Auditing

Big Four Losing Ground to Smaller Firms

Public companies left the largest auditors in droves last year in favor of smaller firms.
Lisa YoonFebruary 11, 2004

When it comes to auditors, many companies are apparently deciding that bigger is not necessarily better.

That assessment comes courtesy of Auditor-Trak, a database that records more than 12,000 auditor changes. In 2003, PricewaterhouseCoopers, KPMG, Deloitte & Touche, and Ernst & Young each lost more public-company audit clients than it gained, according to a report on SmartPros.com.

Meanwhile, more than half of those clients migrated to smaller auditing firms — or even local ones — instead of hiring another Big Four auditor.

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Smaller national firms such as Grant Thornton, BDO Seidman, and McGladrey & Pullen nabbed a total of more than 21 percent of the clients that left the Big Four, according to Auditor-Trak’s analysis. Another 34 percent went with a regional or local firm as a replacement.

Among the Big Four, the biggest loser was PwC; the firm lost 91 clients, according to the Auditor-Trak report. PwC lost $46.4 billion of its revenue as a result of losing such clients as Kmart and Pharmacia.

KPMG lost the fewest audit clients: 51 companies, including Neuberger Berman Inc. and Spiegel Inc. Moreover, the firm actually picked up a net gain of $59.7 billion in combined audit-client revenue, though its overall client assets dropped by $17.3 billion.

Ernst & Young finished 2003 with 76 fewer audit clients. American Skandia Life Insurance and Steak n Shake restaurants were among those that departed. Deloitte & Touche lost 65 clients, including the Denny’s restaurant chain and petroleum company Citgo.

Auditor-Trak could explain only some of the client exodus. One reason is a market shakeout in the wake of Andersen’s 2002 collapse, according to Richard Ossoff, the report’s publisher. Though companies in 2002 flocked to the other four audit firms after the dissolution of Andersen, Ossoff explained to SmartPros, “We expected 2003 would be a year of rationalization of their client bases — and that has clearly taken place.”

Another trend likely to send more audit clients outside the Big Four, according to Ossoff, is that companies are being more selective in their auditor choices because of a concern about meeting Sarbanes-Oxley requirements. (The publisher didn’t address a possible mitigating factor — whether the smaller players could handle the complexities of Sarbox.)

Despite such possible explanations for the movement to smaller firms, “these circumstances alone do not seem to fully explain the extent of these client losses,” he said.