College of Business: University of Illinois at Urbana-Champaign

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LYCEUM: Grant Thornton's Fusco on the Changing Reality of Auditor Concentration


10/24/2006

Eighty percent of all publicly traded firms in the country are audited by one of the Big Four accounting firms. That may be good for the Big Four’s bottom line, but it leaves companies with few choices, and puts the entire capital market at risk, said Cono Fusco, Managing Partner—Strategic Relationships with Grant Thornton LLP.

“What happens if one of these firms goes out of business?” Fusco asked during his mid- October Lyceum presentation. “There’s too much concentration in the hands of so few.”

This wasn’t always the case, he said. In the 1950s, there were 25 large firms, yet by 1965, there were only eight. The number shrank throughout the ‘80s and ‘90s, and with the collapse of Arthur Anderson LLP in 2002, only four were left standing.

Since then, the number of companies switching auditors has increased significantly, as the Big Four focus on their largest and most profitable clients, he said. That, combined with the increased workload generated by Sarbanes-Oxley and a shortage of university graduates to fill the demand for more auditors, has lead to a fundamental shift in the auditing industry. It’s a shift that Fusco believes no longer can be ignored.

Yet while he is pleased that the issue has registered on the radar of the Public Company Accounting Oversight Board, the Securities and Exchange Commission, and Oxera, among others, he does not think the solution lies in government mandates to break up the Big Four, imposing limits on market share, mandatory firm rotation, or joint auditing. “The issue needs to be fixed, but not necessarily through regulation,” he said.

Instead, Fusco argued that the ultimate fix is market driven. He suggested that companies periodically review their auditing arrangements to ensure they have a good fit with their auditors – what he calls “right sizing.”

“This is a rebirth of accounting as a profession,” he said. “It’s about service. It’s about value. It’s about quality. It’s about reach.”

He noted that since 2003, Big Four firms have experienced a net loss of 1,373 audits. More than 68 percent of companies have selected mid-tier or smaller regional firms to replace them. This is especially true with Fortune 1501-3000 companies, as mid-tier firms have almost doubled their footprints within those organizations.

“The large companies are not going to change auditors very much, unless there is an audit scandal,” he said. “What it comes down to, frankly, is that at the million dollar level there are a lot of firms that can do the work.”

Fusco concluded by urging students to consider working for these same smaller firms.
“You should not dismiss local and regional firms as a career opportunity,” he said.

UIUC College of Business