Background

Since the Securities Act of 1933 and the Securities Exchange Act of 1934  established the principle of full disclosure—requiring public companies to  provide full and accurate information to the investing public—public  accounting firms have played a critical role in companies’ financial  reporting and disclosure.  While officers and directors of a public company  are responsible for the preparation and content of financial statements that  fully and accurately reflect the company’s financial condition and the  results of its operations, public accounting firms, which function as  independent external auditors are expected to provide an additional  safeguard.  The external auditor is responsible for auditing companies’  financial statements in accordance with generally accepted auditing  standards (GAAS) to provide reasonable assurance that a company’s  financial statements are fairly presented in all material respects in  accordance with generally accepted accounting principles (GAAP).
Public accounting firms offer a broad range of services to their clients.  In  addition to traditional audit and attest and tax services, firms also offer  consulting services in areas such as information technology.  Although all  of the Big 4 firms continue to offer certain consulting services, three of the  Big 4 have sold or divested portions of their consulting businesses.Following the implementation of Sarbanes-Oxley, SEC issued new  independence rules in March 2003, which place additional limitations on  management consulting and other nonaudit services that firms could  provide to their audit clients.  Sarbanes-Oxley also requires auditors to  report to and be overseen by a public company’s audit committee, which  consists of members of the company’s board of directors who are required  to be independent.  The external auditor also interacts closely with the  company’s senior management, including the chief financial officer.

	Most Respondents Were Satisfied with Their Auditor, Had Long-term Relationships, and Used Their Auditor for a Variety of Services

Most of the survey respondents said they were satisfied with their current  auditor.  Moreover, half of the respondents reported that they have had the  same auditor of record for 10 or more years. Respondents gave various  reasons for changing auditors, including concerns about their auditor’s  reputation and fees.  They also told us what factors would drive their  decision in choosing a new auditor.  Almost all respondents said that they  used their auditor of record for more than audit and attest functions,  including tax-related services and assistance with company debt and equity  offerings.

		High Degree of Client Satisfaction and Auditor Tenure

Overall, 80 percent (127 out of 158 respondents answering this question) of  the respondents said they were “very” or “somewhat” satisfied with their  current auditor of record, while 12 percent (19 of 158) said that they were  very or somewhat dissatisfied, and 8 percent (12 of 158) said they were  neither satisfied nor dissatisfied.  Similarly, of the 135 respondents that  provided the year they first employed their auditor of record, half of them  said they had retained their auditor of record for 10 years or more.  The  average tenure was 19 years, ranging from less than 1 year to 94 years.  When the 37 public companies that switched from Andersen because of  Andersen’s dissolution were excluded, the average tenure increased to 25  years, and the percentage of public companies that had retained their  auditor for 10 years or more increased to 68 percent.  Figure 1 shows the  length of the relationship these respondents had with their current auditor.
We found that there was an association between the length of the company- auditor relationship and satisfaction.  That is, the longer the relationship  between a company and its auditor, the more likely that the company was  satisfied with its auditor of record.  As figure 2 shows, 94 percent (30 of 32)  of companies with auditor tenure of more than 30 years were very or  somewhat satisfied with their auditor, whereas 70 percent (28 of 40) of  companies using their current auditor for 1 year or less said they were very  or somewhat satisfied with their auditor.
Sixty-one of the respondents reported that they switched auditors since  1987.  Of those 61, 37 were former Andersen clients that switched within  the last 2 years as a result of Andersen’s dissolution, five were former  Andersen clients that switched over 2 years ago for reasons other than  Andersen’s dissolution, and 19 were other respondents that switched from  another Big 4 or non-Big firm since 1987, as shown in table 1.  The  respondents who were clients of Andersen and had to change auditors  within the last 2 years as a result of Andersen’s dissolution were somewhat  less satisfied with their current auditor than a separate group of 19  respondents that had switched from another Big 4 or non-Big 4 firm since  1987.  Of the 37 former Andersen clients, 25 respondents indicated that they  were satisfied with their current auditor of record, seven said that they  were dissatisfied with their current auditor, and five said they were neither  satisfied nor dissatisfied.  Of the 19 other respondents that switched from  other firms since 1987, proportionally more (16 respondents) said they  were satisfied with their current auditor of record, while only one was  somewhat dissatisfied and two were neither satisfied nor dissatisfied.  While this suggests that clients leaving Andersen because of its dissolution  are less satisfied with their current audit arrangements than other firms  that had changed auditors in the past, it is important to note that the 37  respondents who were former Andersen clients also had the shortest  tenures with their current auditors, which may in part explain their lower  satisfaction.

