In an accounting industry still recovering from the drama of Andersen's sudden collapse and the subsequent onslaught of new rules, Deloitte Touche Tohmatsu is taking a gamble by forging ahead with a business model its peers have ditched, analysts say.
The firm abruptly broke ranks with the rest of the industry last month by opting to keep its consulting arm in house instead of spinning it off as previously planned.
In doing so, the spotlight is back on an issue that has been a painful thorn in the side of the accounting industry, since critics argue that auditors can't vouch for a company's books after pocketing hefty consulting fees from that client.
In an interview, Deloitte's incoming U.S. Chief Executive James Quigley said the firm was confident of avoiding conflict of interest concerns because it had discussed the issue with regulators and would focus on providing consulting services to the some 75 percent of U.S. public companies it doesn't audit.
Some analysts, however, question whether the move invites unnecessary regulatory scrutiny and disadvantages the firm in the fight for clients in a competitive and dismal economic environment where consulting contracts are hard to come by.
“It's a feasible plan, but I don't know if it's practical,” said Mark Cheffers, an accounting consultant who runs accounting consultancy www.accountingmalpractice.com.
A number of high-profile names have already parted ways with Deloitte on the issue.
Earlier this year, Clorox Co. CLX.N dumped the accounting firm after 46 years because it had not yet completed the separation of its consulting and audit arm. Car retailer AutoNation Inc. AN.N followed suit earlier this month and General Motors Corp. GM.N — which paid Deloitte $102 million in total fees in 2001, including $21 million in audit fees — earlier this week said it would no longer use the firm for consulting services.
For its part, a company spokesman says the consulting unit derives less than 10 percent of its revenue from clients audited by Deloitte, since many clients had already decided to stop buying consulting and audit work from their accounting firm. At the end of the fiscal year in June last year, that figure stood at between 20 to 25 percent, he said.
As of April 15 last year, all of Deloitte's Fortune 500 audit clients had also paid the accounting firm for non-audit work, said Jonathan Hamilton, editor of industry newsletter Public Accounting Report.
SOURCE OF CONCERN
During the boom years of the 1990s, accounting firms aggressively built up their money-spinning consulting units and later beat back initial attempts by regulators to prohibit consulting contracts with audit clients.
Deloitte, in particular, maintained it would keep its consulting and audit arm under one roof. But matters came to a head during the Enron-Andersen debacle last year when a backlash against the practice erupted after critics asked if consulting fees from Enron had impaired Andersen's independence. Deloitte reluctantly agreed to spin off the consulting arm.
A few months later, Congress passed the sweeping Sarbanes-Oxley law that bars accountants from providing a variety of consulting services. But, late last month, the company reversed course and ditched plans for the spinoff, citing a tough credit market and an uncertain economy.
“This is a very, very different than the environment that existed when our separation was announced,” Quigley told Reuters, saying that Sarbanes-Oxley and the burden on audit committees to decide what services auditors can provide had eased concerns about potential conflicts of interests.
Still, the move will once again force Deloitte to fight to prove it is just as independent as other accounting firms who have spun off their consulting units, said Hamilton. Further, being unable to pursue an entire section of corporate America could frustrate Deloitte Consulting employees since few like to walk away from a willing client, Cheffers argues.
In a newspaper interview, PricewaterhouseCoopers CEO Samuel DiPiazza said Deloitte's decision to retain its consulting arm could “send the wrong message.”
Quigley dismisses that concern by saying that the company had largely adjusted to the decision by companies to stop buying both consulting and audit work over the past year and that it was better for an accounting firm to focus on a segment of the market.
Others, like University of Georgia professor Dennis Beresford, who serves on the audit committees at Kimberly Clark Co. (which is audited by Deloitte) and Legg Mason, say concerns over compromising independence do not arise if the auditor does consulting work only for non-audit clients.