Audit Firm Market Share
The Big Four – Deloitte, EY, KPMG, and PwC – largely dominate audit firm market share for SEC registrants. However, the landscape varies substantially depending on the size of the company. The Big Four globally dominate the audit market for larger public companies, but there is more variation in market share for smaller entities.
The audit of small companies carries a certain amount of inherent risk. This risk is due to resource constraints, procedural limitations, and management inexperience that may be present within the organization. As a result, smaller companies – with these characteristics –need different audit procedures than larger clients. Audits for smaller companies typically involve a more substantive approach, with a special focus on their distinct risks.
Using the Audit Analytics Auditor Engagements database, here, we look at a specific snapshot of active SEC filers with revenue between $10 million and $150 million: 171 audit firms compete to audit 1,119 companies.
The top 10 firms hold 51% of the market share, while 161 firms compete for the remaining 49%. Of those firms, 80 firms audit only one client in this revenue range.
The Big Four do not hold a strict monopoly on audits for these smaller companies. Collectively, they audit less than a quarter of the market. EY has a substantial slice of the market share. However, BDO – a non- Big Four firm – has the second largest auditor market share for this population. Other non- Big Four firms that round out the top 10 include Marcum, RSM, Grant Thornton, Moss Adams, and Crowe.
Audit Firm Tenure
There is a long-standing debate in the accounting and regulatory sphere concerning the impact of firm tenure on audit quality and independence. The PCAOB requires the rotation of the audit engagement partner for US companies every five years. Meanwhile, international regulations impose mandatory audit firm rotation every ten years.
Some academic research suggests that longer auditor tenures are positively associated with fewer audit reporting failures and higher earnings quality. Conversely, longer audit firm tenures have also been negatively associated with the timely discovery and correction of misstatements, suggesting lower audit quality.
In general, small public companies tend to have lower audit firm tenures than mid- or large-size companies.
Small companies – less than $150 million in yearly revenue – have an average tenure length of just under eight years. For mid-size companies, with annual revenue ranging from $150 million up to $1 billion, average tenure increases 50%, to nearly 12 years. The average tenure jumps significantly for large companies, averaging almost 24 years.
There are myriad reasons why small public companies might engage an audit firm for a shorter period of time than larger companies. Overall, companies with less revenue are usually young companies, which inherently lowers the average tenure. Another factor that lowers the average tenure is that small companies with less financial resources are more likely to “shop” auditors to find lower fees, while growing companies may change auditors to find a better fit for their evolving needs.
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