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Bring on competition in the accounting profession: the CEO of accounting firm Grant Thornton LLP argues for more competition, saying that depending on only the 'Big Four' is risky for financial markets, and that clients should have more choices.

After decades of consolidation, corporate scandals, the dissolution of Arthur Andersen and the enactment of the Sarbanes-Oxley Act of 2002, the once predictable world of accounting has been turned upside down.

What was once the "Big Eight" has been reduced to only four firms (the "Big Four") that, according to a 2003 study by the Government Accountability Office (GAO), audit 99 percent of all public company sales. So great is the level of concentration that some in the financial markets and media--including The New York Times, The Economist, The Financial Times and The Wall Street Journal--are beginning to ponder if the audit profession could absorb another large firm failure.

Still, no one has fully articulated the risks or agreed on the optimal solution for financial markets stability.

Meanwhile, the effects of audit firm concentration, combined with the impact of the Sarbanes-Oxley Act, are becoming increasingly apparent. Audit Analytics, a company that tracks accounting industry information, recently reported Big Four firms resigned 210 accounts in 2004, up 169 percent from 2002.

While some resignations by the Big Four followed "unclean" opinions of companies' financial statements, others resulted from decisions by the Big Four to sharpen their market focus. The realities of today's marketplace stretch these firms to capacity, forcing them to concentrate on their largest and most profitable clients. In the future, other Big Four clients will inevitably be turned away.

At the same time, companies faced with the mounting costs of Sarbanes-Oxley compliance are also discovering they can better match their needs and realize improved service by moving away from the Big Four to other global, national and regional accounting firms. As Section 404 requirements take effect for smaller, non-accelerated filers in 2005, still more clients may make the decision to switch to non-Big Four auditors better suited to meet their needs and budget.

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Independent audits are a linchpin between a company's financial statements and its credibility to the investing public. Of the 300 business leaders surveyed by Wirthlin Worldwide in 2004, 61 percent said inaccurate financial statements were a critical or very serious threat to their companies--a percentage larger than that associated with terrorism, natural disasters, a stagnant economy, product recall or litigation. Wirthlin is an independent market research firm that conducts Grant Thornton's biannual "Survey of U.S. Business Leaders."

The decision to select a new audit firm, therefore, is not an easy one, but the decision to leave an auditor if company needs are not met should be.

According to The Conference Board Commission on Public Trust and Private Enterprise best-practice suggestions, companies should evaluate their audit firms annually--with a more extensive examination, including review of other firms--every five to seven years.

As part of this process, companies should be cognizant of audit firm options, realizing bigger is not always better. While the very largest--Fortune 500 size--public companies may be confined to the Big Four, other companies can be served as well, and in some cases better, I believe, by other global, national or regional firms with skill sets tailored to their market segment or industry. As companies separate audit and non-audit functions to comply with Sarbanes-Oxley requirements, these other firms will play an increasingly important role.

So, how should companies evaluate their auditors?

To secure the best service and value for shareholders, decision-makers should first decide what they want--and need--from their auditors. Expectations should be defined in terms of service, quality, capabilities, depth of talent, industry expertise and geographic reach, as well as attention, responsiveness, brand and image.

Companies should then evaluate an array of qualified firms to determine which firm best meets their qualifications. Effectively matching company size and requirements with firm size and capabilities, companies often find the expertise and personalized attention of a non-Big Four firm is actually a better fit as they strive to meet the challenges of Sarbanes-Oxley.

Concurrently, regulators and other capital markets influencers need to open the door to a larger universe of firms so companies are not penalized for choosing a non-Big Four firm. Many qualified firms are excluded from consideration simply because market influencers do not understand the full depth of the accounting profession or because guidelines requiring a "nationally recognized audit firm" are misinterpreted.

Companies should be free to change auditors without stigma and the automatic raising of red flags by the investment community and others. Companies and their decision-makers deserve to have all of these choices open to them.

Times have changed. Auditors have changed. Companies' decisions have changed. It's time we embrace this reality and examine all of the possibilities.

Edward E. Nusbaum is CEO of Grant Thornton LLP. He will be speaking at FEI's Summit in Chicago May 18-20, 2005.
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Title Annotation:from where I sit
Author:Nusbaum, Edward E.
Publication:Financial Executive
Geographic Code:1USA
Date:Apr 1, 2005
Words:779
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