Consulting Pays Off for Accountants Again

Deloitte & Touche resisted splitting with its consulting arm, and now the multibillion-dollar segment has inspired other audit firms to rebuild theirs

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Four years ago, the partners of Deloitte & Touche did something radical: They kept the firm in one piece. The Big 4 accounting firm had spent more than a year calculating how it would sever its large consulting practice from its audit and tax group. It was the only one of the big firms that hadn't already done so, and pressure inside and outside the firm was high for them to split.

Outside, concerns raged that consulting had compromised the integrity of the audit. The Sarbanes-Oxley Act had already prohibited firms from selling a number of consulting services to audit clients, chief among them the multiyear IT system integrations that had been their cash cow. Big lawsuits accusing the firms of bias at Enron and a long list of other meltdowns added to the drumbeat. For Deloitte Consulting to survive, all signs seemed to point to separation.

But Deloitte had waited too long. Arthur Andersen had already collapsed under the weight of its Enron woes, and the lenders Deloitte relied on to finance its planned management-led leveraged buyout were demanding big premiums and collateral, too. Audit-client defections meant consulting revenue was dropping, and potentially might not be enough to cover the deal costs. So on Mar. 31, 2003, with little alternative, the firm scrapped the idea.

Advisory Bandwagon

Sometimes it's better to be lucky. In the years since the aborted breakup, Deloitte's consulting business has taken off. Consultants have more than made up for their losses at audit clients by selling to the three-quarters of public companies the firm doesn't audit. Private equity firms and their companies are big clients, too. Strong need for consulting on Sarbanes-Oxley compliance, risk, forensic investigations, and outsourcing has helped fuel demand. So has the mergers-and-acquisitions boom. Today, consulting is Deloitte's second-largest business in the U.S., a $3 billion segment that accounted for more than one-third of the U.S. firm's 2006 revenue. "In a strange kind of way, we're very fortunate," says Barry Salzberg, chief executive of Deloitte & Touche USA. "By serendipity we ended up with a strategy that is unique."

Worldwide, consulting is an even bigger business for Deloitte, making up 45% of its $20 billion in global revenue. In 2006, it totaled $8.9 billion, according to Peterborough (N.H.)-based Kennedy Information. And it hasn't taken long for the other audit firms to do the math, and quickly rebuild their own consulting arms. KPMG Worldwide last year sold $5.3 billion of consulting, a 12% jump from the year before; PricewaterhouseCoopers (PwC) $3.7 billion, up 20%; and Ernst & Young $2.4 billion, a 2% increase. "It's a huge growth industry, and a big margin business," says Clark Beecher, a professional-services executive search consultant at Houston-based Magellan International. Beecher estimates demand for consultants who do the work the Big 4 specialize in is now 15 times the supply. "It's the old mentality again. You sell everything you can."

Independence Issues

That, of course, is exactly what got the firms in trouble the last time. Critics say that the resurgence of consulting within these firms is raising concerns once again that consulting could grow so big that it becomes hard for audit firms to keep the proper focus on the audit part of the business. "The real issue that's going to be posed is, have you learned your lesson or is this going to turn out badly again?" says Tom Rodenhauser, vice-president of Kennedy Information's consulting division.