oversight

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

Published by the Government Accountability Office on 2003-09-30.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

                 United States General Accounting Office

GAO	             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




GAO-03-1158

                 a

                                                September 2003


                                                ACCOUNTING FIRM CONSOLIDATION
                                                Views of Surveyed Large Public
Highlights of GAO-03-1158, a report to          Companies on Audit Fees, Quality,
Senate Committee on Banking, Housing,
and Urban Affairs and the House                 Independence, and Choice
Committee on Financial Services




The largest accounting firms,                   Most of the 159 respondents said that they were satisfied with the current
known as the “Big 4,” currently                 auditor, and half had used their current auditor for 10 years or more (see
audit over 78 percent of U.S. public            figure below). Generally, the longer a respondent had been with an
companies and 99 percent of public              auditor, the higher the overall level of satisfaction. Consistent with high
company annual sales. To address
                                                levels of satisfaction, GAO found that, aside from former clients of
concerns raised by this
concentration and as mandated by                Arthur Andersen, few respondents had switched auditors in the past
the Sarbanes-Oxley Act of 2002, on              decade. When they did, they switched because of reputation, concerns
July 30, 2003, GAO issued a report              about audit fees, and corporate mergers or management changes. In
entitled Public Accounting Firms:               looking for a new auditor, the most commonly cited factors the
Mandated Study on Consolidation                 respondents gave were quality of service, industry specialization, and
and Competition, GAO-03-864. As                 “chemistry” with the audit team. Finally, almost all respondents used
part of that study, GAO surveyed a              their auditor of record for a variety of nonaudit services, including tax-
random sample of 250 public                     related services and assistance with company debt and equity offerings.
companies from the Fortune 1000
list; preliminary findings were
                                                Respondents had differing views about whether past consolidation had
included in the July report. This
supplemental report details more                some influence on audit fees, but most believed that consolidation had
comprehensively the 159 responses               little or no influence on audit quality or independence. Respondents
we received through August 11,                  commented that other factors—such as new regulations deriving from
2003, focusing on (1) the                       the Sarbanes–Oxley Act and changing auditing standards—have had a
relationship of their company with              greater impact on audit price, quality, and independence.
their auditor of record in terms of
satisfaction, tenure relationship,              While half of the respondents said that past consolidation had little or no
and services provided; (2) the                  influence on competition and just over half said they had a sufficient
effects of consolidation on audit               number of auditor choices, 84 percent also indicated a preference for
fees, quality, and independence;
                                                more firms from which to choose as most would not consider using a
and (3) the potential implications
of consolidation for competition                non-Big 4 firm. Reasons most frequently cited included (1) the need for
and auditor choice.                             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.

                                                Length of Relationship with Current Auditor
                                                Number of companies
                                                40   40
                                                     37

                                                30


                                                20                             18
                                                                                                     13                           13                    12
                                                10                  10
                                                                                          8                     7                             8
                                                                                                                           6

                                                 0      3
www.gao.gov/cgi-bin/getrpt?GAO-03-1158.
                                                       <2          2-5        6-10      11-15      16-20      21-25      26-30   31-40      41-50     51-94
                                                     Years
To view the full product, including the scope
and methodology, click on the link above.                      Former Andersen clients that switched within the last 2 years             All other respondents
For more information, contact Davi M.
                                                Source: GAO.
D'Agostino at (202) 512-8678 or
d'agostinod@gao.gov.
Contents




Letter
                                                                                                   1
                             Results in Brief 
                                                           2
                             Background                                                                   4

                             Most Respondents Were Satisfied with Their Auditor, Had Long-term 

                               Relationships, and Used Their Auditor for a Variety of Services            5
                             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                        10
                             Respondents Were Concerned That Limited Audit Choices May
                               Create Problems                                                           13


Appendixes
              Appendix I:    Scope and Methodology                                                       19
             Appendix II:    Annotated Public Company Survey                                             21
             Appendix III:   Summary of Written Comments to the Public Company
                             Survey                                                                      36
                             Change in Audit Quality 
                                                   36
                             Number of Auditor Options Available 
                                       38
                             Sufficiency of the Number of Options 
                                      40
                             Willingness to Use Auditor of Competitor 
                                  41
                             Minimum Number of Firms Necessary 
                                         42
                             Optimal Number of Firms 
                                                   43
                             Suggestions for Increasing Competition 
                                    45
                             Additional Comments 
                                                       46
             Appendix IV:    GAO Contacts and Staff Acknowledgments                                      51
                             GAO Contacts 
                                                              51
                             Staff Acknowledgments 
                                                     51


Tables	                      Table 1: Respondents That Had Switched Auditors Since 1987                   8

                             Table 2: Explanations for Changes in Audit Quality                          37

                             Table 3: Explanations for the Number of Auditor Options 

                                      Available                                                          39

                             Table 4: Number of Auditor Options Available                                40

                             Table 5: Explanations of Why a Company Would or Would Not 

                                      Choose the Auditor of a Competitor                                 41

                             Table 6: Explanations of Minimum Number of Firms Necessary                  42

                             Table 7: Explanations of Optimal Number of Firms                            44

                             Table 8: Suggestions for Taking Action to Increase Competition              45




                             Page i                                GAO-03-1158 Accounting Firm Consolidation
           Contents




           Table 9: Additional Comments                                                           47


Figures	   Figure 1: Length of Relationship with Current Auditor                                      6

           Figure 2: Satisfaction with Current Auditor, by Tenure                                     7

           Figure 3: Factors Cited in Choosing a New Auditor                                          9

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

                     Audit Fees                                                                   11

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

                     Audit Quality                                                                12

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

                     Auditor Independence                                                         13

           Figure 7: Reasons Cited for Not Using a Non-Big 4 Firm                                 15





           Abbreviations

           GAAP         generally accepted accounting principles

           GAAS         generally accepted auditing standards

           SIC          Standard Industry Classification

           SEC          Securities and Exchange Commission





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           Page ii                                       GAO-03-1158 Accounting Firm Consolidation
A

United States General Accounting Office
Washington, D.C. 20548



                                    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.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).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.3 Specifically, our 

                                    objective was to obtain the views of the chief financial officers of large 


                                    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.




                                    Page 1                                         GAO-03-1158 Accounting Firm Consolidation
                    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



                    Page 2                                  GAO-03-1158 Accounting Firm Consolidation
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.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

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.




Page 3                                            GAO-03-1158 Accounting Firm Consolidation
              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.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


              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.




              Page 4                                       GAO-03-1158 Accounting Firm Consolidation
                           to be independent. The external auditor also interacts closely with the
                           company’s senior management, including the chief financial officer.



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

High Degree of Client      Overall, 80 percent (127 out of 158 respondents answering this question) of
Satisfaction and Auditor   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
Tenure
                           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.




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




                           Page 5                                       GAO-03-1158 Accounting Firm Consolidation
Figure 1: Length of Relationship with Current Auditor
Number of companies
     40
40
     37

35


30


25


20                           18

15                                               13                             13
                                                                                                12
                   10
10                                      8                                               8
                                                            7
                                                                      6
 5

         3
 0
       <2         2-5       6-10       11-15    16-20     21-25     26-30      31-40   41-50   51-94
     Years


               Former Andersen clients that switched within the last 2 years
               All other respondents

Source: GAO.



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.




Page 6                                                   GAO-03-1158 Accounting Firm Consolidation
Figure 2: Satisfaction with Current Auditor, by Tenure
Percentage

100
                                                            94


                                             79
 80                           75
         70


 60




 40




 20              18
                                                    15

                                      7                            6

  0
         Less than            More than 1   More than 10     30 or
           1 year             to 10 years    to 30 years   more years
      Tenure with current auditor


               Satisfied

               Dissatisfied

Source: GAO.



