Competing for emerging corporate clients: a study of independent auditor concentration.

• Author: Fisher, Steven A.

Abstract

In recent years competition among the largest public accounting firms has intensified as the so-called Big 8 CPA firms have consolidated into the "Big 5" firms. With audit fees being dependent to a large extent on client size and profitability, growth minded independent auditors are engaged in competition for the largest corporate clients as well as emerging corporate clients. The purpose of this research effort is to generate an understanding of independent auditor competition for emerging corporate clients represented by "Forbes 200 Best Small Companies in America" and for major corporations listed in the "Fortune 500."

The study provides and analyzes independent auditor market shares utilizing a series of market concentration ratios. The results indicate that market concentration has increased in both the "Forbes 200" and "Fortune 500" audit markets. As a consequence, the differences between the "Big 5" and smaller independent auditors are being accentuated. The smaller independent auditors are increasingly unable to compete with the largest firms for the largest and most desirable corporate clients.

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Competing for Emerging Corporate Clients: A Study of Independent Auditor Concentration

Several thousand certified public accounting (CPA) firms operate in the United States. These firms range in size from sole practitioners to international organizations employing thousands of professionals and generating several billion dollars of revenue. The market for independent audits is highly stratified with large CPA firms auditing the largest clients and local firms servicing smaller clients. In general, smaller CPA firms are unable to compete with large firms' vast resources of personnel and technical capabilities.

In recent years, the accounting profession has experienced a wave of merger activity which has consolidated the so-called Big-8 public accounting firms into a group of mega-firms termed the Big-5. As competition intensifies, the Big-5 firms continue to dominate the market for major corporate clients. These firms have gained their market positions by offering a broad array of accounting and related services.

To maintain their individual positions in today's competitive audit market, Big-5 firms are engaged in intense marketing efforts, price competition, and are seeking to expand their client bases (Sommer, 1989). As many of their major audit clients begin to experience slower rates of growth, Big-5 firms are actively courting emerging corporate clients. With audit fees being dependent to a large extent upon client size and profitability, growth-minded Big 5 firms are engaged in intense competition for emerging corporate clients with outstanding growth potential. The independent audit oftentimes opens the door for the CPA firm to market other more profitable services, such as management consulting, to newly acquired client. This competition for emerging corporate clients pits the Big-5 firms against smaller accounting firms as well as against one another (Minyard & Tabor, 1991).

The purpose of this article is to generate an understanding of the extent of independent auditor competition for emerging corporate clients. Through the use of market concentration ratios, a comparative analysis is made of the trends in independent auditor competition in the markets for...