very great importance in determining why 
their companies would not use a non-Big 4 firm: (1) auditor's technical 
skills and knowledge of the company's industry (91 percent or 126 of 
138); (2) the reputation of the accounting firm (91 percent or 126 of 
138); and (3) the capacity of the firm (90 percent or 125 of 138). 
These three factors also corresponded closely to the most frequently 
cited factors in choosing a new auditor as previously noted in figure 
3. One respondent noted, "We have operations in 40 countries and want 
all our auditors to operate with the same systems and procedures. Only 
a global firm can deal with this complexity in a cost-effective manner 
and give us the continuity of support for U.S. generally accepted 
accounting principles and local statutory requirements." Another 
respondent noted, "We would want a Big 4 firm because of its global 
presence and capabilities, reputation, and depth of resources 
available." Sixty-five percent (89 of 137) of respondents also cited 
geographic presence and 60 percent (81 of 134) cited the lack of 
consent from the company's board of directors as reasons of great or 
very great importance. Respondents also provided the following reasons 
as to why they would not use a non-Big 4 firm: their shareholders would 
not want a non-Big 4 firm; to gain investor confidence or stock market 
acceptance; Big 4 firms have financial resources to stand behind their 
work; public companies are expected to use them; and the quality of 
services from a Big 4.

Figure 7: Reasons Cited for Not Using a Non-Big 4 Firm:

[See PDF for image]

[End of figure]

Majority of Survey Respondents Preferred More Audit Choices:

While 57 (90 of 158) percent of respondents said that the number of 
firms their companies could use for audit and attest services was 
adequate as compared with the 43 percent (68 of 158) who said it was 
not, 86 percent (117 of 136) told us that ideally there should be more 
than four large accounting firms as viable choices for large national 
and multinational public companies. In responding to our question on 
what they thought the optimal number of firms for large companies 
should be, 74 percent (100 of 136) said they would prefer from five to 
eight large accounting firms to provide audit and attest services to 
large national and multinational public companies and 12 percent (17 of 
136) of the respondents preferred more than eight firms. Fourteen 
percent (19 of 136) of the respondents said four or fewer firms would 
be optimal. Most comments we received in favor of more firms addressed 
the need to increase competition, decrease fees, and comply with the 
new independence rules as required by Sarbanes-Oxley. Respondents 
noted, "More firms will improve the competition in the [accounting] 
industry," "more choices, more competition, lower cost," and "one firm 
provides [our] tax planning services which may impair [its] 
independence." Another respondent wrote, "Slightly more options would 
enhance technical resourcing opportunities external to current 
auditors.":

However, we also received many comments cautioning that too great a 
number of firms might have negative implications. One respondent said, 
"Any greater number of firms would have difficulty in maintaining scale 
to properly serve large international companies." According to another 
respondent, "If the number gets too big, then [it would be] hard to 
have level of expertise in certain industries." Some respondents felt 
that four or five big firms would be sufficient. One respondent wrote, 
"As a firm believer in the efficiency of the marketplace, I believe 
that the current number of large firms (4) is probably close to the 
optimum number, but wouldn't mind seeing another major firm gradually 
emerge." Another respondent wrote, "Balance must be struck between 
competition and fragmentation of a fixed talent pool.":

Respondents Said Further Consolidation Would Result in Too Few Choices:

When asked the minimum number of accounting firms necessary to provide 
audit and attest services to large national and multinational public 
companies, 82 percent (120 of 147) of respondents indicated that the 
market was either at its minimum or already below the minimum number 
required. Fifty-nine percent (86 of 147) said that four or five large 
accounting firms would be the necessary minimum. According to one 
respondent, "Four is the absolute minimum, because if you currently use 
one firm for external audit purposes and another firm for internal 
audit purposes, that only leaves two other firms from which to choose 
if you want to change auditors or use a Big 4 firm for consulting 
services.":

Some respondents pointed out that not even all the Big 4 firms have the 
necessary industry expertise required to conduct their companies' 
audits. According to one respondent, "From a realistic standpoint, only 
one other Big 4 firm has a utility practice that would help [it] 
understand our industry." Another respondent wrote, "We use one of the 
Big 4. Two of them do not have industry expertise. Only one of the 
remaining three has industry expertise in the geographic region.":

