[...]... company audit market has remained highly concentrated For large public companies, the market remains highly concentrated, with the four largest accounting firms auditing the financial statements of almost all large public companies However, the audit market for smaller public companies has become much less concentrated since 2002 Larger public companies indicated that the industry expertise and technical... GAO-08-163 Public Companies overseeing the functioning of the audit market could take several actions in response to another large audit firm’s leaving the market Overall Market for Public Company Audits Remains Highly Concentrated To assess the degree of concentration in a market, we used the preferred practice of examining the proportion of each competing seller’s in this case accounting firms—share... of the largest firms was not very active in those industries For example, in 2006 one of the largest firms held 77 percent of the market for public company audits in the agriculture, forestry, fishing, and hunting industry, while another of the largest firms 32 had only a 1 percent market share Consistent with reporting that they were not likely to use midsize and smaller audit firms, large companies. .. firms to exercise market power is the Hirschman-Herfindahl 23 Index (HHI) The HHI for a market is calculated using the various market shares (in the case of the audit market, measured by total audit fees collected) of all the firms competing to offer services within that market In 2006, the HHI for the overall market for public company audits was 2,300 According to guidelines issued jointly by the Department... firms Largest firms Source: GAO analysis of Audit Analytics data Note: Totals do not always add to 100 percent due to rounding As the share of smaller companies audited by the largest firms has declined, concentration in the audit market for these companies has eased significantly By grouping public companies by their revenues and calculating HHIs for these groupings, we found that while the audit market. .. importance in deciding to retain their current auditor, although only 9 percent listed these restrictions as of great or very great 30 importance In interviews, officials from a few large public companies indicated that they maintained options while remaining in compliance with independence requirements by not using at least one of the largest firms for prohibited nonaudit services, in some cases by using... prepare audit reports for public companies; • establishing auditing, quality control, ethics, independence, and other standards relating to the preparation of audit reports for public companies; • conducting inspections of registered public accounting firms; and Page 11 GAO-08-163 Public Companies • conducting investigations and disciplinary proceedings of registered public accounting firms and those associated... reporting.) In addition, 84 percent of companies reporting that their audit fees had increased since 2003 indicated on our survey that the audit of internal control over financial reporting was one of the reasons for the increase To date, only larger public companies which SEC calls accelerated filers—have had to comply with the new requirements for assessing these internal controls Smaller public companies those... markets were not paying higher audit fees than companies in sectors with less concentrated audit markets However, for the largest companies we found some evidence that audit market concentration within an industry did have a 36 very small effect on fees More precisely, after isolating the effect of other factors, our model results indicated that large companies in industries with audit markets that were... as independent and expert professionals who will conduct thorough audits In the event that companies are alleged to have misled the public or presented falsified financial information, the accounting firms that performed those audits are also sometimes included in suits brought by investors or actions pursued by regulators Accounting Firm Structure Most accounting firms that audit public companies in