An article in Bloomberg argues that the financial auditing sector in the U.S. is an oligopoly and it imposes unnecessary costs on the businesses. The article expresses several concerns about the current state of the financial auditing industry and how these opinions are shared by several observers. The first concern expressed in the article is that four major players dominate the industry and, thus, businesses have little choice but to obtain the services of one of these four firms, also known as the Big 4. The article also mentions that small firms trying to establish themselves in the auditing industry face numerous barriers (Bloomberg, 2012).
The article also warns that Big 4 firms may become selective in choosing clients among smaller companies who are less profitable or higher risk clients which may put smaller companies at competitive disadvantage against the competition. The article also reports that the auditing fees have increased since the late 1990s because of both changing auditing requirement as well as higher clients’ expectations (Bloomberg, 2012).
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The article does mention that the market structure of the auditing industry is an oligopoly but even if the article had not explicitly mentioned the article, one could have recognized from the details in the article that the market structure of the auditing industry is oligopoly. The most defining aspect of the oligopoly structure is that the industry is dominated by few large players who together control majority of the market share (Investopedia). We know from the article that the industry is dominated by four major players who are together known as the Big 4.
Oligopoly market structure is also characterized by some barriers to entry and the auditing industry has several barriers to entry as mentioned in the article. One barrier to entry is size because there are certain huge risks in the industry such as litigation and insurance risks that small firms cannot afford. Another barrier to entry is the brand power of the Big 4 which makes it difficult for new entrants to attract clients.
The other economic concept touched upon in the article is quantity supplied and quantity demanded. The article mentions in the beginning that organizations especially big firms have limited choices when it comes to auditors which tells us that the quantity demanded for auditing services exceeds the quantity supplied of auditing services. Thus, the price of auditing services is higher due to a shift in the demand curve to the right. Similarly, the article also touches upon the concept of demand. The article mentions that the new internal control audits mandated by the Sarbanes-Oxley Act will force smaller auditing firms to hire more higher-paid professionals which means the demand for professionals will be higher due to a factor other than the price. The article again touches upon the concept of demand at the end of the article when it mentions that the auditing fees has increased since late 1990s due to higher expectations of clients among factors. Thus, we know that the shift of demand curve to the right has pushed up the prices of auditing services. The entire demand curve shifts only due to factors other than price (AmosWeb).
I agree with the author of the article that the industry’s structure as an oligopoly is not good because not only it hurts small businesses who may be rejected by the members of the Big 4 due to lower commercial potential or higher risk but the lack of competition also means higher prices. The Big 4 can choose to discriminate because the demand for their services already exceeds their resources. The article correctly characterizes the industry as oligopoly even though there are smaller-size auditors such as Grant Thornton LLP because Big 4 control most of the market share and together shape the entire industry.
- AmosWeb. (n.d.). Demand and Quantity Demanded. Retrieved August 1, 2013, from http://www.amosweb.com/
- Bloomberg. (2012, November 21). GAO Says Big 4 `Oligopoly’ Can Hamper Business: Lee Berton. Retrieved August 1, 2013, from http://www.bloomberg.com/
- Investopedia. (n.d.). Oligopoly. Retrieved August 1, 2013, from http://www.investopedia.com/
