Deloitte to Keep Its Consulting Unit

Deloitte Touche Tohmatsu reversed course on Friday and said that it would keep its consulting business, becoming the only accounting firm in the Big Four to retain its consulting and auditing services.

Deloitte announced plans to spin off its consulting work in February 2002 when the corporate accounting scandals fueled calls for change. It was the last of the big firms to do so. Concerned that auditors might have gone easy on companies because of lucrative companion contracts for consulting, critics urged the firms to stop consulting for their audit clients.

Regulators said that they had been informed of Deloitte's decision and that the firm would still have to comply with new laws.

Deloitte said the planned spinoff was dropped because of the weakened demand for consulting, the declines in the stock market and the risk that added debt would pose to each part of the divided firm. James E. Copeland Jr., Deloitte's chief executive, said that the firm would simply continue to operate as it has and would comply with laws and regulations intended to prevent conflicts of interest.

“There's no question about conflicts of interest here; that issue's been resolved with Sarbanes-Oxley and regulations,” Mr. Copeland said, referring to the law passed last summer that placed new restrictions on accounting firms. Among them is a prohibition on providing many consulting services to audit clients.

“We fully intend to comply with those laws and regulations,” he said. “We really already have focused our Deloitte Consulting practice on the 75 percent of the market that we don't already audit.”

Last year, many critics cited the conflicts of interest confronting Arthur Andersen as a big factor in its failure to act on potential evidence of fraud in its auditing of Enron.

Lynn Turner, a former chief accountant at the Securities and Exchange Commission who now teaches at Colorado State University, said his concerns were not assuaged. “There's all sorts of consulting that are not prohibited by Sarbanes-Oxley: business strategy, continuity planning.

“If Deloitte & Touche, unlike the other four firms, is going to retain its consulting practice, an audit committee would have to think long and hard about retaining them as their auditors,” he said.

Christi Harlan, a spokeswoman for the Securities and Exchange Commission, said that as long as Deloitte follows Sarbanes-Oxley, “it's not a problem.”

The Public Company Accounting Oversight Board, a regulatory body created by that legislation, will have to pay special attention to Deloitte, said Charles Niemeier, the acting chairman of the board.

“We'll have a special emphasis on that in light of the fact that separation did not occur,” he said.

Mr. Niemeier added that Deloitte's partners were probably unhappy that a transaction was not completed. “I'm sure they're probably just about as disappointed as anyone else was,” he said.

Mr. Copeland said the firm had not reached its decision lightly and had made a serious effort, spending tens of millions of dollars, to conduct a leveraged buyout. “If we could've gotten a deal done that seemed prudent on both sides of the organization, we would have done it,” he said.

“Because of the combination of tightening credit availability and declining market for consulting services, the combination of those two, again exacerbated recently by the situation in Iraq, really made it almost impossible to do this transaction,” he said. The firm had promised to announce its plan by the end of the quarter on Monday.

Still, Mr. Copeland said that a consulting arm would provide a competitive advantage, giving Deloitte access to expertise that might not be available to its rivals.

Beth A. Brooke, a vice chairwoman at Ernst & Young, said that splitting off consulting was successful for her firm and was still viewed that way. Ernst & Young sold its consulting business to Cap Gemini in May 2000. “We were the first firm to sell consulting,” she said. “We believe that it was the right thing to do then, and we continue to believe that it's the right thing to do now.”

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