Big Four Stems Exodus to Smaller Auditors

The stream of companies switching from Big Four auditors to smaller firms slowed by 40 percent in 2007.

In a recent 8-K, Catapult Communications demonstrated that ditching a Big Four accounting firm for a smaller auditor can mean big cost savings. With a $102 million market cap, the telecom test equipment maker expects to save almost 50 percent on audit fees this year by moving from Deloitte & Touche to Stonefield Josephson. Nevertheless, fewer companies are following that path these days.

Indeed, the stream of companies switching from Big Four auditors to smaller firms continued to slow in 2007, a CFO.com analysis of recent data from Audit Analytics shows. In 2007, 101 public companies moved from a Big Four firm to a mid-tier or regional firm, down about 40 percent from 163 in 2006 and 275 in 2005. (See charts below.)

Chart 1: Big Four to Smaller Audit Firm
Market cap 2007 2006 2005 2004
$501m 14 15 31 34
$100m – $500m 38 61 115 85
$100m & under 49 87 129 198
Total: 101 163 275 217

What’s behind the slowdown? Donald Whalen, director of research at Audit Analytics, says it’s part of a general decrease in auditor switches. Considering that the number of companies moving from one Big Four firm to another dropped by 40 percent as well, Whalen says he sees the trend as “a drop in changes, rather than a drop in preferences” for one s of auditor over another. “It looks like things have settled down, with more people seeming to be happy where they are,” he adds. The total number of companies switching auditors was down by 10 percent last year, according to an analysis of the data by Glass Lewis.

Jack Ciesielski, accounting expert and editor of the Analyst’s Accounting Observer, says the decline in switches from Big Four firms to smaller auditors is likely due to being “farther away from 404 and all the bad feelings that went with it.” Complying with Section 404 of the Sarbanes-Oxley Act, which covers internal controls over financial reporting, considerably stiffened relations between auditors and corporate finance executives. The lack of new regulations of the magnitude of 404 in the past few years has also helped. “Now everyone’s comfortable with each other again…until the next dislocation,” he says.

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