Although Sarbanes-Oxley prohibits a company's external auditor from 
providing internal audit services and certain other consulting services 
to the same company, many companies currently use one of the Big 4 as 
their external auditor and one of the remaining three Big 4 firms for 
nonaudit services such as tax consulting and internal audits. 
Therefore, a company with this arrangement that needed to change 
auditors would have one fewer alternative or would need to terminate 
its internal audit or consulting relationship. For example, one 
respondent noted, "Aside from our current auditor, we use another of 
the Big 4 as a co-source provider of internal audit services, so [we] 
would not consider them. We are using a third for tax work so it would 
be hard under Sarbanes-Oxley to switch to them.":

Most Respondents Prefer to Allow Market Forces to Dictate the Level of 
Competition in the Audit Market:

Despite the fact that 94 percent of respondents said they had three or 
fewer options from which to choose if they had to change auditors, 62 
percent (98 of 159) of respondents said they would not suggest that any 
actions be taken to increase competition in the provision of audit and 
attest services for large national and multinational companies. When 
asked whether steps should be taken to increase the number of available 
choices, 79 percent (65 of 83) opposed government action to break up 
the Big 4, while 66 (55 of 83) percent opposed any government action to 
assist non-Big 4 firms. Seventy-eight percent (64 of 82) of respondents 
said they would favor letting market forces operate without government 
intervention.

While some respondents expressed their belief that the market would 
adjust to create a more competitive environment, others expressed 
uncertainty about whether government actions could increase 
competition. According to one respondent, "Government action to assist 
the non-Big 4 firms will not work. The level of expertise and depth of 
resources required to deal with ever increasing levels of complexity 
and regulation cannot be [solved through] government intervention." 
However, another respondent commented, "Having only four large firms is 
a concern. The benefits of consolidation should be higher quality, less 
variation in advice, stronger financial resources of the accounting 
firm, and more accountability. If these benefits are not achieved, then 
the government may need to intervene." In addition, several respondents 
expressed concern about further consolidation. Referring to the 
dissolution of Andersen, one respondent said, "Our biggest concern is 
the ease with which a firm can disappear." Another stated, "The failure 
of Andersen had a devastating impact and ultimately resulted in fewer 
qualified professionals providing attest services during a time of 
rapidly increasing complexity in applying GAAP.":

:

We are sending copies of this report to the Chairman and Ranking 
Minority Member of the House Committee on Energy and Commerce. We are 
also sending copies of this report to the Chairman of SEC, the Chairman 
of the Public Company Accounting Oversight Board, and other interested 
parties. We also will make copies available to others upon request. In 
addition, the report will be available at no charge on the GAO web site 
at [Hyperlink, http://www.gao.gov.] h [Hyperlink, http://www.gao.gov] 
ttp://www.gao.gov.

This report was prepared under the direction of Orice M. Williams, 
Assistant Director. Please contact her or me at (202) 512-8678 if you 
or your staffs have any questions concerning this work. Key 
contributors are acknowledged in appendix IV.

[See PDF for image]

[End of figure]

Davi M. D'Agostino 
Director, Financial Markets and Community Investment:

Signed by Davi M. D'Agostino: 

[End of section]

Appendixes:

Appendix I: Scope and Methodology:

We surveyed a random sample of 250 of the 960 largest publicly-held 
companies. We defined this population using the 2003 list of the 
Fortune 1000 companies produced by Fortune, a division of Time, Inc., 
after removing 40 private companies from this list. We mailed a paper 
questionnaire to the chief financial officers, or other executives 
performing a similar role, requesting their views on the services they 
received from their auditor of record, the effects of past 
consolidation on competition among accounting firms, and its potential 
implications. To develop this questionnaire, we consulted with a number 
of experts at GAO, the American Institute of Certified Public 
Accountants, and the Securities and Exchange Commission, and pretested 
a draft questionnaire with six large public companies from a variety of 
industries. The survey began on May 6, 2003. We removed one company 
that had gone out of business and received 159 usable responses as of 
August 11, 2003, from the final sample of 249 companies, for an overall 
response rate of 64 percent. The number of responses to an individual 
question may be fewer than 159, depending on how many respondents 
answered that question.