		Respondents Cited Varied Reasons for Changing Auditors and Factors for Selecting a New Auditor

Respondents gave a variety of reasons for switching, including concerns  about the reputation of their auditor, the need to retain an auditor that  could meet companies’ new demands, concerns about the level of fees  charged for audit and attest services, and increased demands resulting  from a corporate merger or change in company ownership.  Four  respondents said their relationship with their former auditor was no longer  working, and another respondent cited a disagreement over an accounting  policy that resulted in the switch.  While none of the respondents said their  company had a mandatory rotation policy, two respondents said their  companies switched auditors to obtain a “fresh perspective” and “as a form  of good governance.”
When we asked the respondents what factors would drive their decision if  they had to choose a new auditor, they most often cited “quality of services  offered” as a factor of “very great” or “great” importance (99 percent or 157  of 159). The second most highly rated factor was “reputation or name  recognition of the auditor” (83 percent or 132 of 159), followed by “industry  specialization or expertise” (81 percent or 128 of 159).

		Almost All Respondents Used Auditors for Nonaudit Services

Ninety-four percent (149 of 159) of respondents obtained other services  from their auditors in addition to audit and attest services.  We asked  respondents if their auditor provided any of the three following categories  of services:  tax-related, assistance with company debt and equity offerings,  and “other services.”  Only 10 companies, or 6 percent, reported that their  auditor of record provided them with only audit and attest services.  Respondents for the remaining 149 companies said they used their auditor  of record for one or a combination of other services.  Specifically, 87  percent (130 of 149) said their auditor provided tax-related services, such  as tax preparation and 71 percent (106 of 149) said they received assistance  with company debt and equity offerings.  Thirty-seven percent (55 of 149)  said they received other services, such as merger and acquisition due  diligence, internal control reviews, or tax planning assistance.

	Respondents Had Differing Views about Past Consolidation’s Influence on Audit Fees but Most Agreed That It Had Little or No Influence on Audit Quality or Auditor Independence

Respondents had differing views about the impact of past consolidation  among the largest accounting firms on audit fees, but most agreed that it  had little or no influence on audit quality or auditor independence.  While  93 percent (147 of 158) of respondents said that their audit fees increased  over the past decade, they were almost evenly divided about whether past  consolidation of the largest accounting firms had a “moderate upward” or  “great upward” influence (47 percent or 75 of 158) or little or no influence  (46 percent or 72 of 158).  See figure 4.
More respondents said that audit quality had increased over the past  decade rather than decreased, but the majority of them did not believe that  past consolidation of the largest accounting firms influenced these  changes.  Specifically, 44 percent (69 of 158) of the respondents said that  audit quality had increased, while 18 percent (29 of 158) said quality had  decreased and 37 percent (58 of 158) said there had been little or no  change.  However, 63 percent (100 of 158) of the respondents believed that  consolidation of the largest firms had little or no influence on the quality of  audit and attest services their companies received (see fig. 5).
The respondents provided other reasons for changes in audit quality,  including changes in audit partner, new regulations and audit standards,  and technical expertise of the audit team.  Several respondents cited the  importance of the assigned audit partner to overall audit quality.  One  respondent noted, “The partner in charge is critical .”  Another respondent said audit quality improved because of “more personal  involvement of the audit partner.”  Other respondents believed that  changes in audit quality were due to changes in audit methodologies and  the Sarbanes-Oxley Act.  According to one respondent, “The change in the  depth and quality of the audit process is due to a more rigorous regulatory  and litigation environment and not to audit firm consolidation.”  Another  respondent noted, “Following the Sarbanes-Oxley Act and Andersen’s  downfall, other firms are increasing the level of work they do and the depth  of the audit.”  Finally, we received comments about the skills and  experience of the audit team.  One respondent wrote, “Answers to  accounting questions take too long and quality of staff is poor.  Fundamental audit practices are gone.”  Another respondent similarly  commented that the “level of experience seems to have declined,  contributing to lower quality,  partners supervise more jobs.”  However, that same respondent also noted that since his company had  changed auditors, the “level of experience has improved.”
Finally, 59 percent (94 of 158) of the respondents indicated that their  auditor had become more independent over the past decade, while 1  percent (2 of 158) said that their auditor had become less independent and  38 percent (60 of 158) said that there had been no change in their auditor’s  independence.  However, 72 percent (114 of 158) of the respondents also  said that past consolidations of the largest accounting firms had little or no  influence on auditor independence (see fig. 6).  The remaining views  varied, with 16 percent (26 of 158) of respondents believing that the  consolidations had a negative influence on auditor independence and 8  percent (12 of 158) saying that it had a positive influence.  Some of the  respondents commented that audits had been positively affected by SEC’s  new independence requirements, while one respondent said that the new  rules had not significantly enhanced auditor independence.

