One obvious conclusion here is that - if big accountancy firms require a minimum of 4 operating to give a safe enough operating population, the goverment should be encouraging smaller firms to get together and submit tenders for large goverment contracts - to increase the number of viable alternatives and promote the growth of further competition.

I just don't expect to see it happen.

"The regulators are particularly concerned that the outcome could damage an
already-concentrated audit market by taking out another major player..."

What is the key problem here? I'm not familiar with the corporate audit world. Are fewer large companies bad because of the scarcity it would create? The monopoly potential?

Markets are good because they encourage strategic choice? What are the strategic choices made by a company when hiring an auditor? If it is primarily cost-based, then presumably the (real) threat massive fines would help correct the market. Alternatively, prosecutors could adopt the practice of massively investigating every client of an accused auditor, which would presumably put a market premium on Squeaky-Klean-Audit inc.

To play off Dave's point, fines could go to the promotion of smaller firms. I worry about breeding a set of firms that handle government contracts as a specialty, since that seems like a good recipe for capture.

The nature of the concentrated market is probably a reaction against the power that the big auditers have, as well as intensive lobbying by the firms concerned. They are called the "Big N" because they can demand and get the big accounts; there is tremendous pressure on large firms and large government buyers to buy from the brand names, because that brand carries on to their customers.

There is a fear that if we go to Big 3 then those three firms will simply have more power of the type they exhibit now.

For example, there is the Sarbanes-Oxley affair. The big audit firms lobbied for this, and now it's here. The costs are clear, the benefits are not. Only the big auditors are clear winners in the expansion of what is basically bureaucratic territory. Nobody's much expecting this to stave off the next WorldCom, it's fighting the last generation's battles, so what's the point? And who were the people that did this to us?