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



Page 7                                                GAO-03-1158 Accounting Firm Consolidation
                                          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                 Satisfied with    Dissatisfied with Neither satisfied nor Number of switching
switched auditors                           current auditor     current auditor           dissatisfied         companies
Former Andersen clients that switched
within the past 2 years because of
Andersen’s dissolution in 2002                          25                   7                     5                    37
Former Andersen clients that switched
from Andersen from 1987 through 2000,
for other reasons                                        3                   0                     2                     5
Respondents that switched from other
Big 4 or non-Big 4 firms (not Andersen)
from 1987 through 2003                                  16                   1                     2                    19
Total                                                   44                   8                     9                    61
Source: GAO.




Respondents Cited Varied                  Respondents gave a variety of reasons for switching, including concerns
Reasons for Changing                      about the reputation of their auditor, the need to retain an auditor that
                                          could meet companies’ new demands, concerns about the level of fees
Auditors and Factors for
                                          charged for audit and attest services, and increased demands resulting
Selecting a New Auditor                   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




                                          Page 8                                  GAO-03-1158 Accounting Firm Consolidation
                             of 159).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
                             Factors

                                                  Quality of
                                                                                                                        76         23
                                            services offered

                                          Reputation or
                                                                                                 42                           41
                                       name recognition

                                  Industry specialization
                                                                                                        50                   31
                                             or expertise

                             Chemistry/perceived ability
                                to effectively work with                              31                               43
                                      engagement team

                                                      Price                15                                39

                                     Ability of auditor to
                                      handle company's                                 32               17
                                international operations

                             Number of services offered            5                        31


                                 Auditor's proximity to
                                                                       8                 26
                               company's headquarters

                                                               0                20                 40             60          80    100
                                                               Percentage


                                                                           Very great importance

                                                                           Great importance

                             Source: GAO.




Almost All Respondents       Ninety-four percent (149 of 159) of respondents obtained other services
Used Auditors for Nonaudit   from their auditors in addition to audit and attest services. We asked
                             respondents if their auditor provided any of the three following categories
Services
                             of services: tax-related, assistance with company debt and equity offerings,

                             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.”




                             Page 9                                                           GAO-03-1158 Accounting Firm Consolidation
                           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            Respondents had differing views about the impact of past consolidation
                           among the largest accounting firms on audit fees, but most agreed that it
Differing Views about      had little or no influence on audit quality or auditor independence. While
Past Consolidation’s       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
Influence on Audit         consolidation of the largest accounting firms had a “moderate upward” or
Fees but Most Agreed       “great upward” influence (47 percent or 75 of 158) or little or no influence
That It Had Little or No   (46 percent or 72 of 158). See figure 4.
Influence on Audit
Quality or Auditor
Independence




                           Page 10                                GAO-03-1158 Accounting Firm Consolidation
Figure 4: Views on Change and Impact of Past Consolidation on Audit Fees

Change in fees                                                           Impact of past consolidation on fees

                                                                                Great

    Greatly
                                     32                                       upward
         6
 increased
                                                                            influence

                                                                            Moderate
Somewhat
                                                       61                     upward                                41
increased
                                                                            influence

  Little or                                                                   Little or
                       2                                                                                                  46
no change                                                                no influence

                                                                            Moderate
Somewhat
                   4                                                       downward           1
decreased
                                                                            influence
                                                                                Great

   Greatly
                   1                                                       downward
 0
decreased
                                                                            influence


Don't know         0                                                      Don't know          6

               0           10   20   30   40   50       60    70   80                     0       10    20    30     40        50   60   70   80
               Percentage                                                                 Percentage
Source: GAO.



                                                    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



                                                    Page 11                                            GAO-03-1158 Accounting Firm Consolidation
                                                              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
Change in quality                                                                 Impact of past consolidation on quality

                                                                                          Very
     Much
                       9                                                               positive            2
     better
                                                                                     influence
                                                                                    Somewhat
Somewhat
                                           35                                          positive                 15
   better
                                                                                     influence

  Little or                                                                            Little or
                                               37                                                                                                  63
no change                                                                         no influence

                                                                                    Somewhat
Somewhat
                                16                                                    negative                      16
   worse
                                                                                     influence
                                                                                          Very
     Much
                   2                                                                  negative         0
     worse
                                                                                     influence

Don't know         1                                                               Don't know          4

               0           10        20   30        40   50      60     70   80                    0           10         20    30    40    50     60    70    80
               Percentage                                                                          Percentage
Source: GAO.



                                                              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



                                                              Page 12                                                    GAO-03-1158 Accounting Firm Consolidation
                                                           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
Change in independence                                                         Impact of past consolidation on independence

      Much                                                                             Very
      more             11                                                           positive        3
independent                                                                       influence
  Somewhat                                                                       Somewhat
      more                                       48                                 positive            5
independent                                                                       influence

   Little or                                                                        Little or
                                       38                                                                                                         72
 no change                                                                     no influence

  Somewhat                                                                       Somewhat
       less        1                                                               negative                  15
independent                                                                       influence
      Much                                                                             Very
       less        1                                                               negative         1
independent                                                                       influence

 Don't know        1                                                            Don't know          4

               0        10   20   30        40        50       60    70   80                    0           10     20    30    40     50    60    70    80
               Percentage                                                                       Percentage
Source: GAO.




Respondents Were                                           Respondents raised concerns about the future implications of
                                                           consolidation, especially about possible limitations on audit firm choice. A
Concerned That                                             significant majority of respondents said that their companies would not use
Limited Audit Choices                                      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
May Create Problems                                        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.




                                                           Page 13                                                GAO-03-1158 Accounting Firm Consolidation
Respondents Preferred Big   Eighty-eight percent (139 of 158) of respondents indicated that they would
4 Firms over Non-Big 4      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
Firms for Audit Services    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.




                            Page 14                                  GAO-03-1158 Accounting Firm Consolidation
                        Figure 7: Reasons Cited for Not Using a Non-Big 4 Firm
                        Factors

                           Technical skill/
                            knowledge of                                                            64        27
                                 industry

                             Reputation of
                                                                                          57                  34
                                audit firm


                               Capacity of
                                                                                     48                       42
                                audit firm

                              Geographic
                        presence required                                 37                        28
                             of audit firm

                        Board of directors
                                                                 25                            35
                        would not allow it


                        Inferred obligation
                                                           19                   26
                          to use Big 4 firm

                              Contractual
                         obligation to use        7         14
                              a Big 4 firm
                                              0                 20             40               60       80          100
                                              Percentage


                                                      Very great importance

                                                      Great importance

                        Source: GAO.




Majority of Survey      While 57 (90 of 158) percent of respondents said that the number of firms
Respondents Preferred   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
More Audit Choices
                        (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



                        Page 15                                                 GAO-03-1158 Accounting Firm Consolidation
                             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     When asked the minimum number of accounting firms necessary to
Consolidation Would Result   provide audit and attest services to large national and multinational public
                             companies, 82 percent (120 of 147) of respondents indicated that the
in Too Few Choices
                             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



                             Page 16                                GAO-03-1158 Accounting Firm Consolidation
                             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   Despite the fact that 94 percent of respondents said they had three or fewer
Allow Market Forces to       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
Dictate the Level of         taken to increase competition in the provision of audit and attest services
Competition in the Audit     for large national and multinational companies. When asked whether steps
Market                       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.”




                             Page 17                                GAO-03-1158 Accounting Firm Consolidation
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 

http://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.





Davi M. D’Agostino

Director, Financial Markets and

Community Investment





Page 18                                GAO-03-1158 Accounting Firm Consolidation
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.