While the survey results are based on a random sample drawn to be 
representative of the population of publicly held Fortune 1000 
companies and thus could be adjusted statistically to represent the 
whole population, including those not sampled, we are instead reporting 
totals and percentages only for those companies actually returning 
questionnaires. We did this because a significant number of sampled 
companies did not respond, and the answers respondents gave could 
differ from those nonrespondents might have given had they 
participated. This kind of potential error from nonresponse, when 
coupled with the sampling error that results from studying only a 
fraction of the population, made it particularly risky to project the 
results of our survey to not only the nonrespondents, but also to the 
part of the public company population we did not sample. There are 
other practical difficulties in conducting any survey that may also 
contribute to errors in survey results. For example, differences in how 
a question is interpreted or the sources of information available to 
respondents can introduce unwanted variability into the survey results. 
We took steps during data collection and analysis to minimize such 
errors. In addition to the questionnaire testing and development 
measures mentioned above, we followed up with nonresponding companies 
with telephone calls to help them overcome problems they encountered in 
completing the survey and to encourage them to respond. We also checked 
and edited the survey data and programs used to produce our survey 
results.

All 159 companies responding to our survey employed a Big 4 firm as 
their auditor of record. These companies derived an average of 83 
percent of their total revenues from operations within the United 
States and paid, on average, $3.19 million in fees to their auditor of 
record in the fiscal year prior to the survey. Using Standard Industry 
Classification (SIC) codes, we found that 149 respondents represented 
39 different industry sectors; we could not identify an SIC code for 
the other 10 respondents. The top 7 industry sectors represented were:

* electric, gas, and sanitary services (17 companies),

* depository institutions (10 companies),

* business services (9 companies),

* industrial and commercial machinery and computer equipment (9 
companies),

* wholesale trade-non-durable goods (9 companies),

* chemicals and allied products (8 companies), and:

* electronic and other electrical equipment and components, except 
computer equipment (6 companies).

[End of section]

Appendix II: Annotated Public Company Survey:

[See PDF for image]

[End of figure]

[End of section]

Appendix III: Summary of Written Comments to the Public Company Survey:

Companies surveyed were invited to add written comments to a number of 
questions to further explain their answers. Of the 159 respondents that 
responded to the survey, 149 volunteered written answers to at least 
one of the eight key open-ended comment questions in our survey:

* change in audit quality,

* the number of auditor options,

* the sufficiency of such options,

* willingness to use the auditor of a competitor,

* minimum number of audit firms necessary,

* optimal number of firms,

* suggested actions for increasing competition, and:

* any additional comments on the survey.

The following tables display selected comments from some respondents to 
these eight questions. Some of the quotes illustrate typical comments 
made by several other companies, while others represent a unique 
viewpoint of only that company. While these specific comments provide 
valuable insights, the number of comments of a particular type 
reproduced here is not necessarily proportional to the number of other 
similar responses, and, therefore, the comments do not represent the 
variety of opinion that might be found in the population of large 
public companies as a whole.

Change in Audit Quality:

More respondents said that overall audit quality had gotten better over 
the past decade than worse (44 percent compared to 18 percent). The 
reasons behind these ratings are presented in table 2, grouped into 
summary categories.

Table 2: Explanations for Changes in Audit Quality:

[See PDF for image]

Source: GAO.

[End of table]

Number of Auditor Options Available:

Almost all respondents--94 percent--indicated that they had three or 
fewer options from which to choose if they had to change auditors, and 
61 percent said exactly three. The explanatory comments we received to 
that question, shown in table 3, confirm that respondents are almost 
always referring to the Big 4 firms other than the one they currently 
employ. As only 8 percent of respondents said they currently use or 
would consider using a non-Big 4 firm, there were few written 
explanations for why they thought they had more than three or four 
options. Those who did explain mentioned the national prominence of the 
larger second-tier firms and smaller firms with special industry 
expertise as reasons.


Table 3: Explanations for the Number of Auditor Options Available:

[See PDF for image]

Source: GAO.

[End of table]

Sufficiency of the Number of Options:

Almost half of the respondents (43 percent) said they did not have 
enough options and desired more. Respondents who said they had enough 
options said the Big 4 firms were able to meet their needs. However, 
several of these respondents cautioned that further reductions could be 
problematic. Those saying the number of firms was not sufficient often 
took the position that "more competition is always better." Other 
comments included that differentiation between the firms' services was 
declining, special expertise was not longer readily available, and 
monopolistic tendencies in setting fees. See table 4.

Table 4: Number of Auditor Options Available:

[See PDF for image]

Source: GAO.