	Respondents Were Concerned That Limited Audit Choices May Create Problems

Respondents raised concerns about the future implications of  consolidation, especially about possible limitations on audit firm choice.  A  significant majority of respondents said that their companies would not use  a non-Big 4 accounting firm for audit services, which limited their choices.  While most respondents said that they would be able to use another Big 4  firm as their auditor of record if they had to change, they also said that they  would prefer more large firms from which to choose.  Moreover, they  raised concerns that further consolidation among the largest accounting  firms would result in too few choices.  Yet, despite those concerns, most  respondents favored allowing market forces to dictate the level of  competition in the market for audit and attest services.

		Respondents Preferred Big 4 Firms over Non-Big 4 Firms for Audit Services

Eighty-eight percent (139 of 158) of respondents indicated that they would  not consider using a non-Big 4 firm for audit and attest services.  As shown  in figure 7, nearly all the respondents cited three factors as being of great or  very great importance in determining why their companies would not use a  non-Big 4 firm:  (1) auditor’s technical skills and knowledge of the  company’s industry (91 percent or 126 of 138); (2) the reputation of the  accounting firm (91 percent or 126 of 138); and (3) the capacity of the firm  (90 percent or 125 of 138).  These three factors also corresponded closely  to the most frequently cited factors in choosing a new auditor as previously  noted in figure 3.  One respondent noted, “We have operations in 40  countries and want all our auditors to operate with the same systems and  procedures.  Only a global firm can deal with this complexity in a cost- effective manner and give us the continuity of support for U.S. generally  accepted accounting principles and local statutory requirements.”  Another  respondent noted, “We would want a Big 4 firm because of its global  presence and capabilities, reputation, and depth of resources available.”  Sixty-five percent (89 of 137) of respondents also cited geographic  presence and 60 percent (81 of 134) cited the lack of consent from the  company’s board of directors as reasons of great or very great importance.  Respondents also provided the following reasons as to why they would not  use a non-Big 4 firm:  their shareholders would not want a non-Big 4 firm;  to gain investor confidence or stock market acceptance; Big 4 firms have  financial resources to stand behind their work; public companies are  expected to use them; and the quality of services from a Big 4.

		Majority of Survey Respondents Preferred More Audit Choices

While 57 (90 of 158) percent of respondents said that the number of firms  their companies could use for audit and attest services was adequate as  compared with the 43 percent (68 of 158) who said it was not, 86 percent  (117 of 136) told us that ideally there should be more than four large  accounting firms as viable choices for large national and multinational  public companies.  In responding to our question on what they thought the  optimal number of firms for large companies should be, 74 percent (100 of  136) said they would prefer from five to eight large accounting firms to  provide audit and attest services to large national and multinational public  companies and 12 percent (17 of 136) of the respondents preferred more  than eight firms.  Fourteen percent (19 of 136) of the respondents said four  or fewer firms would be optimal.  Most comments we received in favor of  more firms addressed the need to increase competition, decrease fees, and  comply with the new independence rules as required by Sarbanes-Oxley.  Respondents noted, “More firms will improve the competition in the   industry,” “more choices, more competition, lower cost,” and  “one firm provides  tax planning services which may impair   independence.”  Another respondent wrote, “Slightly more options would  enhance technical resourcing opportunities external to current auditors.”
However, we also received many comments cautioning that too great a  number of firms might have negative implications.  One respondent said,  “Any greater number of firms would have difficulty in maintaining scale to  properly serve large international companies.”  According to another  respondent, “If the number gets too big, then  hard to have  level of expertise in certain industries.”  Some respondents felt that four or  five big firms would be sufficient.  One respondent wrote, “As a firm  believer in the efficiency of the marketplace, I believe that the current  number of large firms (4) is probably close to the optimum number, but  wouldn’t mind seeing another major firm gradually emerge.”  Another  respondent wrote, “Balance must be struck between competition and  fragmentation of a fixed talent pool.”

