The sudden reduction of the Big Four to a Big Three would exacerbate the
current restricted choice of auditors, according to the Department of Trade
report into competition among the largest firms.
The report, compiled with the help of the Financial Reporting Council,
concluded: ‘Given the existing problem of choice for certain large companies in
complex sectors (particularly financial services), the exit of one Big Four firm
could only increase the number of FTSE 350 companies in this situation. A
four-to-three scenario could also result in loss of investor confidence in the
effective operation of the audit market.’
The report’s authors believe that the destruction of a Big Four would most
likely come through a civil or criminal prosecution for professional misconduct,
prompting a catastrophic damage to reputation.
The solution to such a loss would be a mid tier firm moving up to occupy the
available market space, but the report concludes this is unlikely.
‘Further analysis based on the market entry model indicates that only if
existing barriers to entry in terms of perception/reputation and low switching
rates could be reduced might such market entry become feasible,’ the authors
The report goes on to conclude that ‘the lack of choice has resulted in a
certain degree of power for the audit firm in the bargaining process and an
inability to change auditor.’
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