              Page 19                                GAO-03-1158 Accounting Firm Consolidation
Appendix I

Scope and Methodology





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).




Page 20                                GAO-03-1158 Accounting Firm Consolidation
Appendix II

Annotated Public Company Survey





                                                  United States General Accounting Office


                                                  Survey of Public Companies

              Introduction                                           Instructions

              The Sarbanes-Oxley Act of 2002 mandated that           Please complete this questionnaire specifically
              the U.S. General Accounting Office (GAO), the          for the company named in the cover letter, and
              independent research and investigative arm of          not for any subsidiaries or related companies.
              Congress, study the impact of the recent
              consolidation of firms in the accounting               This questionnaire should be completed by the
              profession.                                            Chief Financial Officer (CFO) or other
                                                                     executive of this organization who can provide
              To provide a thorough, fair, and balanced report       historical information on mergers, operations
              to Congress, it is essential that we obtain the        and finance, as well as report the corporate
              experiences and viewpoints of a representative         policy of this firm.
              sample of public companies.
                                                                     Please return the completed questionnaire in the
              Your company was selected randomly from the            enclosed envelope within 10 business days of
              2002 list of Fortune 1000 companies. It is             receipt. If the envelope is misplaced, our
              important for every selected firm to respond to        address is:
              ensure the validity of our research.
                                                                            U. S. General Accounting Office
              The results of the survey will be compiled and                Attn: Cecile Trop
              presented in summary form only as part of our                 200 W. Adams Street, #700
              report, and GAO will not release individually                 Chicago, IL 60606
              identifiable data from this survey, unless
              compelled by law or required to do so by the           If you have any questions or concerns about this
              Congress.                                              survey, please contact:

                                                                            Michelle Pannor
                                                                            Telephone: (202) 512-3608
                                                                            Email: pannorm@gao.gov

                                                                     Thank you for participating in this survey.




                                                                 1




                     Page 21                                                 GAO-03-1158 Accounting Firm Consolidation
  Appendix II

  Annotated Public Company Survey





Background


1. Approximately what percentage of your company’s total revenues are derived from operations
   within and outside of the United States?
   Please enter percentages totaling 100%.

 _____% of our revenues are derived from operations within the United States
                                           N=158 Mean=83 Median=95 Range=12-100

 _____% of our revenues are derived from operations outside of the United States
                                           N=110 Mean=25 Median=20 Range=0-88

  100 % Total revenues


2. If your company was founded in the past decade, in what year was it founded?
   Please enter 4-digit year.

   _______________ Year founded


3. What is the name of your company’s current auditor of record and when did this firm become
   your auditor of record? Please enter name of auditor and 4-digit year hired.

    ______________________________ Name of auditor

   _______________________________ First year employed as auditor


4. What type of services does your auditor of record currently provide to your company? Please
   check all that apply.

   1.     Only audit and attest services                                             N=10
   2.     Tax-related services (e.g., tax preparation)                               N=130
   3.     Assistance with company debt and equity offerings (e.g. comfort letters)   N=106
   4.     Other services - please describe:                                          N=54

          _______________________________________________________________________




                                             2




  Page 22                                                 GAO-03-1158 Accounting Firm Consolidation
  Appendix II

  Annotated Public Company Survey





5. Approximately how much were the total annual fees that your company paid to your auditor of
   record for audit and attest services during your last fiscal year?
   Please enter approximate dollar figure.
   N=156

    $_________________ Annual fees                                 Mean=$3,189,578
                                                                   Median=$1,334,500
                                                                   Range=$13,807-$62,000,000

6. Starting in 1987, when consolidation of the largest accounting firms began, or since your
   company was founded (if that occurred after 1987), has your company employed more than one
   auditor of record? Please check one box.
   N=158

   1.     Yes - how many: ________                                               38%
   2.     No         SKIP TO NEXT PAGE                                           62%



7. What were the names and tenures of the most recent previous auditor(s) of record your company
   has employed since 1987? Please name up to two of the most recent previous auditors and
   years employed.

    ________________________ Name of auditor           from (year)_____ to (year)_______

    ________________________ Name of auditor           from (year)_____ to (year)_______


8. Which of the following reasons explain why your company changed auditor of record one or
   more times since 1987? Please check all that apply.

   1.     Our company had a mandatory rotation policy                             N=0
   2.     Expansion of our company required an auditor of record that could meet new demands
                                                                                  N=7
   3.     New regulations forbidding use of auditor for management consulting and other services
                                                                                  N=2
   4.     Fees for audit and attest services                                      N=7
   5.     Concern about reputation of our auditor of record                       N=10
   6.     Our auditor of record was going out of business                         N=31
   7.     Our auditor of record resigned                                          N=0
   8.     Relationship with our auditor of record was no longer working           N=4
   9.     Other – please describe:                                                N=19

          __________________________________________________________________


                                            3




  Page 23                                                GAO-03-1158 Accounting Firm Consolidation
    Appendix II

    Annotated Public Company Survey





 9. If your company previously employed Arthur Andersen as your auditor of record and switched
    to another firm in the past two years, did you switch to the firm to which your previous Arthur
    Andersen partner moved? Please check one box.
    N=56

     1.     Not applicable – did not employ Arthur Andersen               34%
     2.     Yes, switched to partner’s new firm                           30%
     3.     No, switched to other firm –                                  36%
     please explain: _______________________________________________________________

Consolidation in the Accounting Profession

We are focusing on the trend toward consolidation that has occurred in the public accounting
profession starting in 1987, when consolidation activity among the largest firms began, primarily the
consolidation of the “Big 8” into the “Big 4.” This section asks you to consider how your company’s
relationship with its auditor of record, and the audit services it provides, has changed over this time
frame. Although a number of factors may have influenced these changes, we would like you to
assess the influence of consolidation in the accounting profession in particular. Please base your
answers on your experience in the past decade or, if this is not possible, on the time frame that
reflects your experience.

 10. How have the fees that your company pays for audit and attest services changed over the past
     decade? If it is not possible for you to answer for the past decade, please base your answer on
     the time frame that best reflects your experiences. Please check one box.
     N=158

     1.     Greatly increased                                                           32%
     2.     Somewhat increased                                                          61%
     3.     Little or no change                                                         2%
     4.     Somewhat decreased                                                          4%
     5.     Greatly decreased                                                           1%




                                                 4




    Page 24                                                   GAO-03-1158 Accounting Firm Consolidation
  Appendix II

  Annotated Public Company Survey





11. If your company changed auditors within the last two years, how have the fees your company
    pays your current auditor of record changed compared to the fees paid to your previous auditor?
    Please check one box.
    N=156

   1.      Not applicable – have not changed auditors                                    71%
   -----------------------------------------------------------
   2.      Greatly increased                                                             5%
   3.      Somewhat increased                                                            15%
   4.      Little or no change                                                           7%
   5.      Somewhat decreased                                                            2%
   6.      Greatly decreased                                                             0%

12. In your opinion, how has the consolidation of the largest accounting firms over the past decade
    influenced the fees that your company pays for auditing and attest services?
    N=158

   1.     Great upward influence                                                         6%
   2.     Moderate upward influence                                                      41%
   3.     Little or no influence                                                         46%
   4.     Moderate downward influence                                                    1%
   5.     Great downward influence                                                       0%
   ----------------------------------------------------------
   6.     Don’t know                                                                     6%

13. Audit quality is often 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.

   Do you believe that the overall quality of audit services your company receives has gotten better
   or worse over the past decade? Please check one box.
   N=158

   1.     Much better                                                                    9%
   2.     Somewhat better                                                                35%
   3.     Little or no change                                                            37%
   4.     Somewhat worse                                                                 16%
   5.     Much worse                                                                     3%
   ----------------------------------------------------------
   6.     Don’t know                                                                     1%




