Concentration of Audit Market

 Concentration of Audit Market
The Audit Market in the UK has continued to be dominated by only four audit firms. The
market is extremely, and persistently, concentrated. There exist a wide gap in sizes between the
top four and mid-tier audit firms. The top four audit firms include Ernst & Young, Deloitte &
Touche, PricewaterhouseCoopers (PwC) and KPMG). The Big Four firms according to Tysiac
(2012), audit all except one of the FTSE 100 companies. The same Big Four audit firms audit
242 of the FTSE 250 companies. Both the mid-tier and the top four firms supply the other
section of the audit market comprising of the small listed firms. Even in auditing the small listed
firms, the Big Four audit firms have a greater market shares as compared to the mid-tier audit
firms. Because of the domination of the big, four firms in the audit market; various individuals
and institutions have raised concerns on the impact on audit fees, competition, quality, and
choice. These report discuses on whether the audit market concentration is a cause for concern. It
also focuses on steps taken, and proposals made to widen participation and to increase
competition in the large company audit market.
Arguably, the concentration of large company audit market in the big four big firms is a cause
for concern. Midsize and small firms have continued to undergo various challenges in entering
the large companies audit market. Thus, there is a need to give attention to their challenges in
order to enhance competition and participation for large company audit market. Among the
challenges are limited technical capabilities and specialized industry knowledge, entry barriers,
reputation, and unlimited liability among others.
Most listed companies in London Stock Exchange are large and have complex accounting
procedures and policies. There is an entry barrier in entering the large company audit market for
small firms because of the sheer size of large companies, as well as the size gap existing between 
top four and small audit firms. Midsize and small firms does not have enough resources to audit
the large companies. To achieve the standard that have been reached by the top four firms will
require other firms to invest heavily in terms of resources, energy, and time. More so, investing
in financial and other resources can be extremely risky for other firms. This is because of the
costly nature of scaling up to achieve the resources needed in auditing large companies. There is
need to reduce barriers to entry in order to enhance competition from midsize and small audit
firms.
Midsize and small audit firms face the problem of limited technical capabilities and specialized
industry knowledge. Large companies have complex organizational structures and complex
accounting policies. Thus, in looking for an auditor, public companies seeks audit firms with
excellent industry knowledge and technical capability. Since small audit firms does not have
sufficient expertise, large companies are left with limited to the big audit fiems. Technical and
specialized industry knowledge limits small firms’ ability to enter the large company audit
market and lowers their concentration. Smaller audit firms face difficulty in sustaining their
technical knowledge. According to Velte and Stiglbauer (2012), smaller firms consider
maintaining technical expertise as time-consuming and extremely costly. In addition, smaller
audit firms face difficulty in updating its staff with new standards and procedures. Auditing
standards and procedures keep changing due to the changing nature of business environment.
Reputation is another problem that has hindered midsize and small firms from competing with
the largest audit firms. Midsize and small audit firms does not enjoy the reputations that the
largest firms are enjoying. Large companies seeks the services of firms with excellent reputation. 
Accordingly, large organizations are confident that big firms will meet their organization’s audit
needs. This is because big audit firms have excellent brand name and reputations for high quality
services. The challenge with smaller firms is that large companies are not familiar with their
service quality and thus, are not certain on their ability and sufficiency to serve large
organizations.
Various interested parties in order to widen participation as well as to raise competition in the
large audit company market have put various proposals forward. Among the plans, does
competition commission propose the mandatory five-year tendering? The proposal of
compulsory tendering seeks to enhance greater competition between audit firms. The current
audit market tenders every ten years and is does not promote competition because the period is
long. Arguably, reducing the tendering period to five years could be essential in providing
opportunity for other firms to compete in the tendering process. The Financial Reporting Council
(FRC) has openly