US watchdog says "Big 4" audit firms enough for now

By Emily Chasan

NEW YORK, Jan 10 (Reuters) - Most large public companies feel severely limited by having just the "Big Four" auditor firms to work with, but they do not actually experience many bad effects from having so few choices, according to a report on Thursday from the Government Accountability Office (GAO).

According to the U.S. government watchdog, while academics and business groups have proposed reducing concentration among the audit firms and suggested auditor liability caps to help smaller firms grow, there is no compelling need to change the status quo immediately.

The report was the GAO's second survey of audit concentration.

After a fifth large auditor, Arthur Andersen, collapsed in the wake of the Enron scandal, the GAO, under orders from Congress, surveyed large companies to determine whether having fewer auditors affected the market.

The report, published in 2003, found that most large U.S. companies will not even consider hiring an auditor from outside the ranks of the Big 4, but most said they would prefer having more than four.

In the follow-up report released on Thursday, the GAO said that, currently, the largest accounting firms -- PricewaterhouseCoopers [PWC.UL], KPMG [KPMG.UL], Ernst & Young [ERNY.UL] and Deloitte & Touche [DLTE.UL] -- audit 98 percent of U.S. companies with annual revenues over $1 billion.

And while some might expect the concentration to increase audit fees, the report found the lack did not significantly lead to higher prices. Rather, the GAO found that other costs, such as increasing accounting and auditing requirements, and higher costs to attract and retain accounting employees led to the higher fees firms have paid in the past few years.

The report also revealed that some 82 percent of large public companies saw their choice of auditor as being limited to just 3 or fewer firms, while smaller public companies believe they have more choices.

In fact, the report found that the proportion of the smallest public companies that used the "Big 4" auditors fell by half between 2002 and 2006.

But even if large public companies believe they have insufficient choices, the current situation is unlikely to change because those companies are still hesitant to go to a mid-size firm such as Grant Thornton, or BDO Seidman, the GAO said.

"A significant majority (of mid-size and smaller accounting firms) is not interested in auditing large public companies and those that are interested face various challenges in expanding their capability to do so," the GAO said in the report, citing difficulties such as smaller international staffs and a lack of name recognition. (Reporting by Emily Chasan Editing by Andre Grenon)