                                                      5




  Page 25                                                        GAO-03-1158 Accounting Firm Consolidation
  Appendix II

  Annotated Public Company Survey





14. If your company changed auditors within the last two years, do you believe that the overall
    quality of audit services your company receives from your current auditor is better or worse
    than the overall quality of audit services your company received from its previous auditor?
    Please check one box.
    N=154

   1.      Not applicable – have not changed auditors                                71%
   ----------------------------------------------------------
   2.      Much better                                                               5%
   3.      Somewhat better                                                           10%
   4.      Little or no change                                                       8%
   5.      Somewhat worse                                                            5%
   6.      Much worse                                                                1%
   -----------------------------------------------------------
   7.      Don’t know                                                                0%


15. In your opinion, how has the consolidation of the largest accounting firms over the past decade
    influenced the quality of audit and attest services that your company receives?
    N=158

   1.     Very positive influence                                                    2%
   2.     Somewhat positive influence                                                15%
   3.     Little or no influence                                                     63%
   4.     Somewhat negative influence                                                16%
   5.     Very negative influence                                                    0%
   ----------------------------------------------------------
   6.     Don’t know                                                                 4%

16. If you have experienced a change in audit quality, please explain:
    If you have not experienced a change, please enter “none.”

   _________________________________________________________________________

   _________________________________________________________________________

   _________________________________________________________________________




                                                      6




  Page 26                                                        GAO-03-1158 Accounting Firm Consolidation
  Appendix II

  Annotated Public Company Survey





17. Auditor independence is often thought to relate to the accounting firm’s ability and willingness
    to appropriately deal with (a) financial reporting issues that may indicate materially misstated
    financial statements; (b) the appearance of independence in terms of the other services a firm is
    allowed to and chooses to provide to their clients; and (c) how much influence clients appear to
    have in the audit decisions.

  Do you believe that your company’s auditor(s) has become more or less independent over the
  past decade? Please check one box.
  N=158

   1.      Much more independent                                                      11%
   2.      Somewhat more independent                                                  48%
   3.      Little or no change                                                        38%
   4.      Somewhat less independent                                                  1%
   5.      Much less independent                                                      1%
   ----------------------------------------------------------
   6.      Don’t know                                                                 1%


18. If your company changed auditors within the last two years, do you believe that your current
    auditor is more or less independent than your previous auditor?
    Please check one box.
    N=155

   1.      Not applicable – have not changed auditors                                 72%
   ----------------------------------------------------------
   2.      Much more independent                                                      5%
   3.      Somewhat more independent                                                  11%
   4.      Little or no change                                                        12%
   5.      Somewhat less independent                                                  0%
   6.      Much less independent                                                      0%
   ----------------------------------------------------------
   7.      Don’t know                                                                 0%




                                                      7




  Page 27                                                       GAO-03-1158 Accounting Firm Consolidation
  Appendix II

  Annotated Public Company Survey





19. In your opinion, how has the consolidation of the largest accounting firms over the past decade
    influenced the ability of your auditor of record to maintain independence in the audit and attest
    services it provides to your company? Please check one box.
    N=158

   1.     Very positive influence                                                      3%
   2.     Somewhat positive influence                                                  5%
   3.     Little or no influence                                                       72%
   4.     Somewhat negative influence                                                  15%
   5.     Very negative influence                                                      1%
   ----------------------------------------------------------
   6.     Don’t know                                                                   4%



20. How satisfied are you with your current auditor of record?
    Please check one box
    N=158

   1.     Very satisfied                                                               45%
   2.     Somewhat satisfied                                                           35%
   3.     Neither satisfied nor dissatisfied                                           8%
   4.     Somewhat dissatisfied                                                        11%
   5.     Very dissatisfied                                                            1%
   ----------------------------------------------------------
   6.     Don’t know                                                                   0%




                                                      8




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Competition in the Public Accounting Profession

     21. Would you consider using a non-Big 4 firm for audit and attest services?
         Please check one box
         N=158

         1.      Not applicable – already use a non-Big 4 firm               SKIP TO QUESTION 23
                                                                                      4%
         2.      Yes              SKIP TO QUESTION 23                                 8%
         3.      No                                                                   88%


     22. IF NO: How important are the following reasons in explaining why you would not consider
         using a non-Big 4 firm? Please check one box in each row.

                                      Very Great     Great       Moderate       Some       Little or No   Don’t
                                      Importance   Importance   Importance    Importance   Importance     Know
                                         (1)          (2)          (3)           (4)           (5)         (6)
Geographic presence that our
company requires of an auditor          37%          28%          18%            9%            8%         0%
N=137
Technical skill/knowledge of
industry                                64%          27%           6%            3%            0%         0%
N=138

Capacity of audit firm                  48%          42%           8%            1%            1%         0%
N=138

Reputation of audit firm                57%          34%           9%            0%            0%         0%
N=138
Contractual obligation to use a
Big 4 firm (e.g., with banks,            7%          14%          15%           11%           46%         7%
lenders, or landlords)
N=137
Inferred obligation to use a Big 4
firm (e.g., with banks, lenders, or     19%          26%          19%           12%           20%         4%
landlords)
N=136
Our Board of Directors would
not allow it                            25%          35%          14%            4%            4%         18%
N=134
Other - please describe:
                                        N=10          N=3          N=0           N=0          N=0         N=7
N=20




                                                       9




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     23. If you had to switch your auditor of record, how easy or difficult would each of the following
         stages be? Please check one box in each row.
                                   Very         Somewhat      Neither Easy    Somewhat   Very         Don’t
                                  Difficult      Difficult    nor Difficult     Easy     Easy         Know
                                     (1)           (2)             (3)          (4)       (5)          (6)
Identifying eligible candidates
                                    1%            11%             8%            15%      65%          0%
N=158
Reviewing proposals and
selecting the new auditor           3%            38%             29%           21%       9%          0%
N=157
Transitioning to the new
auditor (e.g., training)           39%            53%             5%            1%        1%          1%
N=158
Other - please describe:
N=19                               N=11           N=2             N=0           N=0      N=0          N=6


     24. Aside from your current auditor of record, how many firms do you think your company would
         have as options if you needed to change auditors?
         Please enter the number of firms to which your company could switch.
         N=157
         __________________ firm(s)

                                           Range of responses=0–3                N=148          94%
                                           Range of responses=4–8                N=9            6%

         Please explain: ___________________________________________________________

         _________________________________________________________________________



     25. Do you think the number of firms your company has as options for auditing and attest services
         is enough? Please check one box.
         N=158

         1.     Yes                                                                             57%
         2.     No                                                                              43%

         Please explain: ___________________________________________________________

         _________________________________________________________________________

         _________________________________________________________________________



                                                         10




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     26. Would your company choose as your auditor of record an accounting firm that currently audits
         one of your competitors? Please check one box.
         N=157

         1.     Yes                                                                       92%
         2.     No                                                                        8%

         Please explain: ___________________________________________________________

         _________________________________________________________________________

         _________________________________________________________________________


     27. If you had to choose a new auditor of record, how important would each of the following factors
         be to your decision? Please check one box in each row.

