Big Four auditors and divestment
In the UK, the Big Four international audit firms are under pressure to divest some of their clients to small accounting firms. An article, in the Financial Times ("Deloitte chief in warning on audit break-up" , 8/9/06) reports that "the Association of British Insurers stirred controversy this week by saying the stranglehold of the big four firms on the audit market could be broken by forcing them to shed clients."
In the UK market, Deloitte, PWC, KPMG, and Ernst & Young together audit all but one of the FTSE 100 (the tope 100 British public companies) and 97% of the FTSE 250, according to the Financial Times article. That means that mid-tier accounting firms don't even try to sign up leading firms as clients.
The response from Deloitte CEO was angry. He gave a blunt warning: "If the firms had a choice, he added: 'They'll give up the high-risk ones, the ones that are most difficult for the mid-tier [audit firms] to handle.'"
In other words, the mid-size firms will be palmed off with the clients that involve the greatest expertise should there be any attempt to open up the top of the market.
An interesting letter to teh editor in the Financial Times (8/1/06) came in response from the head of audit at a mid-tier company.
There could be little more powerful evidence of the disadvantages of a market being controlled by an oligopoly than the assertion that the Big Four will respond to regulatory intervention by passing their most difficult, high-risk clients to other firms. It seems extraordinary that the views of the largest institutional investors can be disregarded in this way and it is for clients, not auditors, to decide who they are audited by and for auditors to decide for whom they are prepared to act… In a truly competitive market this kind of comment would be unthinkable.
The writer puts his finger on the issue. In other words, the Big Four, a tight oligopoly, are dictating to large firms that they will decide who will serve whom, not the clients who are presumably buying the services. Deloitte (and presumably the other three big auditors) believes that the top of the market is theirs by right, and while they compete among themselves, they find outrageous any attempt to bring in more competitors.
We know since the Enron/Arthur Anderson debacle the dangers to the public good when auditing firms collude with corporations and they act with little government oversight. When Andersen fell, it was widely assumed that there would be an opportunity for mid-size firms to step up. That hasn't happened much in the USA and, in the UK, not at all.
9:35:23 PM 
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