The U.S. General Accounting Office has released a report warning regulators of the risk of sanctions against the remaining Big Four public accounting firms, while also pointing out that they should not feel that they are "too few to fail."

The report, PUBLIC ACCOUNTING FIRMS: Mandated Study on Consolidation and Competition, was developed by the GAO for Senate Committee on Banking, Housing, and Urban Affairs and the House Committee on Financial Services.

The GAO study points to consolidation in the accounting profession and the demise of Arthur Andersen as leaving the audits of public companies in the hands of just a few firms.

"It is important that regulators and enforcement agencies continue to balance the firms' and the individuals' responsibilities when problems are uncovered and to target sanctions accordingly," the report said.

It suggests the possibility of curbing any additional consolidation among the Big Four to preserve competition in the industry.

"For example, when appropriate, hold partners and employees rather than the entire firm accountable and consider the implications of sanctions on the audit market."

Smaller Firms Face Significant Barriers to Break Into Top Tier

The 147 page study cites significant barriers for other firms to break into the top tier for auditing large multinational public companies. Barriers for smaller firms identified in the study include:

• The lack of staff resources, technical expertise, and global reach to audit public companies.

• Public markets prefer the Big Four because of their perceived reputation.

• Increased litigation risk and insurance costs create a strong disincentive to smaller firms.

• Raising the capital to establish a global structure to compete will be difficult for smaller firms because of the nature of partnership structures.

• Certain state laws, such as state licensing requirements, make it harder for smaller firms that lack a national presence to compete.