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Are the Big Four Audit Firms Too Big to Fail?

Published: | February 4, 2013 |

Author: | Martha Lagace |

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Executive Summary:

Although the number of audit firms has decreased over the past few decades, concerns that the "Big Four" survivors have become too big to fail may be a stretch. Research by professor Karthik Ramanna and colleagues suggests instead that audit firms are more concerned about taking risks.

About Faculty in this Article:

Karthik Ramanna is an associate professor in the Accounting and Management unit at Harvard Business School.

* More Working Knowledge from Karthik Ramanna

* Karthik Ramanna - Faculty

Research

* E-mail Karthik Ramanna: kramanna@hbs.edu

Are auditors becoming too big to fail? For over a decade, there have been articles and op-eds in the popular and business press arguing that the auditing industry, currently dominated by Deloitte & Touche, Ernst & Young, KPMG, and PwC, is a tightening oligopoly, increasingly insulated from the risks of failure.

Adding to this concern is that even as the number of mega audit firms has contracted from eight in the 1980s to four today, their combined market share remains formidable, especially in the United States. The Government Accountability Office, the investigative arm of Congress, periodically raises concerns about audit-industry concentration and suggests ways to boost growth of smaller firms. The consolidation raises the issue of how the surviving big auditors and the nation's accounting regulators will manage their relationship and what the effects will be on accounting rules and thus on capital markets, observes Karthik Ramanna, an associate professor and Henry B. Arthur Fellow in the Accounting and Management unit at Harvard Business School, where he studies the political economy of corporate accountability and financial reporting.

Several scenarios are possible.

"There are important...