Consulting Journal: Trends - Consulting and accountants (3)

Trends: Consulting and accountants (3)

by David Blakey

The third article suggests a possible future for consulting and accountants.

[Monday 8 April 2002]

In my previous two articles I discussed the Enron situation and the proposed Corporate and Auditing Accountability, Responsibility and Transparency Bill. I shall close the series by presenting my thoughts for the future of accounting and consulting.

Divestment

Most of the major accounting firms have already divested themselves of their consulting practices. Arthur Andersen and KPMG moved them out of the main firm. Ernst & Young sold its to Cap Gemini. Despite this, some consulting has continued. PricewaterhouseCoopers has retained all its consulting business, although there were discussions with Hewlett Packard some time ago. All the other firms have either kept some areas of consulting, such as internal audit, or they have rebuilt some areas of consulting that they had previously divested, such as systems development.

Retention

I do not imagine that the accounting firms that voluntarily give up consulting. It brings in higher fees per person that auditing. It can be done all year round. Much of the consulting by accounting firms can be proceduralized and mechanized by methodologies and software tools. Consulting is just too good for them to want to stop doing it.

Consulting can also be sold more easily to existing clients. An audit client may appoint consultants from the same firm without a competitive pitch. It may be more difficult for a consulting company that is not part of an accounting firm. In most countries, corporate bodies must have external auditors. It is not surprising, therefore, that auditors should use this legal requirement in order to do more business, not that they should want to keep the opportunities within their audit clients to themselves.

Protection?

I do not support clients being ‘protected’ from this. I am a firm believer in caveat emptor - let the buyer beware. If a client is prepared to appoint consultants in this way, then that is their affair. There is an exception for most government work in many countries, where a government department or agency will have to conduct a transparent and competitive selection.

The real problem, as I see it, is that auditors - and their professional associations - have decided that they will not try to discover wrong-doing by their clients. If such wrongdoing is not apparent from the accounts that they are asked to audit, then they have no reason to check whether there is any wrong doing at all. But what happens when such wrongdoing is discovered by a consultant from the same firm? Are they obliged to make this knowledge available to the auditors?

The magical shredder

When documents are in the possession of the consultant, can they be assumed to be in the possession of the firm? And, hence, can these documents be assumed to be in the possession of the auditors? Generally, there is an issue of corporate responsibility here that most companies would recognize. Within accounting firms, this corporate responsibility is not only not recognized: it is often evaded. This is where the accounting firms - and their associations - have failed. This is why legislation is now needed.

It may come as a surprise to accounting firms that a shredder will only shred documents. It will not remove the fact that the documents were in their possession at some time. No professional criminal would expect that destroying evidence of a crime would remove the crime itself.

It seem to me that the only solution to all this is legislation. If accounting firms are not going to acknowledge the information that their consultants have unearthed, then they must be prevented from getting into this situation. It would be difficult to enforce a law that compelled auditors to look for problems. The practical solution is to stop them doing other work for their audit clients. Some clients already prevent this. Some do not engage consultants from their auditors. Others set a limit to the consulting fees that they will spend with their auditors. The Bill will stop an auditor who provides two specific kinds of consulting to its clients from certifying the accounts of those clients. The result will be that the accounting firms will drop these kinds of consulting, rather than drop the audits.

The Bill, unfortunately does not go far enough. In my view, no accounting firm should be able to audit a client to whom they provide any other services, of any kind. I think that we shall need to see a few more scandals like Enron before that occurs.

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