                                    Very Great     Great       Moderate    Some     Little or No   Don’t
                                    Importance   Importance   Importance Importance Importance     Know
                                       (1)          (2)          (3)         (4)         (5)        (6)
Price
                                      15%          39%          37%          7%          2%        0%
N=157

Number of services offered
                                       5%          31%          33%         20%         10%        1%
N=158

Quality of services offered
                                      76%          23%           1%          0%          0%        0%
N=159
Industry specialization or
Expertise                             50%          31%          15%          4%          0%        0%
N=159
Reputation or name recognition
of the auditor                        42%          41%          11%          5%          1%        0%
N=159
Auditor’s proximity to your
company’s headquarters                 8%          26%          42%          9%         15%        0%
N=159
Ability of auditor to handle your
company’s international               32%          17%           8%          7%         35%        1%
operations
N=155
Chemistry/perceived ability to
effectively work with engagement      31%          43%          18%          6%          2%        0%
team
N=159
Other - please describe:               N=5          N=2          N=0        N=0         N=0        N=5
N=12



                                                     11




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     28. Has the consolidation of the largest accounting firms over the past decade made it harder or
         easier for your company to satisfactorily select an auditor and maintain a relationship with that
         auditor? Please check one box.
         N=158

         1.      Much harder                                                                         6%
         2.      Somewhat harder                                                                     17%
         3.      Little or no effect                                                                 68%
         4.      Somewhat easier                                                                     3%
         5.      Much easier                                                                         0%
         ----------------------------------------------------------
         6.      Don’t know                                                                          6%

     29. How, if at all, has the consolidation of the largest accounting firms over the past decade affected
         competition in the provision of audit and attest services? If it is not possible for you to answer
         for the past decade, please base your answer on the time frame that best reflects your
         experiences. Please check one box.
         N=159

         1.      Greatly increased competition                                                       1%
         2.      Somewhat increased competition                                                      9%
         3.      Little or no effect               SKIP TO QUESTION 31                               50%
         4.      Somewhat decreased competition                                                      24%
         5.      Greatly decreased competition                                                       11%
     ----------------------------------------------------------
         6.      Don’t know                                                                          5%

     30. How, if at all, has this change in competition affected each of the following areas?
                                   Greatly       Somewhat        Little or No   Somewhat     Greatly       Don’t
                                  Increased      Increased          Effect      Decreased   Decreased      Know
                                     (1)              (2)             (3)          (4)         (5)          (6)
Costs
                                    12%              61%              14%         5%          0%           8%
N=77

Quality of service
                                     1%              16%              43%         31%         1%           8%
N=77
Auditor independence at the
overall firm level                   1%              10%              68%         14%         0%           6%
N=77
Auditor independence at the
individual partner level             4%              9%               70%         8%          0%           9%
N=77
Other - please describe:            N=3              N=1              N=1         N=0         N=0          N=2
N=7



                                                            12




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31. What do you believe is the minimum number of accounting firms necessary to provide audit
    and attest services to large national and multinational public companies? Please enter a
    number.

   ______________ number of firms

   N=147

                                Range of responses=0–3               N=27           18%
                                Range of responses=4–5               N=86           59%
                                Range of responses=6–8               N=31           21%
                                Range of responses=10+               N=3            2%

   Please explain: ____________________________________________________________

   _________________________________________________________________________

   _________________________________________________________________________

   _________________________________________________________________________



32. What do you believe is the optimal number of accounting firms for providing audit and attest
    services to large national and multinational public companies? Please enter a number.

   ______________ number of firms

   N=136

                                Range of responses=0–2               N=5            4%
                                Range of responses=3–4               N=14           10%
                                Range of responses=5–8               N=100          74%
                                Range of responses=9+                N=17           12%

   Please explain: ___________________________________________________________

   _________________________________________________________________________

   _________________________________________________________________________

   _________________________________________________________________________




                                              13




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33. Do you suggest that any actions be taken to increase competition in the provision of audit and
    attest services for large national and multinational public companies? Please check one box.
    N=159

   1.     Yes                                                                            22%
   2.     No                                                                             62%
   3.     Don’t know                                                                     16%

   Please explain: ___________________________________________________________

   _________________________________________________________________________

   _________________________________________________________________________

   _________________________________________________________________________


34. Would you favor or oppose the following actions to increase competition to provide audit and
    attest services for large national and multinational clients? Please check one box in each row.

                             Strongly   Somewhat Neither Favor    Somewhat      Strongly       Don’t
                              Favor       Favor   nor Oppose       Oppose       Oppose         Know
                               (1)         (2)          (3)           (4)          (5)          (6)
Government action to
break up the Big 4             2%         7%           12%           22%          57%          0%
N=83
Government action to
assist the non-Big 4 firms     2%         18%          13%           17%          49%          0%
N=83
Let market forces operate
without intervention          48%         31%          13%           4%           2%           2%
N=82
Other - please describe:
N=10
                              N=9         N=1          N=0           N=0          N=0          N=0

Other - please describe:
N=2
                              N=1         N=0          N=0           N=0          N=1          N=0

Other - please describe:
N=0
                              N=0         N=0          N=0           N=0          N=0          N=0




                                                 14




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35. Do you have any additional comments on any of the issues covered by this survey?
    Please use the space below to make additional comments or clarifications of any answers you
    gave in this survey.




                   Thank you for your assistance with this survey!
                     Please return it in the envelope provided.




                                             15




  Page 35                                                 GAO-03-1158 Accounting Firm Consolidation
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 	   More respondents said that overall audit quality had gotten better over the
                    past decade than worse (44 percent compared to 18 percent). The reasons
Quality	            behind these ratings are presented in table 2, grouped into summary
                    categories.




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                                               Summary of Written Comments to the Public 

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Table 2: Explanations for Changes in Audit Quality

Drawn from 56 responses to question 16—“If you have experienced a change in audit quality, please explain.”
Direction of quality     General category of
change                   explanation                 Comment
Better                    Audit methods                  “Improved methodologies and documentation. Improved support tools and
                                                         depth of expertise.”
                                                         “Improvements largely reflect steady, incremental improvements in
                                                         effectiveness—applying new technology, lessons learned from customer
                                                         feedback, etc.”
                                                         “More focus on risk analysis and internal controls.”
                          Staffing/expertise             “Better experienced audit staff; better national level resources available.”
                                                         “Greater familiarity and experience of auditors with our company has had some
                                                         positive impact on quality. They understand our business more and are much
                                                         more efficient.”
                                                         “Broader client base gives greater practice experience.”
                          Environmental forces	          “I believe there has been a change, but driven more by the environment and
                                                         Sarbanes-Oxley.”
                                                         “Change in the depth and quality of the audit process is due to a more rigorous
                                                         regulatory and litigation environment and not audit consolidation.”
                          Changing requirements	         “Audit quality is somewhat higher, due to added GAAS requirements rather
                                                         than consolidation of audit firms.”
                                                         “Audit quality has been positively impacted by new independence requirements
                                                         and scrutiny of the accounting industry.”
                          Client actions	                “Our audit quality has increased as we have changed audit partners and have
                                                         requested an increase in scope and scrutiny.”
                                                         “We are challenged thoroughly to document fully matters of judgment and
                                                         estimates.”
                                                         “Recent events have caused [our auditor] to scrutinize more closely and we
                                                         have asked for more coverage in certain areas.”
Worse                     Audit methods                  Less specific transaction testing now than before.”
                                                         “Less insightful; rarely identifies known matters of concern; overly simplistic in
                                                         approach; poor identification of financial and business risks.”
                                                         “Focus on ‘form’ of compliance not substance... Audits in ‘90s did not focus on
                                                         controls...Sarbanes-Oxley 404 brings controls back to forefront but of little value
                                                         as audit firms are focused on fee, opportunity & form (not substance) which
                                                         should have been there (in audits) these past 10 years for auditors to attest as
                                                         to validity of financial results.”
                                                         “Auditors are increasingly worried about 'checklist' compliance with unduly
                                                         complicated GAAP rules rather than assessing 'fair presentation' in the context
                                                         of the company's line of business.”