		Respondents Said Further Consolidation Would Result in Too Few Choices

When asked the minimum number of accounting firms necessary to  provide audit and attest services to large national and multinational public  companies, 82 percent (120 of 147) of respondents indicated that the  market was either at its minimum or already below the minimum number  required.  Fifty-nine percent (86 of 147) said that four or five large  accounting firms would be the necessary minimum.  According to one  respondent, “Four is the absolute minimum, because if you currently use  one firm for external audit purposes and another firm for internal audit  purposes, that only leaves two other firms from which to choose if you  want to change auditors or use a Big 4 firm for consulting services.”
Some respondents pointed out that not even all the Big 4 firms have the  necessary industry expertise required to conduct their companies’ audits.  According to one respondent, “From a realistic standpoint, only one other  Big 4 firm has a utility practice that would help  understand our  industry.”  Another respondent wrote, “We use one of the Big 4.  Two of  them do not have industry expertise.  Only one of the remaining three has  industry expertise in the geographic region.”
Although Sarbanes-Oxley prohibits a company’s external auditor from  providing internal audit services and certain other consulting services to  the same company, many companies currently use one of the Big 4 as their  external auditor and one of the remaining three Big 4 firms for nonaudit  services such as tax consulting and internal audits.  Therefore, a company  with this arrangement that needed to change auditors would have one  fewer alternative or would need to terminate its internal audit or consulting  relationship.  For example, one respondent noted, “Aside from our current  auditor, we use another of the Big 4 as a co-source provider of internal  audit services, so  would not consider them.  We are using a third for  tax work so it would be hard under Sarbanes-Oxley to switch to them.”

		Most Respondents Prefer to Allow Market Forces to Dictate the Level of Competition in the Audit Market

Despite the fact that 94 percent of respondents said they had three or fewer  options from which to choose if they had to change auditors, 62 percent (98  of 159) of respondents said they would not suggest that any actions be  taken to increase competition in the provision of audit and attest services  for large national and multinational companies.  When asked whether steps  should be taken to increase the number of available choices, 79 percent (65  of 83) opposed government action to break up the Big 4, while 66 (55 of 83)  percent opposed any government action to assist non-Big 4 firms.  Seventy- eight percent (64 of 82) of respondents said they would favor letting market  forces operate without government intervention.
While some respondents expressed their belief that the market would  adjust to create a more competitive environment, others expressed  uncertainty about whether government actions could increase competition.  According to one respondent, “Government action to assist the non-Big 4  firms will not work.  The level of expertise and depth of resources required  to deal with ever increasing levels of complexity and regulation cannot be   government intervention.”  However, another respondent  commented, “Having only four large firms is a concern.  The benefits of  consolidation should be higher quality, less variation in advice, stronger  financial resources of the accounting firm, and more accountability.  If  these benefits are not achieved, then the government may need to  intervene.”  In addition, several respondents expressed concern about  further consolidation.  Referring to the dissolution of Andersen, one  respondent said, “Our biggest concern is the ease with which a firm can  disappear.”  Another stated, “The failure of Andersen had a devastating  impact and ultimately resulted in fewer qualified professionals providing  attest services during a time of rapidly increasing complexity in applying  GAAP.”
We are sending copies of this report to the Chairman and Ranking Minority  Member of the House Committee on Energy and Commerce.  We are also  sending copies of this report to the Chairman of SEC, the Chairman of the  Public Company Accounting Oversight Board, and other interested parties. We also will make copies available to others upon request.  In addition, the  report will be available at no charge on the GAO web site at  http://www.gao.gov.
This report was prepared under the direction of Orice M. Williams,  Assistant Director.  Please contact her or me at (202) 512-8678 if you or  your staffs have any questions concerning this work.  Key contributors are  acknowledged in appendix IV.

