Who Audits Public Companies? Large Firms Dominate, Although the Pie is Shrinking

Two recent reports on the market for public company audits indicate that the largest firms continue to dominate, although they are moving away from smaller clients.  At the same time, the population of both public companies and PCAOB-registered auditors is falling.

Ideagen Audit Analytics

Ideagen Audit Analytics (IAA) has released its annual analysis of the market for public company auditing. Who audits public companies finds that, in 2024, the four largest firms – EY, Deloitte, PwC, and KPMG – together audited 49.7 percent of SEC-registered companies, up slightly from 48.4 percent last year.  Ten accounting firms audited 65.4 percent of the total SEC-registered company universe, down from 68 percent last year.  For a summary of the prior IAA report, see Who Audits Public Companies? Mostly Ten Firms, April 2024 Update.

Highlights of IAA’s report include:

• ·         Deloitte replaced EY as the firm with the greatest share of the public company audit market. Deloitte audited 14.3 percent of SEC registrants (901 companies), compared to 13.8 percent (869 companies) for EY.  Last year, EY led with 14.7 percent (971 public company clients).  Deloitte didn’t have to grow its client base much to move into the top spot.  IAA observes that: “Deloitte gained a net of one client from last year.  EY, who held 971 clients the previous year, dropped over 100 clients this year to a total of 869 as the company looks to tailor its clientele.”  PwC and KPMG both increased their client count and expanded their market share.  Crowe, which was not on last year’s top ten list, is in ninth place with 1.6 percent of the market. IAA attributes Crowe’s ranking rise to the collapse of BF Borgers auditing business, resulting in its deletion from the list.

• Both the number of audit firms performing public company audits and the number of public companies continued to fall.  Overall, 228 firms conducted audits of 6,285 SEC registrants in 2024.  By comparison, 239 firms audited 6,607 SEC registrants in 2023, and 258 firms performed audit engagements for 6,950 SEC registrants in 2022. 

• SPACs declined as a percentage of total registrants. In 2024, special purpose acquisition companies (SPACs) were 2.4 percent of total SEC-registered public companies; in 2023, SPACs constituted about five percent. One hundred fifty of the 6,285 public companies audited in 2024 were SPACs.  WithumSmith + Brown audited 30 percent of the SPAC population, followed by Marcum (22.7 percent) and MaloneBailey (13.3 percent).

• The largest audit firms control the audit market for the largest companies.  The Big Four firms audited 89.5 percent of large accelerated filers (LAFs) in 2024, roughly the same percentage as in 2023.  Including the other two global network firms – Grant and BDO – this share rises to 94.9 percent.  As it has for the past nine years, EY leads in the LAF segment with 540 clients (down from 577 in 2023) or 26.7 percent of the LAF population.  As was the case last year, 35 firms audited at least one LAF.  In 2024, the LAF population shrank to 2,026 from 2,065 in 2023. 

• There is considerable competition in the smaller public company audit market.  At the other end of the public company size spectrum, 89 firms audited 227 smaller reporting companies (SRCs).  Six firms – M&K CPAs, Olayinka Oyebola & Co CPAs, Victor Mokuolo CPA, RBSM, Haynie & Company, and JP Centurion – together audited 28.6 percent of SRCs. Eighty-three other firms audited the remaining 71.4 percent of the non-SPAC SRC market. As noted above, BF Borgers, which topped the SRC auditor list last year, is no longer engaged in public company auditing.   

The Landscape of Auditing in U.S. Capital Markets

Consistent with IAA’s annual reports, an academic study of public company auditing between 2003 and 2023 finds “remarkable stability in the Big 4’s proportion of total audit fees but substantial declines in their presence among Nasdaq and OTC issuers.”  In The Landscape of Auditing in U.S. Capital Markets, Thomas Bourveau, Jonathan Fluharty-Jaidee, Juan Mao, Min Ren, Martin Schmalz, and Joshua T. White analyze trends in U.S. public company auditing with a focus on auditor size distribution, switching patterns, and the impact of regulatory changes.  With respect to market share, they report that, from 2003 to 2023, the Big 4 firms consistently accounted for between 91 and 95 percent of total audit fees.  However, their share of audits among Nasdaq-listed companies and companies that trade over-the-counter (OTC) declined significantly, with Nasdaq fees dropping from 93 to 84 percent and OTC fees from 74 to 54 percent.  Correspondingly, smaller audit firms increased their share of this market segment, auditing nearly 90 percent of OTC-quoted issuers by 2023.

The authors also identify trends in the frequency with which companies change auditors.  Their analysis finds that Big Four firm clients rarely switch auditors and that the annual rate of switching declined from eight to nine percent in the early 2000s to three to four percent since 2009. Clients of mid-size firms have higher switching rates, averaging around eight percent, although this rate has also decreased over time. Smaller audit firms experience the highest switching rates, ranging from 12 percent to 18 percent annually.  Eighty-nine percent of small firm clients that changed auditors remained with a small firm.

Landscape of Auditing also reports on the declines in the number of public companies and the number of PCAOB-registered auditors.  According to the paper, the total number of SEC-registered companies decreased by approximately 54 percent from around 7,200 to about 4,700 between 2003 and 2023.  There has also been a significant drop in PCAOB-registered accounting firms.  Total registered firms fell from approximately 1,500 in 2010 to below 750 in 2023.  However, the study observes that the decreasing number of registered firms has not had a significant impact on competition, since only 21 percent of the firms that gave up their PCAOB registration had audited at least one SEC-registered issuer in the three years prior to their deregistration. 

Audit Committee Takeaways

The IIA report and Landscape of Auditing may provide audit committees with useful background in connection with the selection and evaluation of their audit firm. For example, understanding the shifting market share among audit firms, the highly competitive smaller company audit market, and the decline in the number of both public companies and registered audit firms may help audit committees benchmark their auditor selection against industry trends. These reports also provide context on market dynamics, auditor rotation, and the importance of ongoing audit committee auditor evaluation.