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(Continued From Previous Page)
Direction of quality    General category of
change                  explanation                     Comment
                        Staffing/expertise	             “Less involvement by partners/senior management, lower quality planning and
                                                        execution.”
                                                        “Too much reliance on technology to cut hours; less on the ground time; staff
                                                        turnover higher.”
                                                        “Firms have become cookie-cutter checklist type of auditors. Very little
                                                        business sense of experience exists. The auditor should know more than the
                                                        client but that doesn't exist today.“
                        Environmental forces            “Slight decline mainly due to fee pressure.”
                                                        “Less competition; more regulation; more complexity; more ‘legalistic,’
                                                        nonproductive effort and protectionism on everyone's part.”
                        Timeliness	                     “The timeliness of resolving issues is much slower and the answers to key
                                                        accounting issues can change shortly before filings and/or press releases.”
                                                        “Too much info to keep ‘current’ on results in longer internal review process and
                                                        longer decision-making process on part of the auditors.“
Source: GAO.




Number of Auditor                             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
Options Available                             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.




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Company Survey





Table 3: Explanations for the Number of Auditor Options Available

Of the 157 responses to question 24—“Aside from your current auditor of record, how
many firms do you think your company would have as options if you needed to change
auditors?”—130 respondents also provided comments. Below are selected comments.
Range of options         Comment
Three remaining Big 4    “As a Fortune 100 company, I believe that our realistic options
firms                    are currently limited to the Big 4.”
                         “I believe the board and management would require that the
                         switch be made to a Big 4 firm.”
                         “Because of our size and technical complexity, we would choose
                         from the remaining Big 3.”
                         “We have operations in 40 countries—all operating on the same
                         systems, procedures. Only a global firm can deal with this
                         complexity in a cost effective manner and continuity of support
                         for US GAAP and local statutory requirements.”
Only one or two of the   “Remainder of Big 4 firms who have an expertise/knowledge of
Big 4 firms	             our industry and a willingness to take on new clients in our
                         industry.”
                         “…Aside from our current auditor, we use another of the Big 4 as
                         a co-source provider of internal audit services, so would not
                         consider them. We are using a third for tax work so it would be
                         hard under Sarbanes-Oxley to switch to them.”
                         “One of the remaining Big 4 would probably be excluded due to
                         potential independence issues.”
                         “Only two firms other than [our current auditor] in the northwest
                         that have energy experience and expertise.”
                         “Current and predecessor audit firm exclusion leaves only two
                         other Big 4 firms. However, both of these firms have existing
                         relationship with major direct competitors.”
Others in addition to    “It would be fairly easy to transition to one of the other ‘Big 4.’
the Big 4 firms	         However, there are probably only a couple regional firms that
                         have industry expertise and a base of operations in Nevada,
                         such that we could utilize them.”
                         “Other three of the Big 4; two other firms of sufficient capability
                         (technical expertise, SEC experience, industry experience,
                         sufficient staff resources-quantity & quality) could probably be
                         identified.”
                         “We would consider the remaining Big 4 firms and could also
                         consider the top 2 non-Big 4 firms. But because of our
                         international operations, our bias would be strongly in favor of a
                         Big 4 firm.”
                         “National firms of prominence.” [This company said it had five
                         options.]
Source: GAO.




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Sufficiency of the                            Almost half of the respondents (43 percent) said they did not have enough
                                              options and desired more. Respondents who said they had enough options
Number of 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

Of the 158 responses to question 25—“Do you think the number of firms your company has as options for auditing and attest services is
enough?”—63 respondents also provided comments. Below are selected comments.
                         General category of
Sufficiency of options explanation                       Comment
Sufficient               General                           “Current firms as sufficient to meet business needs and independence
                                                           rules. Sarbanes-Oxley Act and subsequent rules are more constraining
                                                           than [number] of firms.”
                                                           “[Sufficient] but just barely. I felt much more comfortable with 5 or 6.”
                         Competition/fees                  “Three firms still provide a variety of choices and competition; however, if it
                                                           declines further problems could arise.”
                                                           “There is adequate competition and rivalry among 4 firms.”
                                                           “…While more firms would possibly increase competition, I think the fee
                                                           effect would be modest.”
                         Specialties/expertise	            “The other 3 Big 4 CPA firms should possess appropriate professional
                                                           qualifications and be able to provide services on a global basis.”
                                                           “All 4 firms have good technical competence and sufficient resources.”
Insufficient             General	                          “I do not believe that the 4 major firms offer sufficient alternatives. Too
                                                           many potential conflicts with customers, vendors, partners, etc., to ensure
                                                           independence in all cases.”
                                                           “Considering a need to spread work among non-competitor firms, 4 is too
                                                           small. Also, in-house auditing can't be done by the named firm, audit-
                                                           related work is being spread to others, as is non-audit work; 4 large firms
                                                           limits choices.”
                                                           “It is always better to have more competition.”
                         Competition/fees	                 “It is clear that [auditor] believes they can become more aggressive with
                                                           billings due to the lower number of competitors.”
                                                           “We believe that there are not enough choices. More competition might
                                                           drive audit fees down.”
                         Specialties/expertise	            “We would feel more comfortable about locating a firm that fit our
                                                           geographic and technical needs if there were more options.”




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                                           Company Survey





(Continued From Previous Page)
                         General category of
Sufficiency of options   explanation                    Comment
                                                        “It would be great to have large national alternatives to call on like the old
                                                        Kenneth Leventhal & Co. which had an expertise in real estate and was
                                                        national.”
                         Differentiation                “Not sufficient differentiation in audit approach, personality.”
                                                        “Talent pool is restricted.”
Source: GAO.




Willingness to Use 	                       More than 90 percent of our respondents said that their company would
                                           choose the auditor of a competitor. A few of those respondents provided
Auditor of Competitor                      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

                                           Of the 157 responses to question 26—“Would your company choose as your auditor of
                                           record an accounting firm that currently audits one of your competitors?”—87
                                           respondents also provided comments. Below are selected comments.
                                           Would choose
                                           a competitor’s
                                           auditor?         Comment
                                           No	              "Not in same city. Would not want same personnel auditing a
                                                            competitor."
                                                            "Probably not if a primary competitor in our key markets - concerns
                                                            about auditor personnel discussions, etc."
                                                            "Too much competitive intelligence."
                                                            “Not one of our major, direct competitors. Partly for confidentiality and
                                                            partly because we don't want to be the ‘#2’ client and fail to attract the
                                                            best talent at our auditor.”
                                                            “I would rather say ‘maybe.’ The fact that our major competitor was one
                                                            of the 3 other Big 4 firms available would be a ‘strike’ against that firm
                                                            due to sensitive information.”
                                                            “Industry too small and potential conflicts too risky.”
                                           Yes	             "Comfort that there would be no risk of competitive information being
                                                            communicated within audit firm or to competitor client."
                                                            "The confidentiality and integrity of the audit firm should allow for this."
                                                            "We have too many competitors to use this as a valid screening
                                                            criterion. Also, we have confidence in the ‘Chinese walls’ inside of [our
                                                            auditor]."




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                      Summary of Written Comments to the Public 

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                      (Continued From Previous Page)
                      Would choose
                      a competitor’s
                      auditor?         Comment
                                       "With only 4 firms to choose from, we've had to change our views on
                                       this."
                                       "Because of the limited choices we must be willing to choose a firm that
                                       audits competitors."
                                       "Our current auditor audits a significant portion of our peer group. We
                                       consider that a good thing for addressing new accounting issues."
                                       "This decision will be based on the professional qualifications of the
                                       CPA firm and we would expect that firm to maintain the highest level of
                                       confidentiality. Some of our competitors are audited by other Big 4
                                       firms so it is possible that we may select one of these firms"
                                       As long as the competitor's audit was not performed out of the same
                                       local office.
                      Source: GAO.




