Consulting Journal: Trends - Consulting and accountants (1)

Trends: Consulting and accountants (1)

by David Blakey

Will the consulting sector change as a result of Enron?

[Monday 18 March 2002]

The Enron situation - and others like it - have prompted responses from the House of Representatives, the Securities and Exchange Commission and the AICPA in the US, and from other legislative, regulatory and professional organizations throughout the world. There has also been considerable coverage and comment in the media, both in the US and internationally.

It is clear that there are issues of independence and responsibility, and that some of these involve consulting practices within accounting firms.

History

It was accounting and auditing firms that moved into consulting and not the other way around. There are two many restrictions, both in terms of qualifications and in terms of the operation of a professional ‘closed shop’ for a company engaged in some other sector - such as consulting - to be able to diversify into accounting.

The big accounting firms moved into consulting as ‘business advisers’. They provided assistance to clients on financial matters and this later moved into financial information systems advice and some work as internal auditors. These grew into strategic consulting, full information systems implementation, and a broad range of consulting practices, covering specific sectors - such as retail and energy - and covering specific business areas - such as business improvement and quality management.

Some clients accepted ‘cross-selling’ of consulting by their auditors; some clients restricted the amount of work - as a dollar ‘cap’ - that their auditors could perform as consultants; and others rejected any consulting advice from their auditors. As it happens, many of the largest, most robust and long established companies adopted one of these two latter policies. They capped or rebuffed any consulting work by their auditors. Smaller, growing companies were often happy to accept consultants from their auditors. They believed that they would get value for money, that the consultants were experienced, that the advice would be impartial, and that they could not do better if they went through a competitive selection process.

As it happened, they were wrong on all counts.

Value for money?

Many consulting practices within accounting firms have simply not given value for money. They have adopted the audit practice of charging on an hourly basis. They have also adopted the audit practice of running a consulting assignment as a ‘black box’. This means that clients would brief the consultants, the consultants would almost disappear for a few weeks, except for some interviews with senior management, and the consultants would then present a report. Often, the final report from a consulting assignment would entirely ignore the clients' culture and traditions. Sometimes, sweeping changes to these were suggested that would throw the client into confusion. This was one of the features of much of the business process re-engineering (BPRE) work that consultants did.

The consulting practices within the accounting firms were reluctant to accept any risk during the implementation of their suggestions. They clung to an hourly rate instead of offering a contingency fee. A contingency fee would mean the consultants accepting a percentage of the actual financial benefits to the client. If real dollar revenues were increased or if real dollar costs were decreased, the consultants would get a share. Consultants with the accounting firms were extremely reluctant to accept this method. I would argue that this is proof that they had little confidence that their recommendations would produce tangible results.

Experienced?

One of the features of the consulting practices of the accounting firms has been their fixation with methodologies. This led to a major change in the expectation that many clients had of consultants. The technical consultants from the mainstream of consulting continued to sit down with their clients, talk through issues, apply their experience and make recommendations. This continued to be the pattern in engineering, for example. In management consulting, however, this pattern was largely replaced by a consultant sitting down once with the client, getting enough information to enter into the methodology tools, applying the methodology and giving the client standard answers. In some instances, such as information systems strategic plans (ISSPs), this went so far that it became almost like some Victorian automaton on an English seaside pier: the little figures moved about, following a set course, and the result was always the same. The advantage to the accounting firms of using methodologies was that they could use their senior, experienced consultants to make sales, and then put their junior consultants in to do the assignments, at senior consultant rates. The only investment that they would have to make was in the development of the methodologies, and a great deal of that work was done on clients' assignments, on clients' sites, and on clients' time.

Impartial?

Consultants can be said to be impartial if they present their clients with a case for further work that allows that work to be performed by someone else. Here are some examples of consultant impartiality.

A consultant recommends that a client should retain a specialist consultant - another consultant - to examine their energy needs and costs. The reverse of this is the consultant who calls in another consultant from their own firm.
A consultant specifies a new information system that will not depend on that consultant's development skills for its implementation. The reverse of this is the consultant who specifies a system so that it requires software available from the consultant's firm.

Competitive?

The consulting practices of the major accounting firms are hardly competitive with the market when you consider their fees and their additional charges. These firms have their premises in expensive properties, usually in the central business district. They have partners who need to demonstrate that they earn fees themselves, so these partners may perform ‘quality assurance’ on the consultants' work, adding hours at a rate higher than the consultants' rates. They charge for all kinds of ‘services’, including photocopying, telephone calls and even Internet access, that other consultants write off as part of the cost of doing business.

[In the next article, I shall look at the proposed legislation and its effectiveness.]

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