Is Four Enough?

The collapse of Arthur Andersen proved that even the big five are not too big to fail. The remaining firms are Deloitte & Touche, Ernst & Young, KPMG and PricewaterhouseCoopers. They are now known as the big four. These public accounting firms are responsible for the audits of almost all the billion dollar companies in the United States. Out of all of these companies over 98 percent of them are clients of the big four. It is scary to think that another one of these companies could collapse but it would also be bad if they started getting any kind of protection from it.

The watch dogs of the accounting world such as the accounting oversight board are getting nerves. Having only four major public accounting firms are making these watch dogs nerves because it is starting to resemble a monopoly. There is one main reason that there has not been any action taken to break them up and that is because there has not been any obvious price gouging as you would expected in a monopoly.

Immediately after the collapse of Arthur Andersen there was a major price jump. Fees went up over 45 percent compared to what they were before. This was contributed to the new rules and regulations that were set in place due to the Sarbanes-Oxley act. The increase in fees were considered acceptable because the accounting firms had so much more work to do to meet these new rules. Since the spike accrued the prices have been slowly declining again. In the four years after the Sarbanes-Oxley act fees averaged about $569 per million dollars of revenue that a company brings in. This is down 6 percent.

The slow and steady decline in the prices charged for an audit is raising the question of how are prices going down while the workload is going up? It is obviously not due to new competition in the industry. It is most likely a result of cutting corners. Not doing all the work that is needed is a good way to cut cost until they get caught. Deloitte & Touche have already been caught. They were simple not doing what they said they were doing and still getting paid for it. Even though they were caught there was not much punishment. The only thing that happened to them was their poor ethics were made public. In most industries this would be bad for business but it did little of nothing to Deloitte & Touche. This is because their clients don’t really have any other chose. There are the other three big firms but they already have a lot of clients and are not really thought to be any better than Deloitte & Touche.

The only way to fix this problem is to get more firms in the market that can handle the kind of work that is done by the big four. There is no way a newly started company would be able to do this because of the cost. There would only be one other option left. That is to break up the big four into smaller firms. It would not be very hard. They could simply use the monopoly laws that already exist.

Crane, Agnes T. “Longing for the Days of the Big Eight.” New York Times 27 10 2011. n. pag. Web. www.nytimes.com