In a study mandated by the Sarbanes-Oxley Act, the General Accounting Office found five specific factors as barriers to top tier entry:

• Smaller firms generally lack staff resources, technical expertise, and global reach to audit large public companies
• Smaller firms lack global reputation that the larger firms have established
• Increased litigation risk and insurance costs associated with auditing public companies make the large company audit market less attractive than other options
• Raising capital for growth to compete with the Big Four is difficult
• State requirements pose obstacles for small firms in particular

As a result, the GAO presumes that market forces are not likely to result in the expansion of the Big Four, which includes Deloitte & Touche, Ernst & Young, PricewaterhouseCoopers and KPMG. Currently, the Big Four audit over 78 percent of all U.S. public companies and 99 percent of public company sales. The report cites the mergers during the 1980s and 1990s and the 2002 dissolution of Arthur Andersen as a major reason for this oligopoly, and estimates that certain factors and conditions could further reduce the number of major accounting firms.

Accounting firms surveyed by the GAO, including the Big Four, said they do not foresee any of the other accounting firms being able to grow to compete with the Big Four. The total revenue gap between KPMG (#4) and Grant Thornton (#5) is nearly three billion dollars, according to 2002 figures. In addition, whereas KPMG employs nearly 11,000 workers, Grant Thornton employs a little over 2,000.

In a case study of Arthur Andersen, the report reveals that just 13 percent of former Andersen clients switched to a non-Big Four firm.

Despite extensive research on audit fees, the study did not identify a direct correlation with consolidation.

The 147-page report, Public Accounting Firms: Mandated Study on Consolidation and Competition, is available online in PDF format. Click here for a direct link.