Minimum Number of 	   A large majority (82 percent) of respondents said that the minimum
                      number of firms necessary to provide audit services to large companies
Firms Necessary 	     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

                      Of the 147 responses to question 31—“What do you believe is the minimum number of
                      accounting firms necessary to provide audit and attest services to large national and
                      multinational public companies?”—84 respondents also provided comments. Below are
                      selected comments.
                      Number of
                      firms               Comment
                      2-3	              "One firm would be a monopoly—two firms would allow for some
                                        competition."
                                        "If for some reason we had to switch auditors (poor service, conflicts of
                                        interest, etc.) we would have at least two firms to look at."
                                        "Having at least two choices from your current firm is important to
                                        maintain competition. Otherwise, there would be no competition when
                                        you made a decision to change and fees/quality would be adversely
                                        impacted."




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                      Summary of Written Comments to the Public 

                      Company Survey





                      (Continued From Previous Page)
                      Number of
                      firms             Comment
                      4	                "Seems ok now but shouldn't be any less. Better now for primarily
                                        domestic companies like ours."
                                        "We're doing it now. I'd hate to see that number go lower. A higher
                                        number would be preferred."
                                        "If there are more firms than this you have to question whether they
                                        would have the size and scale to support multinational audit."
                                        "There should not be further consolidation within the Big 4 firms. This
                                        group represents our service provider choices given the size and
                                        complexity of [our] worldwide operations."
                                        "Current set up is minimum to provide coverage due to risk of big 4
                                        regressing to an oligopolistic common cost/performance level that
                                        provides insufficient audit quality at too high a cost."
                      5-6	              "No good reason other than 4 is too few. If one more firm fails/choices
                                        for separate firm consulting and it projects - conflicts between
                                        businesses become impossible."
                                        "The minimum of 6 firms is based upon expanding competition is many
                                        geographical areas. Currently with only 4, there are areas where only
                                        2 or 3 are active."
                                        "With four firms, a 25% success rate on bid is high. Fair competition is
                                        better served when the success rate to bid is below 20%."
                                        "Biggest issue is that the potential for overlaps of coverage of closely
                                        associated competitors, vendors and customers makes it harder to
                                        ensure independence absentee conflicts. With six, this should be able
                                        to be avoided."
                      7-12	             "In order to get competition and assure that all your competitors don't
                                        use same people (firms). You need more firms than currently
                                        available. We've lost creativity and competition as a result of
                                        consolidation."
                                        "Right balance of competition in price & service."
                                        "With a restriction that no firm has more than 20% of the market—
                                        defined as member of SEC registrants."
                      Source: GAO.




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




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Appendix III

Summary of Written Comments to the Public 

Company Survey





Table 7: Explanations of Optimal Number of Firms

Of the 136 responses to question 32—“What do you believe is the optimal number of
accounting firms for providing audit and attest services to large national and multinational
public companies?”—66 respondents also provided comments. Below are selected
comments.
Number of
firms              Comment
4-6                "As a firm believer in the efficiency of the market place, 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."
                   “Any more would result in consolidation as we have seen over past 15
                   years.”
                   "Four firms provide enough choices from which to select. Also, by
                   limiting the number of firms to four ensures that there will be capable &
                   talented individuals available at the firms."
                   "We believe that a couple more choices than currently available would
                   be optimal, but any additional beyond that would not be incrementally
                   beneficial to companies."
                   "Need a balance between the healthy level of diverse views of
                   accounting application, and having too much inconsistency."
                   "Two more large firms would help avoid problems - particularly if
                   certain firms are conflicted through board membership, and other
                   issues."
7-8                "The highest quality of service came at a time in history when there
                   were 8 firms."
                   "Big 8 provided more choice, competition."
                   "Beyond 8 I don't believe there will be enough qualified personnel."
                   "More choice would be preferable, although industry experience is very
                   important to us."
                   "Having a few large firms has caused the firms to take on more of a
                   ‘market share’ mentality with too much focus on increasing client base
                   and fees and not enough focus on providing a quality audit."
10 or more	        "The more firms of similar size, caliber, quality, knowledge the more
                   choices for public companies."
                   "Enough for both scale and price competition."
                   "This number [20] would allow for better stratification of clients by size,
                   geographic needs, etc. However current legal environment and
                   complexity of rules and regulations probably makes this difficult. We
                   choose the large firms because of their depth of resources and
                   expertise. Increasing the level of complexity just eliminates more
                   firms."
Source: GAO.




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                           Appendix III

                           Summary of Written Comments to the Public 

                           Company Survey





Suggestions for 	          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
Increasing Competition 	   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

                           Of the 159 responses to question 33—“Do you suggest that any actions be taken to
                           increase competition in the provision of audit and attest services for large national and
                           multinational public companies?”—37 respondents also provided comments. Below are
                           selected comments.
                           Action 

                           suggested?          Comment

                           Yes	               "Perhaps assist the non-Big 4 to become ‘big’ by reducing some
                                              barriers to entry."
                                              "Government assistance to non-Big 4 accounting firms."
                                              "Encourage regional firms to develop national organization."
                                              "Expand the number of companies and reduce the educational
                                              Inequities placed upon new public accountants versus accountants in
                                              the private sector."
                                              "…Help smaller firms grow larger. Incentives [to] companies to use
                                              smaller firms…."
                                              "Financial solvency of existing Big 4 firms must be secured primarily
                                              through tort reform."
                                              "Action should be taken to maintain current level of competition or
                                              choice."
                                              "Liability for audit failures should be limited. 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."
                                              "Allow no more mergers. Fire the idiots in the Justice Dept. that killed
                                              Andersen; absolutely asinine."
                                              "I would like to see some of the firms broken up. How to do so is
                                              another question."
                                              "They will need some effort to break them up. The idea that one firm is
                                              needed to handle worldwide engagements is absurd."
                                              "Require rotation of audit firms."




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                        Summary of Written Comments to the Public 

                        Company Survey





                        (Continued From Previous Page)
                        Action 

                        suggested?        Comment

                                          "Separate audit & attestation services."
                                          "Enable a competing firm to provide a company's Sarbanes-Oxley
                                          attest function."
                        No or don’t know "Market forces should be allowed to work freely without constraints."
                                          "The market will adjust/add more competitors if needed/supported,
                                          over time."
                                          "Allow market based forces to continue to operate without
                                          intervention."
                                          "I believe in free enterprise market conditions & competition will
                                          provide adequate alternatives."
                                          "Do not favor government intervention in the marketplace."
                                          "Current level of competition combined with strong corporate reporting
                                          regulations, appears sufficient to allow market forces to operate."
                                          "I cannot foresee how this would be accomplished. ‘Competition’ for
                                          the audit piece comes into play very infrequently and switching
                                          costs/disruption are very high. I oppose any government action to
                                          encourage a breakup."
                                          "There should be opportunities for smaller firms (e.g., BDO Seidman)
                                          to get bigger and be able to handle large, international accounts."
                                          "Big 4 firms are competitive today. No need to take action."
                                          "Enough pressure on price, quality pressure remains high."
                        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.




