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Post-Enron accounting firms thrive despite reforms

NEW YORK, Dec 23 (Reuters) – With the Enron-Andersen scandal looming over the accounting industry like a malignant growth at the start of 2002, the year looked grim for accounting firms.

But as the year draws to a close, the major accounting firms have not only survived the turmoil and wing-clipping reforms, they are thriving. Their business model has seen only modest changes, while their bread and butter auditing business has been reshaped into an aggressive effort to root out fraud, accountants and industry consultants said.

The collapse of accounting giant Andersen because of its role in the Enron Corp. debacle had raised fears that firms would have to disband the business model developed in the 1990s of broad-based “professional services firms.” But the reforms ushered in the with Sarbanes-Oxley bill passed over the summer only pushed accounting firms to focus consulting work on non-audit clients

In addition, the firms have seen a bonanza of new clients and higher audit fees.

“As bad as it looks for the accounting industry this year because of what happened with Andersen, and despite not just Sarbanes-Oxley but also a recession, this is going to be a record year for all the firms simply because of all the business they've gained,” said Allan Koltin, an industry consultant and head of the Practice Development Institute.

TIDINGS OF JOY?

Pressure on top accounting firms to spin off their consulting arms to remove potential conflicts of interest had raised fears that the change would sound the death knell for the firms' management consulting services.

Firms that had not already spun off their consulting businesses did so earlier this year. PwC, which had already decided to separate its consulting arm, sold the unit to IBM Corp. in July. Deloitte's consulting unit was spun off as a private firm in June.

But contrary to fears, the non-audit business is alive and well. The remaining Big Four firms still provide non-audit and management consulting services ranging from merger advice to legal services, but now for non-audit clients.

PricewaterhouseCoopers, for example, has seen increased non-audit business, such as internal audit work, because rival firms can no longer provide those services to their own audit clients, PwC U.S. Chairman and senior partner Dennis Nally said.

“We would say while there have been changes in terms of where those services are provided, it has not had anything other than a positive impact on the business,” Nally said in an interview.

The industry still faces the prospect of tougher regulation and legislation, but the structure of accounting firms involved in many different businesses has survived largely intact.

Firms such as PricewaterhouseCoopers and Ernst & Young say that's because they had already restructured their businesses when the scandals erupted. With the exception of Deloitte & Touche, each of the major players had already spun off or moved to separate their consulting units when the scandals erupted.

As a result, they didn't have to make additional changes when new laws were passed over the summer, they say. KPMG will review the services it offers once final rules stemming from the Sarbanes-Oxley bill are issued, a spokesman said.

AUDIT FEES SPIRAL

Accountants have also responded to the new restrictions by using existing network alliances with local and regional accounting firms to refer business back and forth.

Mid-market accounting and consulting firm RSM McGladrey, for example, has been able to use its network to bounce off consulting services to local and regional partners when it cannot provide them to audit clients, said Dan Brooks, executive director of RSM McGladrey.

The auditing business, meanwhile, has flourished, from new clients won from Andersen's demise and from higher audit fees due to additional work demanded by audit committees.

PwC has seen audit fee hikes of 15 percent to 25 percent, and they are expected to go up further as more is demanded of audit teams, Nally said. Ernst & Young has seen similar increases in audit fees, Beth Brooke, the firm's global vice chair of strategy, said in an interview.

To be sure, the profession is still waiting for regulators to spell out new rules mandated by Sarbanes-Oxley, which could put a lid on some remaining lucrative services they provide audit clients, such as certain types of tax work.

A powerful lobbying force on Capitol Hill — the Big Five accounting firms, including Andersen, were among the top 20 contributors to President George W. Bush's 2000 presidential campaign — the accounting industry's fate now lies in the approach pursued by federal regulators.

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