Oligopoly of the Big 4s

Since at least the 1980s the audit market has functioned as an Oligopoly with few large firms providing the auditing services to the majority of large companies. The past three decades have seen a steady tightening of the oligopoly firms with the big audit firms declining from eight to four in 2002, While their combined market share has grossly remained unchanged.

The big 4 as of 2003 held as much as 99% of the market share in the US which has severely threatened the potential for smaller and novice accounting firms. The result has been a very stiff competition among the smaller and the mediocre firms to bid for the public companies or companies having a huge turnover.

Contracts are usually bid at a very low and competitive price but even so this dutch price auction(auctions where prices reduce with each bid) does not seem to interest the listed companies as they have started to have some sort of a pre-requisite to hire the big 4s majorly because the money is been rooted from abroad through either their holding companies or through foreign direct investment and they are pretty much adamant on having an international firm to audit the accounts and handle taxation.

Moreover such companies require huge manpower which the other firms are seldom able to provide even with outsourcing! The big 4s and the companies having relatively huge market share are able to lobby better with the institute and even at a political level to administer or change certain accounting standards which shall accrue to their own benefit. In a competitive equilibrium, auditor's wealth is eventually dependant on that of its clients.

Clients usually encounter a wide variety of transactions and they would prefer standards that would allow them flexibility to choose the most appropriate reporting method for a given transaction . For example, when apple entered into the cellphone business, it had to recognise the revenue from the sales of iPhone over a period of two years ( because majority of apple phones are sold in US on a contractual basis between apple and the cellular(network) service provider and this contract ranges for 2 years). Apple along with its auditors successfully lobbied the government to amend this standard in such a way that the revenue could be recognised at the point of sale of iPhones.

According to certain auditors, "accounting is of strategic importance rather than a compliance tool" and therefore there are "rents to be earned" by firms customising their accounting metrics. Such flexibility is effected through accounting discretion, which can come atthe expense of objectivity, a key component of reliability and therefore preferences for flexibility in accounting standards provides auditors incentives to support accounting rules that can decrease reliability and hence not reflect a "True and Fair view"