[End of table]

Willingness to Use Auditor of Competitor:

More than 90 percent of our respondents said that their company would 
choose the auditor of a competitor. A few of those respondents provided 
explanations as to why they would or would not, as shown in table 5.

Table 5: Explanations of Why a Company Would or Would Not Choose the 
Auditor of a Competitor:

[See PDF for image]

Source: GAO.

[End of table]

Minimum Number of Firms Necessary:

A large majority (82 percent) of respondents said that the minimum 
number of firms necessary to provide audit services to large companies 
such as theirs was four or more. The largest number of responses was 
received for four or five firms. See table 6.

Table 6: Explanations of Minimum Number of Firms Necessary:

[See PDF for image]

Source: GAO.

[End of table]

Optimal Number of Firms:

Most (86 percent) respondents said the optimal number of firms was 
greater than four, although the majority of those responses remained in 
the five to eight range. See table 7 for selected comments.

:

:

Table 7: Explanations of Optimal Number of Firms:

[See PDF for image]

Source: GAO.

[End of table]

Suggestions for Increasing Competition:

While 62 percent said no actions should be taken and 16 percent did not 
know, 22 percent of respondents said that they thought actions should 
be taken to increase competition in the audit industry. When asked to 
explain, those that favored action mentioned assisting non-Big 4 firms 
to by reducing barriers to entry, preventing further consolidation, 
breaking up the Big 4, and other actions. Many suggested that market 
forces should be allowed to operate without intervention. See table 8.

Table 8: Suggestions for Taking Action to Increase Competition:

[See PDF for image]

Source: GAO.

[End of table]
Source: GAO.

Additional Comments:

We asked respondents to volunteer any additional comments on the issues 
in the survey. A number of respondents mentioned concerns about further 
consolidation in the accounting profession, cost and quality, and other 
issues such as the impact of the Sarbanes-Oxley act and proposals for 
mandatory audit firm rotation.

Table 9: Additional Comments:

[See PDF for image]

Source: GAO.

[End of table]

[End of section]

Appendix IV: GAO Contacts and Staff Acknowledgments:

GAO Contacts: 

Davi M. D'Agostino (202) 512-8678 
Orice M. Williams (202) 512-8678:

Staff Acknowledgments: 

In addition to those individuals named above, Martha Chow, Marc Molino, 
Michelle Pannor, David Pittman, Carl Ramirez, Barbara Roesmann, and 
Derald Seid made key contributions to this report.

(250159):

FOOTNOTES

[1] The Big 8 were Arthur Andersen LLP, Arthur Young LLP, Coopers & 
Lybrand LLP, Deloitte Haskins & Sells LLP, Ernst & Whinney LLP, Peat 
Marwick Mitchell LLP, Price Waterhouse LLP, and Touche Ross LLP. The 
Big 4 accounting firms are Deloitte and Touche LLP, Ernst & Young LLP, 
KPMG LLP, and PricewaterhouseCoopers LLP. These firms differ from other 
firms by their total revenues, size, and global reach.

[2] See U.S. General Accounting Office, Public Accounting Firms: 
Mandated Study on Consolidation and Competition, GAO-03-864 
(Washington, D.C.: July 30, 2003) and Pub. L. No. 107-204 § 701 (2002).

[3] We also surveyed the 97 largest public accounting firms for their 
views on accounting firm consolidation and its potential implications; 
their responses are included in our July 30, 2003, report. This report 
focuses on the views of large public companies as clients of accounting 
firms.

[4] Sarbanes-Oxley requires that the Securities and Exchange Commission 
(SEC) enact independence rules, which address areas such as prohibited 
nonaudit services, audit partner rotation, and conflicts of interest. 
See Pub. L. No. 107-204, Title II § 201-§ 206 and 17 C.F.R. Parts 210 
and 240, Final Rule: Revision of the Commission's Auditor Independence 
Requirements.

[5] PricewaterhouseCoopers' consulting practice was sold to 
International Business Machines Corp.; KPMG's consulting practice 
became BearingPoint; and Ernst & Young sold its practice to Cap Gemini 
Group USA.

[6] The 159 respondents include 37 public companies that had to switch 
from Andersen since 2002; Andersen dissolved in 2002.

[7] The survey stated that "Audit quality is thought to include the 
knowledge and experience of audit firm partners and staff, the 
capability to efficiently respond to a client's needs, and the ability 
and willingness to appropriately identify and surface material 
reporting issues in financial reports."

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