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Appendix III

Summary of Written Comments to the Public 

Company Survey





Table 9: Additional Comments

Drawn from the 33 answers given to question 35—“Do you have any additional comments
on any of the issues covered by this survey?”
Type of

Comment            Comment

Consolidation     "The number of firms cannot be permitted to go below 4. To destroy a
concerns          firm like Andersen because of the action of a few partners was
                  nonsense and must not happen again. The remaining firms have now
                  a license to increase fees disproportionately to existing levels,
                  especially with Sarbanes-Oxley. Has anyone calculated the cost to us
                  industry of this and measured the impact on future earnings and jobs -
                  I doubt it!"
                  "Having only 4 large firms is a concern! However, the benefit should
                  be: —higher quality—less variation in advice— stronger financial
                  resources—more accountability. If these benefits an not achieved,
                  then government may need to intervene."
                  "…Our biggest concern is the ease at which a firm can disappear (e.g.,
                  A. Andersen)….Competition does not affect us now, but actions
                  beyond our control (e.g., firm disappears) could put us in a position to
                  search…."
                  "4 major audit firms is too few! 6+ is a minimum."
                  "It would be in the best interest of the public to have more choices.
                  However, the reason there is less is due to the fixed infrastructure cost
                  of large firms and the need for a global reach. Therefore size does
                  count."
                  "Consolidation of auditors and increased regulation has greatly
                  increased the cost of governance. I'm not sure society is benefiting
                  from this."
                  "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 provided by
                  government intervention."
                  "…I am concerned about the stability of the existing Big 4 firms with
                  the implications from audit-failure lawsuits. Can these firms survive
                  financially an Enron-like lawsuit? What choices do global fortune 500
                  companies have if another one of these firms fail? The next tier of
                  firms has not developed a strong enough global network to be viewed
                  as viable."
                  The government forced Arthur Andersen out of business! I certainly
                  don't condone the activities of a few who did ‘bad,’ but 99.9% of the AA
                  people were honest, hard-working people, with the highest integrity.”




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Appendix III

Summary of Written Comments to the Public 

Company Survey





(Continued From Previous Page)
Type of

Comment            Comment

Cost and quality   "The accounting and auditing profession is clearly broken. The source
and concerns       1 root cause appears to be the enormous compensation levels of the
                   partners in the Big 4—often exceeding those of the CFOs they are
                   suppose to audit. There is an eternal quest for higher fees, higher
                   profits and growth. The result of which is to perform less work for more
                   money. Auditing standards need to be very specific - as an example,
                   review the documentation/testing now performed on fraud. Even
                   though numerous standards on fraud detection have been released,
                   the firms have not substantially changed their audits."
                   "I think the public accounting profession is in disarray predominantly
                   because, for several years, audit expertise has been de-emphasized
                   for selling. While this may appear to be an economic model for
                   success, it has led to major problems, some of which we have seen
                   coming to fruition recently. (i.e., lack of ethical standards, lack of basic
                   accounting & auditing knowledge, etc.)"
                   "The evolution of the current system of auditing U.S. companies is
                   bordering on being worthless. We have kids from colleges with no
                   business experience auditing companies using checklists & cookie
                   cutter approaches rather than using sound business experience to
                   ferret out problems."
                   "Very timely subject. I am greatly concerned about this topic. It is very
                   difficult to manage audit costs. We are paying $150/hour for a college
                   graduate with very little experience; yet that is what the lack of
                   competition brings. We are classed for 4 different partner/(3 hrs each)
                   at $450/hr reviews on a simple SEC consent letter and we are told ‘that
                   is our firm policy.’"
                   "The biggest issue today with audit quality is 'check list' GAAP audits.
                   We need to be standards based, not rules based. Audits should
                   employ thoughtful and insightful analysis of the company, industry and
                   economic environment. This issue however will only be corrected with
                   well thought out tax reform that allows thoughtful analysis of facts and
                   national resolutions of disputes."
                   "Our 2002 audit fees are about 4x those of a decade ago. I do not
                   believe our stake holders would conclude that they are receiving 4x the
                   value. I do not believe there is a single solution that would be effective,
                   but enthusiastically endorse the efforts by GAO to explore the matter."
                   "As indicated early on in the survey, my perception of the
                   real problem with auditing today is as follows: —complex standard
                   setting with minimal consideration of the impact or value to the
                   investing public—audit firms treat audit like a ‘loss leader’ for other
                   selling opportunities. — audit firms financially reward partners for
                   selling—not performing quality audits. Audit staff are inadequately
                   trained to keep up with changing accounting standards and the
                   complexity of operations."
                   Engagement partners need very high level of technical competence
                   not sales skills—engagement partners should be subject to ongoing
                   periodic proficiency evaluation of some type.




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Company Survey





(Continued From Previous Page)
Type of

Comment           Comment

                  "My responses do not reflect my expectations about fees in the future.
                  Although our fees did not increase in 2002, I anticipate that we will see
                  significant increases in the future (50%-100%) to cover increased
                  hours required as a result of the new provisions under Sarbanes-Oxley
                  and the audit firms bearing the cost of securities litigation. We need
                  smart professionals performing our audits, and increased exposure to
                  audit failures drives these people to jobs in industry."
Other concerns	   "I have a developing concern. The Big 4 provide excellent audit &
                  attest services in the financial area. Legislation is
                  preventing/restricting ‘other’ services. Yet corporations are reporting in
                  more than financial areas, and the shareholders, employees and public
                  want these other areas (environmental, social, etc.) to be attested and
                  verified. It would seem beneficial to have the named audit firm provide
                  such verification. Yet current legislative developments will prevent that.
                  It seem that the named auditor could provide the best overall
                  verification. As corporations report in global reporting initiative (GRI)
                  reports, on sustainability report on triple bottom line (economic,
                  environmental & social) reports, will there have to be multiple verifying
                  firms?"
                  "Litigation/securities reform. Lawsuits are sapping capital & causing
                  audit fees to rise. CEO & CFOs need to do hard time for the misery
                  they have inflicted on the rest of us. SEC needs to be a bit restrained
                  in interpreting S.O. act—we're getting a little too much enthusiasm
                  right now."
                  "Summary points: (1) need more competition in the auditing industry.
                  (2) don't know how best to accomplish this!! (3) in any event - need the
                  SEC to be more active in the resolution of accounting issues - not just
                  policy setting!"
                  "Sarbanes-Oxley legislation has been primarily responsible for
                  increasing fees and reducing auditor selection choices."
                  "Strongly opposed to mandatory rotation of independent firms. The
                  start up costs to corporations would be significant. Also mandatory
                  rotations may limit the individual firms from innovating to differentiate
                  their service offering in the marketplace…."
                  "I am leery of government intervention as it tends to create other
                  problems. I believe the current focus on audit quality and corporate
                  governance which is arising out of government policies will (1) raise
                  costs of being public significantly, (2) fuel going private, (3) change the
                  capital profile of investors, [and] (4) lead to less efficient markets and
                  less creativity."




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Summary of Written Comments to the Public 

Company Survey





(Continued From Previous Page)
Type of

Comment           Comment

                  "The biggest ‘independence’ and ‘quality’ issues faced by corporate
                  America today are from credit rating agencies, e.g., S&P and Moody’s,
                  not auditors. Rating agencies are a de facto duopoly, are opaque (how
                  they derive their ratings is largely not determinable based on
                  quantitative measures), and full of conflicts (selling consulting services
                  regarding how to improve a company's rating). The government
                  should (1) forbid rating agencies to sell rating consulting services, (2)
                  require greater disclosure regarding ratings methodology, and as a last
                  resort (3) consider breaking up S&P and Moody’s or other action to
                  lessen their duopoly power."
                  "Companies should be encouraged, not discouraged, to use their audit
                  firm for tax return and planning support because of the efficiencies
                  gained."
                  "Consider having investors directly fund audits by an assessment
                  against assets invested in public entities. Investors could provide
                  audits through a nongovernment entity like NASD, or they could
                  contract with existing audit firms."
Source: GAO.




Page 50                                        GAO-03-1158 Accounting Firm Consolidation
Appendix IV

GAO Contacts and Staff Acknowledgments




GAO Contacts	     Davi M. D’Agostino (202) 512-8678
                  Orice M. Williams (202) 512-8678



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




(250159)          Page 51                              GAO-03-1158 Accounting Firm Consolidation
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