Consulting Pays Off for Accountants Again

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Lynn Turner, former chief accountant of the Securities & Exchange Commission, notes that ensuring auditors don't overstep the bounds of what's allowed falls ultimately to each company's audit committee. But those committees are not always as attuned to independence issues as they might be. As evidence, Turner cites recent examples of companies where auditors were partly paid on a contingent-fee basis. Such fees are a no-no under U.S. regulatory rules, but the audit committees hadn't caught it.

A series of SEC and private lawsuits accusing the firms of independence violations in the 1990s and early 2000s continue to fuel concerns. Most recently, PwC paid $2.3 million to settle Justice Dept. allegations of kickbacks and undisclosed conflicts of interest in government contracts, though they did not admit wrongdoing and denied kickbacks. Those contracts were handled by the consulting group PwC spun off in 2002. On Aug. 13 and 14, a Florida jury came in with two verdicts of $521 million combined against BDO Seidman, the sixth-largest audit firm. That case included accusations of conflicts of interest in BDO's audits of factoring firm E.S. Bankest, based on a BDO affiliate's consulting work at the company. The firm is appealing.

Benefiting from Compliance

Given these criticisms—and others involving Enron, WorldCom, Adelphia, Tyco (TYC), et al, it's more than a little surprising that the very dangers those meltdowns highlighted are what's driving much of the demand for Big 4 non-audit services today. Mark Goodburn, head of KPMG's advisory business, says forensic investigations and anti-money-laundering concerns are among the businesses that have grown his practice to 30% of the firm's U.S. revenue. "The risk awareness has been changed forever," says Goodburn.

M&A deals that used to be done on the CEO's handshake now take months of financial due diligence. Even credit markets are finally demanding tough financial reviews of debt. High turnover among chief financial officers, combined with increasing responsibility in that role, has provided a steady stream of customers in need of help.

At Deloitte, partners say consultants are far more intertwined with the rest of the business than ever before, starting with their wallets. The SEC outlawed the practice of paying auditors based on non-audit work. So now Deloitte has one big pool of profit that auditors, tax experts, and consultants all share. Audit partners can still refer business to their consulting counterparts, but they only benefit in a broad sense, no longer directly. "Teaming became our mantra," says Salzberg. James Quigley, chief executive of the global firm, Deloitte Touche Tohmatsu, says the U.S. firm's array of services makes it "a category of one."

A 200-Person Assignment

Rival audit firms aren't conceding that point, but Deloitte is cross-selling pretty vigorously these days. One example: A large project the firm did for test and measurement company Agilent Technologies (A) in 2005 and 2006. Agilent, then a $7 billion hodgepodge of businesses Hewlett-Packard (HPQ) had spun off, wanted to split up, and eventually sold off its semiconductor business to private equity firm Kohlberg Kravis Roberts (KKR) and spun off another business, Verigy (VRGY).

Deloitte was the main adviser on all three deals, and put a team of 200 different people on the assignment. Auditors advised on how to set up the IPO financials, consultants helped design the proper supply chain for a smaller Verigy, and tax strategists worked to lower the tax bill for the remaining Agilent business. In the course of the work, Deloitte ran into just one independence issue. The firm had been running some of the systems KKR was buying, and since Deloitte audits the private equity giant, it had to off-load those duties before the deal closed. Other than that, says Agilent CFO Adrian Dillon, there was "never an issue."

Accountability Matters

To ensure it stays that way, Deloitte has a firm-wide training program for all professionals, and everyone has to attest each year, around the time of their birthday, that they have not provided forbidden services. The firm has changed its accounting system as well. It won't allow someone to start a project at all without first asserting the lead partner at that company has O.K.'d it. (Any new engagement requires an accounting number.)

The lead partner is particularly pivotal, because he or she knows all the business the firm is doing at the client and is in the best position to flag any potential issues. Deloitte has created a team that randomly audits its own engagements to ensure compliance as well. Thanks to Sarbanes-Oxley, the services with the clearest potential for conflict of interest have been outlawed. And though there remains potential for tension within the firm if one practice is growing faster than another, Deloitte purposefully no longer calculates the individual profitability of its audits or consulting in an attempt to foster team spirit.

It's not easy to know for certain how well any of the firms' systems are working. The Public Company Accounting Oversight Board (PCAOB), created by the Sarbanes-Oxley Act to monitor audit quality, does check whether auditors are providing any of the explicitly prohibited services. But the PCAOB does not publicly disclose their findings. At Deloitte, small issues may have been raised, Salzberg says, but the firm, he asserts, has yet to lose a single client over an independence issue.

Byrnes is a senior writer for BusinessWeek in New York.