Break Up the Big Four?

Companies that are dissatisfied with their current auditor don't have much choice when it comes to picking another. In fact, for the next few months, they may have only one alternative. In April, the Securities and Exchange Commission barred Ernst & Young from accepting new audit clients for the next six months as a punishment for abuse of auditor-independence rules. Companies that have a consulting relationship with one of the two remaining firms and want to switch auditors are down to one option.

The dearth of alternatives has led some critics to advocate splitting the Big Four into as many as eight accounting firms. One such critic is Richard Breeden, former SEC commissioner and court-appointed monitor for MCI. "The next head of antitrust at the [Department of Justice] should just sit down with [European Union competition commissioner] Mario Monti and agree to break the Big Four firms up," he says. "The concentration is too big to be healthy."

Robert Howell, a distinguished visiting professor at Dartmouth College's Tuck School of Business, says, "It's a better solution than trying to cobble together some smaller firms."

Although William McDonough, chairman of the Public Company Accounting Oversight Board, which polices auditors, acknowledges the scarcity of large firms, he stops short of calling for a breakup. Late last year he said, "The lack of competition is a problem… . But what can be done about it?"

Of course, a breakup would be extremely complex, but Professor Howell insists it's a realistic option. Says Howell: "Public accounting leaders who say this can't be done are just trying to save their own necks." —Joseph McCafferty