Miller Stands in Florida, with Future Moves Unclear

Miller Stands; Amex Rests
The U.S. Supreme Court has refused to hear the controversial Miller case so the 11th Circuit Court of Appeals ruling stands. The appeals court had ruled that CPAs, even while working for an unlicensed entity, may advertise their designation. (See " Florida First Amendment Case Settles Little, " JofA, Nov.97, page 14.) For the state of Florida, this means a local trip back to district court rather than the hoped-for one to Washington.

"The issue is again before district court judge Maurice Paul," John Rimes told the Journal . Rimes, an assistant attorney general in Florida said, "American Express has been arguing that the rules and statutes limited its ability to express itself. Judge Paul dismissed that originally for lack of standing. However, the 11th circuit said Amex does have standing."

Rimes said the district court would have to see what Amex wants to do and whether its actions are protected by the First Amendment. "We just don't know what Amex intends to do in marketing its CPA employees. We assume it doesn't want to say that it's a licensed CPA firm because it's not." Amex currently is running commercials nationwide advertising its CPA employees. "If that's the limit of Amex's marketing, I suspect it may not need any court protection. There may be something else it wants. I guess we'll find out."

Right now, Amex is resting after its victory. "We plan on doing nothing," Amex spokesman Richard D'Ambrosio told the Journal . "The Supreme Court has sided with us, and we're very pleased to see it has made that decision. The situation is resolved as far as we're concerned."

When Bigger Is Not Better
A common corporate argument against Big Six mergers—one that regulators have to examine—is that the reduced number of large accounting firms means less competition and perhaps higher fees as a result. In fact, regulators worldwide put so much pressure on two of the merging firms—KPMG Peat Marwick and Ernst & Young—that they called off the venture. Nevertheless, the Coopers & Lybrand/Price Waterhouse merger was still on at Journal press time, and no agency has ruled out any future mergers. So the question remains for regulators from Canberra, Australia, to Washington, D.C.: How do you quantify competition? What if in any one industry there are only two major competitors because two firms dominate before the merger and those same two firms dominate after the merger—will competition have changed? It depends how one views the data. Although regulators did not necessarily base their opposition on the data presented below, the results of one study help explain why two giants were forced apart.

Paul L. Walker, CPA, PhD, and Malcolm H. Lathan, CPA, PhD, both of the University of Virginia, did a study of 5,288 companies in 177 four-digit standard industrial classification (SIC) codes in an attempt to analyze the nature of changes in competition before and after the E&Y/KPMG (now defunct) and C&L/PW mergers. Arguments that mergers reduce competition via a loss of a Big 6 firm assume that each Big 6 firm has a significant practice in all industries. In fact, that is simply not the case. It takes economies of scale to be able to audit an industry efficiently and to compete effectively. In many industries there aren't six real competitors but sometimes only two or three.

Exhibit 1: Big Firm Competitors in Selected Industries
  Major Big Six Competitors Major Proposed Big 4 Competitors
Transportation equipment (cars and trucks) 2 2
Department/retail stores 2 2
Pharmaceutical preparation 3 1
Grocery stores 1 2

Consider four specific industries as examples (see exhibit 1). Assume that to have a reduction in competition you must have a reduction in the number of major competitors. Furthermore, measure a major competitor as any auditor that audits at least an equal share in an industry (one-sixth premerger and one-fourth afterward). Using this approach for SIC category "transportation equipment," only two Big 6 firms are major competitors before the merger and there would have been only two afterward. That is, before the merger C&L and D&T dominate the industry with almost 70% of the market. After the merger these same two firms (now C&L/PW and D&T) would audit over 70% of the market. What is the impact on competition? Very little. SIC category "department/retail stores" shows a similar conclusion. "Pharmaceutical preparation" shows a decrease in competition but "grocery stores" shows an increase . The mixed results show the difficulties of reaching a final conclusion.

How often does competition change in the 177 industries examined (which represent $7.4 trillion in sales)? Exhibit 2 shows the percentage of 177 industries in which there would have been a change in the number of accounting firms that were major competitors, as the national firms shifted from the Big 6 to the Big 4. It assumes a Big 4 firm would still have needed an equal share—now at 25%—to make it a major competitor. This calculation leads to a drastic change: nearly half (43%) of all industries would have had fewer major competitors to choose from for audit services if the Big 6 had become the Big 4.

Exhibit 2: Competition Change— 25% Share Is Competitor Threshold
Decrease 43%
Increase 1%
No change 56%

Walker and Lathan assumed that a Big 6 firm having an equal share (one-sixth, or approximately 17%), or greater, of audit clients in any industry was a "major competitor." If the firms had become the Big 4, would it still have been appropriate to consider that a 17%-threshold share made a firm a major competitor? That is, would a firm with a 17% share of an industry have been able to compete and survive over the long run? Or should a firm need a 25% share in an industry to consider itself a major competitor and compete effectively? The threshold used radically changes the number of competitors. Exhibit 3 is identical to exhibit 2, except it assumes the 17% figure remains constant: if a one-sixth share makes a major competitor before the merger, one-sixth would still make a major competitor after. This shows that only 16% of all industries would have had fewer major competitors to choose from and that 13% of the industries would have had an increase in competition.

Exhibit 3: Competition Change— 17% Share Is Competitor Threshold
Decrease 43%
Increase 1%
No change 56%

The mere 8-point (25%—17%) difference in threshold results in a 27-point (43%—16%) difference in the "decreased competition" figure. In fact, the 17% threshold may imply that the mergers would not have greatly reduced competition. Note that in both exhibits 1 and 2, the majority of the industries would have had no change in number of major competitors to choose from. And Walker and Lathan point out that these figures represent only one method of measuring competition; there are others. Obviously, the firms attempting to merge would argue for the 17% threshold.

The differing projected results for the Big 4 show not only that there was enough hard data to split up one merger but also that regulators now and in the future will have their work cut out for them in reaching a rational decision.


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Black CPA Centennial, 1921–2021

With 2021 marking the 100th anniversary of the first Black licensed CPA in the United States, a yearlong campaign kicked off to recognize the nation’s Black CPAs and encourage greater progress in diversity, inclusion, and equity in the CPA profession.