Scope and Methodology

We surveyed a random sample of 250 of the 960 largest publicly-held  companies.  We defined this population using the 2003 list of the Fortune  1000 companies produced by Fortune, a division of Time, Inc., after  removing 40 private companies from this list.  We mailed a paper  questionnaire to the chief financial officers, or other executives performing  a similar role, requesting their views on the services they received from  their auditor of record, the effects of past consolidation on competition  among accounting firms, and its potential implications.  To develop this  questionnaire, we consulted with a number of experts at GAO, the  American Institute of Certified Public Accountants, and the Securities and  Exchange Commission, and pretested a draft questionnaire with six large  public companies from a variety of industries.  The survey began on May 6,  2003.  We removed one company that had gone out of business and  received 159 usable responses as of August 11, 2003, from the final sample  of 249 companies, for an overall response rate of 64 percent.  The number  of responses to an individual question may be fewer than 159, depending on  how many respondents answered that question.
While the survey results are based on a random sample drawn to be  representative of the population of publicly held Fortune 1000 companies  and thus could be adjusted statistically to represent the whole population,  including those not sampled, we are instead reporting totals and  percentages only for those companies actually returning questionnaires.  We did this because a significant number of sampled companies did not  respond, and the answers respondents gave could differ from those  nonrespondents might have given had they participated.  This kind of  potential error from nonresponse, when coupled with the sampling error  that results from studying only a fraction of the population, made it  particularly risky to project the results of our survey to not only the  nonrespondents, but also to the part of the public company population we  did not sample.  There are other practical difficulties in conducting any  survey that may also contribute to errors in survey results.  For example,  differences in how a question is interpreted or the sources of information  available to respondents can introduce unwanted variability into the survey  results.  We took steps during data collection and analysis to minimize such  errors.  In addition to the questionnaire testing and development measures  mentioned above, we followed up with nonresponding companies with  telephone calls to help them overcome problems they encountered in  completing the survey and to encourage them to respond.  We also checked  and edited the survey data and programs used to produce our survey  results.
All 159 companies responding to our survey employed a Big 4 firm as their  auditor of record.  These companies derived an average of 83 percent of  their total revenues from operations within the United States and paid, on  average, $3.19 million in fees to their auditor of record in the fiscal year  prior to the survey.  Using Standard Industry Classification (SIC) codes, we  found that 149 respondents represented 39 different industry sectors; we  could not identify an SIC code for the other 10 respondents.  The top 7  industry sectors represented were electric, gas, and sanitary services (17 companies), depository institutions (10 companies), business services (9 companies),  industrial and commercial machinery and computer equipment (9  companies), wholesale trade-non-durable goods (9 companies), chemicals and allied products (8 companies), and electronic and other electrical equipment and components, except  computer equipment (6 companies).

