Deloitte Bucks Trend by Continuing to Consult

Jim Quigley, chief executive of accounting giant Deloitte & Touche LLP, ran his hands down the softly glowing sides of a stand-up walnut desk — a replica of the desk used by one of the firm's founders in the 1890s.

The latest addition to Quigley's Manhattan office, the desk is an apt symbol of the task facing Quigley and other leaders at the $6.5 billion firm. In the wake of accounting scandals that have damaged investor confidence, Deloitte's leaders are trying to reach back to the glory days and polish the industry's tarnished reputation.

Complicating Deloitte's task is its strategy, unique among the other large audit firms, of keeping its consulting unit intact rather than selling it. Many of the past two years' scandals revolved around inadequate oversight by firms that were selling consulting services to the same clients whose accounting they vouched for.

Last year Congress passed landmark reforms designed to ensure that judgment is not compromised by lucrative consulting fees, barring auditors from offering certain kinds of advice to clients. The response by many other major accounting firms was to split off their consulting services from their auditing business. Now Deloitte is grappling with its choice to keep both businesses together while avoiding the conflicts that ensnared other firms.

“I just wanted to be reminded of the history of the firm and the kinds of decisions we have made, so we don't lose sight of that in pursuit of the short-term commercial goals,” Quigley said as he stood at the desk on a recent morning.

Concerns that Deloitte may be walking a fine line between profits and possible conflicts are the subject of animated discussions among regulators, consumer advocates, and even some clients, who have been forced to choose between hiring Deloitte to review financial statements and using the firm to evaluate their computer systems and personnel departments.

Deloitte announced earlier this year that it would retain its consulting unit, because splitting it off would have resulted in its partners' shouldering millions of dollars in debt. Deloitte's leaders say that the firm offers better audits in part because it can call on tax experts, pension gurus and others already within its ranks to advise clients on a wide range of issues.

According to its most recent public reports, 112 clients that used Deloitte for both services , paid Deloitte as much, if not more, in consulting fees as for audit work.

That figure worries ethics watchdogs, who fear that reforms designed to give auditors more backbone could be threatened. “As long as you've got these two functions combined, audit and consulting, there is a strong incentive to do whatever it takes to keep the client happy,” said Barbara Roper, director of investor protection for the Consumer Federation of America.

Deloitte said its consultants will not sell services that were barred in last year's Sarbanes-Oxley Act — such as technology consulting and payroll work — to the nearly 25 percent of large public companies it audits. Greg Weaver, who oversees audits for the firm, pointed out that Deloitte's consultants can sell their services to companies in the three-quarters of the market whose financial reports Deloitte does not review.

“The ability of a professional services firm to keep the public interest in mind, I think, is enhanced by the diversity of its practice,” Quigley said. Not being completely dependent on auditing fees makes it easier to challenge a client's accounting, he said.

Robert Kueppers, a veteran Deloitte partner who oversees independence and SEC issues for the firm, said there are several checks and balances in place to prevent conflicts. First, he said, anyone who wants to sell consulting services to a company that Deloitte audits must check with the lead audit partner who is charged with flagging any conflict of interest. Next, the client company's audit committee must approve the consulting work before Deloitte is hired to do it. What's more, Kueppers said, he and others in Deloitte's 10-member national compliance unit serve as the ultimate arbiters. Once the firm has reached a final decision on an issue, no partner can sign an audit opinion that conflicts with the firmwide ruling.

Not all of Deloitte's 450 U.S. consulting partners are happy with the decision to stick with the 750 partners on the audit side, though Deloitte's global chief executive, William G. Parrett, said that the formal legal vote in late August was an “overwhelming” decision and that the firm overall has kept turnover low.

Still, industry analysts warned that Deloitte's consulting partners could be picked off by rivals once the economy improves and demand for such work recovers. Indeed, Quigley said one of his biggest challenges as chief executive will be to get not just the “arms and legs” but also the “hearts and minds” of consultants who are independent-minded and itching to break off on their own.

Among those who have left is Todd D. Lavieri, a 13-year Deloitte veteran who headed the manufacturing-client practice. Lavieri and nearly a dozen other Deloitte consulting partners recently formed Stamford, Conn.-based Archstone Consulting, which provides management advice to manufacturing and life sciences clients. Lavieri said he realized there might be client interest in a smaller consulting firm when he started to get calls from headhunters earlier in the year after Deloitte decided against a consulting spinoff.

Industry analyst Tom Rodenhauser said the challenges for reintegrating the consulting arm are considerable, and competition from larger rivals such as International Business Machines Corp. and McKinsey & Co. is daunting.

“I think Deloitte is trying in one sense to go back in time,” said Rodenhauser, of Keene, N.H.'s Consulting Information Services. “So many things have changed, not the least of which is the consulting industry and what it's becoming.”

© 2003 The Washington Post Company

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