Several articles have recently pointed to an interesting development in the world of auditing. Swamped with the demands of Sarbanes-Oxley implementation and with the increased complexity of even ordinary audits, the Big Four are less willing to handle smaller or private accounts. One industry insider reported that the number of hours for a typical audit have increased by 30%, and its getting harder to find qualified auditors to do the work. The Big Four are turning many formerly loyal accounts away, and giving the impression in general that they are less interested in such work than they used to be.
So who benefits from such a major industry-wide shift?Turns out to be the former ‘second tier’ players — companies such as BDO Seidman, who have picked up clients such as the $2 Billion revenue chemicals giant, Hercules. Another name that comes up a lot is Grant Thornton, the fifth largest accounting firm.
According to an article in Business Week (August 22, 2005, p. 39) 238 companies with revenue of $100 million plus switched their auditors in 2004, up from 115 in 2003. The Big Four have all suffered significant net losses while the second-tier players have gained.
Another interesting aspect of this story is a second – order effect. Used to be that a compelling argument for using a Big Four firm was that your analysts would dump on you if you didn’t. Today, the picture has changed, and smaller firms are seen as reputable enough to instill investor confidence. According to Business Week, citing Deutsche Bank analyst David Begleiter, “it’s positive, actually. IT’s savign a lot of money.”. What nobody is talking about is that this shift in analyst perceptions will dramatically change the traditional barriers to entry in accounting. The Big Four had better watch out – the barriers that allowed them to worry mostly about each other in a competitive setting have just begun to topple.
Second order benefits, anyone?