Annotated Public Company Survey

Please complete this questionnaire specifically  the U.S. General Accounting Office (GAO), the  for the company named in the cover letter, and  independent research and investigative arm of  not for any subsidiaries or related companies.
This questionnaire should be completed by the  profession.
To provide a thorough, fair, and balanced report  historical information on mergers, operations  to Congress, it is essential that we obtain the  and finance, as well as report the corporate  experiences and viewpoints of a representative  policy of this firm. sample of public companies.
Your company was selected randomly from the  enclosed envelope within 10 business days of  2002 list of Fortune 1000 companies. It is  receipt.  If the envelope is misplaced, our  important for every selected firm to respond to  ensure the validity of our research.
Congress.
Telephone:  (202) 512-3608  Email:  pannorm@gao.gov  Thank you for participating in this survey.  1.  Approximately what percentage of your company’s total revenues are derived from operations  within and outside of the United States?
Please enter percentages totaling 100%.  of our revenues are derived from  operations within the United States  of our revenues are derived from  operations outside of the United States  2.  If your company was founded in the past decade, in what year was it founded?
Please enter 4-digit year.  3.  What is the name of your company’s current auditor of record and when did this firm become  your auditor of record?  Please enter name of auditor and 4-digit year hired.  4.  What type of services does your auditor of record currently provide to your company?  Please  check all that apply.  1.
Only audit and attest services  2.
Tax-related services (e.g., tax preparation)
3.
Assistance with company debt and equity offerings (e.g. comfort letters)  N=106  4.
Other services - please describe:  _______________________________________________________________________  5.  Approximately how much were the total annual fees that your company paid to your auditor of  record for audit and attest services during your last fiscal year?
Please enter approximate dollar figure.
Range=$13,807-$62,000,000  6.  Starting in 1987, when consolidation of the largest accounting firms began, or since your  company was founded (if that occurred after 1987), has your company employed more than one  auditor of record?  Please check one box.  1.
Yes - how many: ________  2. 7.  What were the names and tenures of the most recent previous auditor(s) of record your company  has employed since 1987?  Please name up to two of the most recent previous auditors and  years employed. from (year)_____ to (year)_______   (year)_____ to (year)_______  8.  Which of the following reasons explain why your company changed auditor of record one or  more times since 1987?  Please check all that apply.  1.
Our company had a mandatory rotation policy  2.
Expansion of our company required an auditor of record that could meet new demands  3.
New regulations forbidding use of auditor for management consulting and other services  4.
Fees for audit and attest services  5.
Concern about reputation of our auditor of record  6.
Our auditor of record was going out of business  7.
Our auditor of record resigned  8.
Relationship with our auditor of record was no longer working  9.
Other – please describe:  __________________________________________________________________  9.  If your company previously employed Arthur Andersen as your auditor of record and switched  to another firm in the past two years, did you switch to the firm to which your previous Arthur  Andersen partner moved?  Please check one box.  1.
Not applicable – did not employ Arthur Andersen  2.
Yes, switched to partner’s new firm  3.
No, switched to other firm –  Consolidation in the Accounting Profession  We are focusing on the trend toward consolidation that has occurred in the public accounting  profession starting in 1987, when consolidation activity among the largest firms began, primarily the  consolidation of the “Big 8” into the “Big 4.”
This section asks you to consider how relationship with its auditor of record, and the audit services it provides, has changed over this time  frame.
Although a number of factors m ay have influenced these changes, we would like you to  assess the influence of consolidation in the accounting profession in particular.  answers on your experience in the past decade or, if this is not possible, on the time frame that  reflects your experience.  10. How have the fees that your company pays for audit and attest services changed over the past  decade?  If it is not possible for you to answer for the past decade, please base your answer on  the time frame that best reflects your experiences.  Please check one box.  1.  2.  3.  4.  5.
1%  11. If your company changed auditors within the last two years, how have the fees your company  pays your current auditor of record changed compared to the fees paid to your previous auditor?
Please check one box.  1.
Not applicable – have not changed auditors  ----------------------------------------------------------- 2.  3.  4.  5.  6.  12. In your opinion, how has the consolidation of the largest accounting firms over the past decade  influenced the fees that your company pays for auditing and attest services?  1.  Great upward influence  2.  Moderate upward influence  3.  4.  Moderate downward influence  5. ---------------------------------------------------------- 6.  Don’t know  13. Audit quality is often thought to include the knowledge and experience of audit firm partners  and staff, the capability to efficiently respond to a client’s needs, and the ability and willingness  to appropriately identify and surface material reporting issues in financial reports.
Do you believe that the overall quality of audit services your company receives has gotten better  or worse over the past decade?  Please check one box.  2.  3.  4.  ---------------------------------------------------------- 6.  Don’t know  1%  14. If your company changed auditors within the last two years, do you believe that the overall  quality of audit services your company receives from your current auditor is better or worse  than the overall quality of audit services your company received from its previous auditor?
Please check one box.  1.
Not applicable – have not changed auditors  ---------------------------------------------------------- 3.  4.  5.  ----------------------------------------------------------- 7.  15. In your opinion, how has the consolidation of the largest accounting firms over the past decade  influenced the quality of audit and attest services that your company receives?  1.  Very positive influence  2.  3.  4.  5.  Very negative influence  ---------------------------------------------------------- 6.  Don’t know  16. If you have experienced a change in audit quality, please explain:  If you have not experienced a change, please enter “none.”  _________________________________________________________________________  17. Auditor independence is often thought to relate to the accounting firm’s ability and willingness  to appropriately deal with (a) financial reporting issues that may indicate materially misstated  financial statements; (b) the appearance of independence in terms of the other services a firm is  allowed to and chooses to provide to their clients; and (c) how much influence clients appear to  have in the audit decisions.
Do you believe that your company’s auditor(s) has become more or less independent over the  past decade?  Please check one box.  1.  Much more independent  2.  3.  4.  5. ---------------------------------------------------------- 6.  18. If your company changed auditors within the last two years, do you believe that your current  auditor is more or less independent than your previous auditor?
Please check one box.  1.
Not applicable – have not changed auditors  ---------------------------------------------------------- 2. 3.  4.  5.  6. ---------------------------------------------------------- 7.

