Audit firms are once again placing more emphasis on providing clients with consulting services to help enhance business strategies. This renewed activity can easily lead down the same road that led to the Enron fiasco, the demise of Arthur Andersen, and the
The Sarbanes-Oxley Act of 2002 (SOX) prohibits independent auditors from providing to their audit clients specified nonaudit services, primarily management consulting. But auditing firms, including the Big 4, appear to be moving back toward providing more consulting services in order to benefit their bottom line. The ethics culture that drives the deliberate strategy to provide more of these highly profitable and rapidly growing consulting services could very well lead to the same conflict of interest that brought about the SOX legislation—that is, diminished efforts by audit firms to perform high-quality audits for the benefit of investors and the public.
The language in SOX Section 202 specifically bars audit firms from providing to their audit clients consulting services involving “management functions or
PwC’s press release broadly describes the purchase of Booz as providing “an enhanced range of services for our clients” and announces the new name for Booz is Strategy& (pronounced “Strategy and”). The release also says that the acquisition “reflects the strength in strategy consulting that Booz & Company brings to the PwC Network and the benefits this deal will bring to all clients and stakeholders.” It isn’t clear how consulting clients about strategies doesn’t expressly conflict with both the language and intent of SOX to preserve the independence of audit firms from their clients.
The website for Strategy& contains information about the types of services the firm provides and articulates what it means by “strategy consulting.” Some of the statements on the site include:
* “What PwC and Strategy& create together will be unique.”
* “We’ll offer clients something they can’t get elsewhere: a combination of strategy consulting expertise, and a proven track record of delivery, with unrivalled global scale and experience.”
* “Clients will be able to get practical strategy advice from people who understand the opportunities and risks involved in implementation—and strategic execution skills from people who understand the context.”
These suggest that one of PwC’s primary growth strategies is to provide broad-scope consulting that involves the kinds of strategic business decisions only management and the board of directors can make and then facilitate the tactical implementation of those decisions.
In a May 1, 2014, speech at Baruch College’s 13th Annual Financial Reporting Conference, James R. Doty, chairman of the Public Company Accounting Oversight Board (PCAOB), noted that “Audit is a declining portion of accounting firms’ business models.” This is a sharp turnaround from the practices firms adopted a decade ago shortly after SOX was passed. Most of the then-Big 5 accounting firms divested their consulting businesses, and PwC was no exception.
In October 2002, PwC sold its consultancy business to IBM for approximately $3.9 billion in cash and stock. But beginning in 2009, PwC began to backtrack by acquiring firms—including Paragon Consulting Group and BearingPoint, the North American commercial practice that succeeded KPMG Consulting—to rebuild its consulting practice. PwC continued its acquisition strategy by adding Diamond Management & Technology Consultants Inc. in 2010 and a firm called PRTM in 2011. In 2012, PwC acquired a social media strategy development and consulting firm called Ant’s Eye View so that it could augment its growing customer impact and customer engagement capabilities in management consulting. The 2013 acquisition of Booz & Co. was a natural follow-on.
Ernst & Young (EY) coped with divesting from its consulting practice by selling it to Capgemini SA, a large global consulting firm headquartered in Paris, France. EY isn’t known to have engaged in large-scale merger activity after 2002, when it acquired some of the remaining practices of Arthur Andersen outside the United States. Its French website doesn’t mention providing consulting services, but its U.S. website indicates that the firm provides advisory services related to performance improvement, performance technology, and
The smallest of the Big 4, KPMG, spun off its consulting practice in 2000 as KPMG Consulting. The company went public in 2001 and was renamed BearingPoint a year later. It fell on hard times, and its U.S.
Deloitte, which is competing with PwC to be the largest accounting firm, is the only one that didn’t divest its consulting practice after SOX was enacted. Its consulting website calls it the largest consulting firm in the world, providing perhaps the most diverse array of consulting services. General categories of the consulting services it provides include analytics, business transformation, digital enterprise, human capital, strategy and operations, technology services, and innovation. Additional services are provided under the heading Financial Advisory Services and Deloitte Growth Enterprise Services.”
In addition to part of BearingPoint, Deloitte also acquired Drivers Jonas in the United Kingdom in 2010, plus ClearCarbon Consulting and DOMANI Sustainability Consulting in 2011 to augment its offerings in the field of sustainability. Deloitte entered the mobile application field in 2012 when it acquired Übermind, Inc. and Monitor Group after Monitor filed for bankruptcy.
There are many potential dangers to the independent auditing function as the Big 4 accounting firms (and undoubtedly many smaller firms) become preoccupied with consulting services, and the PCAOB has started to take notice. In a December 2013 speech at the American Institute of Certified Public Accountants (AICPA) National Conference on SEC and PCAOB Developments, the PCAOB’s Doty posed a number of questions dealing with the impact of consulting on audit quality:
* “Of what consequence are these developments for the audit function? What are the implications for independence of the audit function?”
* “What will firm management do to meet the compensation and cultural challenges that destabilized Arthur Andersen?”
* “How will firms avoid talent misallocation, with the best minds going to consulting at the expense of audit expertise and competence?”
* “What is the capability of audit
* “What are the risks of other business lines and how do they affect resource allocation and investment in audit?”
Doty also noted that “audit firms have said that the acquisition and ownership of nonaudit expertise benefits and supports audit expertise.” Following his speech, however, he questioned that assertion, wondering about the extent to which firm consulting expertise can impact audit quality and
In the midst of this, public reports on audit quality continue to be disappointing. In April 2014, the International Forum of Independent Audit Regulators (IFIAR) released a global survey of audits conducted by the six largest audit firms. Titled “Report on 2013 Survey of Inspection Findings,” the survey “indicates the persistence of deficiencies in important aspects of audits and that there is a basis for ongoing concerns with audit quality.”
In the 1930s, to serve the public interest, Congress mandated that all public companies engage independent auditors to perform periodic auditing services. Many of these audit providers have merged over time, which means the vast majority of these services are now provided by only a very few firms. Economists characterize this situation as an oligopoly. A 2012 academic study, “The Capture of Government Regulators by the Big 4 Accounting Firms: Some Evidence,” found that regulators “have failed to indict any of the Big 4 for known criminal actions” because of a “too concentrated to indict” modification of the “too big to fail” doctrine.
The public interest isn’t being served if we stand by while accounting firms become global, giant, broad-scope financial service enterprises designed to serve a wide variety of the needs of client management with a lesser commitment to perform the highest-quality independent audits. It’s hard to see how such firms can effectively serve the conflicting interests of such disparate groups of stakeholders. Firm management attention and resources inevitably follow the business line providing the greatest profitability. But we can’t permit the consulting excesses and “please-the-client” culture that led to the demise of Arthur Andersen and collapse of Enron to occur ever again.
Curtis C. Verschoor, CMA,
©2014 by the Institute of Management Accountants (IMA®), www.imanet.org; reprinted with permission.
Reprinted with permission from Strategic Finance.