	N=157

		N=12

28. Has the consolidation of the largest accounting firms over the past decade made it harder or  easier for your company to satisfactorily select an auditor and maintain a relationship with that  auditor?  Please check one box.  2.  3.  4.  ---------------------------------------------------------- 6.  29. How, if at all, has the consolidation of the largest accounting firms over the past decade affected  competition in the provision of audit and attest services?  If it is not possible for you to answer  for the past decade, please base your answer on the time frame that best reflects your  experiences.  Please check one box.  1.  2.  3.  4.  5.  ---------------------------------------------------------- 6.  30. How, if at all, has this change in competition affected each of the following areas?  (1) (2) (3) (4) (5) (6)

	N=77

		N=7

31. What do you believe is the minimum number of accounting firms necessary to provide audit  and attest services to large national and multinational public companies?  Please enter a  number.  32. What do you believe is the optimal number of accounting firms for providing audit and attest  services to large national and multinational public companies?  Please enter a number.  _________________________________________________________________________  33. Do you suggest that any actions be taken to increase competition in the provision of audit and  attest services for large national and multinational public companies?  Please check one box.  3.  Don’t know  34. Would you favor or oppose the following actions to increase competition to provide audit and  attest services for large national and multinational clients?  Please check one box in each row.  (1) (2) (3) (4) (5) (6)
N=0  35. Do you have any additional comments on any of the issues covered by this survey?
Please use the space below to make additional comments or clarifications of any answers you  gave in this survey.
Thank you for your assistance with this survey!
Please return it in the envelope provided.

Summary of Written Comments to the Public Company Survey

Companies surveyed were invited to add written comments to a number of  questions to further explain their answers.  Of the 159 respondents that  responded to the survey, 149 volunteered written answers to at least one of  the eight key open-ended comment questions in our survey: change in audit quality, the number of auditor options, the sufficiency of such options, willingness to use the auditor of a competitor, minimum number of audit firms necessary, optimal number of firms, suggested actions for increasing competition, and any additional comments on the survey.
The following tables display selected comments from some respondents to  these eight questions.  Some of the quotes illustrate typical comments  made by several other companies, while others represent a unique  viewpoint of only that company.  While these specific comments provide  valuable insights, the number of comments of a particular type reproduced  here is not necessarily proportional to the number of other similar  responses, and, therefore, the comments do not represent the variety of  opinion that might be found in the population of large public companies as  a whole.

	Change in Audit Quality

More respondents said that overall audit quality had gotten better over the  past decade than worse (44 percent compared to 18 percent).  The reasons behind these ratings are presented in table 2, grouped into summary  categories.

	Number of Auditor Options Available

Almost all respondents—94 percent—indicated that they had three or  fewer options from which to choose if they had to change auditors, and 61  percent said exactly three.  The explanatory comments we received to that  question, shown in table 3, confirm that respondents are almost always  referring to the Big 4 firms other than the one they currently employ. As  only 8 percent of respondents said they currently use or would consider  using a non-Big 4 firm, there were few written explanations for why they  thought they had more than three or four options.  Those who did explain  mentioned the national prominence of the larger second-tier firms and  smaller firms with special industry expertise as reasons.

	Sufficiency of the Number of Options

Almost half of the respondents (43 percent) said they did not have enough  options and desired more.  Respondents who said they had enough options  said the Big 4 firms were able to meet their needs.  However, several of  these respondents cautioned that further reductions could be problematic.  Those saying the number of firms was not sufficient often took the position  that “more competition is always better.”  Other comments included that  differentiation between the firms’ services was declining, special expertise  was not longer readily available, and monopolistic tendencies in setting  fees.  See table 4.

	Willingness to Use Auditor of Competitor

More than 90 percent of our respondents said that their company would  choose the auditor of a competitor.  A few of those respondents provided explanations as to why they would or would not, as shown in table 5.

	Minimum Number of Firms Necessary

A large majority (82 percent) of respondents said that the minimum  number of firms necessary to provide audit services to large companies such as theirs was four or more.  The largest number of responses was  received for four or five firms.  See table 6.

	Optimal Number of Firms

Most (86 percent) respondents said the optimal number of firms was  greater than four, although the majority of those responses remained in the five to eight range.  See table 7 for selected comments.  those that favored action mentioned assisting non-Big 4 firms to by  reducing barriers to entry, preventing further consolidation, breaking up  the Big 4, and other actions.  Many suggested that market forces should be  allowed to operate without intervention.  See table 8.  in the survey.  A number of respondents mentioned concerns about further  consolidation in the accounting profession, cost and quality, and other  issues such as the impact of the Sarbanes-Oxley act and proposals for  mandatory audit firm rotation.

GAO Contacts and Staff Acknowledgments

	GAO Contacts

	Staff Acknowledgments

In addition to those individuals named above, Martha Chow, Marc Molino,  Michelle Pannor, David Pittman, Carl Ramirez, Barbara Roesmann, and  Derald Seid made key contributions to this report.

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Summary:
Why GAO Did This Study

The largest accounting firms, known as the "Big 4," currently audit over 78 percent of U.S. public companies and 99 percent of public company annual sales. To address concerns raised by this concentration and as mandated by the Sarbanes-Oxley Act of 2002, on July 30, 2003, GAO issued a report entitled Public Accounting Firms: Mandated Study on Consolidation and Competition, GAO-03-864 . As part of that study, GAO surveyed a random sample of 250 public companies from the Fortune 1000 list; preliminary findings were included in the July report. This supplemental report details more comprehensively the 159 responses we received through August 11, 2003, focusing on (1) the relationship of their company with their auditor of record in terms of satisfaction, tenure relationship, and services provided; (2) the effects of consolidation on audit fees, quality, and independence; and (3) the potential implications of consolidation for competition and auditor choice.

What GAO Found

Most of the 159 respondents said that they were satisfied with the current auditor, and half had used their current auditor for 10 years or more. Generally, the longer a respondent had been with an auditor, the higher the overall level of satisfaction. Consistent with high levels of satisfaction, GAO found that, aside from former clients of Arthur Andersen, few respondents had switched auditors in the past decade. When they did, they switched because of reputation, concerns about audit fees, and corporate mergers or management changes. In looking for a new auditor, the most commonly cited factors the respondents gave were quality of service, industry specialization, and "chemistry" with the audit team. Finally, almost all respondents used their auditor of record for a variety of nonaudit services, including tax-related services and assistance with company debt and equity offerings. Respondents had differing views about whether past consolidation had some influence on audit fees, but most believed that consolidation had little or no influence on audit quality or independence. Respondents commented that other factors--such as new regulations deriving from the Sarbanes-Oxley Act and changing auditing standards--have had a greater impact on audit price, quality, and independence. While half of the respondents said that past consolidation had little or no influence on competition and just over half said they had a sufficient number of auditor choices, 84 percent also indicated a preference for more firms from which to choose as most would not consider using a non-Big 4 firm. Reasons most frequently cited included (1) the need for auditors with technical skills or industry-specific knowledge, (2) the reputation of the firm, and (3) the capacity of the firm. Finally, some expressed concerns about further consolidation in the industry and the limited number of alternatives were they to change auditors under existing independence rules.