PracticeAccounting Firms35th Anniversary: Back to the future

35th Anniversary: Back to the future

The year 2000 feels longer than four years ago. We had a Big Five then, WorldCom was busily expanding, while Enron was a company revered for the shareholder value it created and not notorious for all that it destroyed.

And, of course, there was Arthur Levitt, the then chairman of the US Securities and Exchange Commission. Four years ago Levitt was none too popular with the big firms as he fought to ensure they maintained their independence from clients. His headline-grabbing solution was to see the firms divest themselves of their consulting arms. It had an effect.

That prompting helped persuade Pricewaterhouse-Coopers to review the relationship between its consulting and audit arms – and to sell its consulting side to IBM.

Meanwhile KPMG pressed the SEC for a decision on whether the firm could float its consulting arm, while Ernst & Young partners prepared to back the firm’s decision to sell its consulting arm to Cap Gemini.

Only Deloitte stood out, as it adopted a strategy of keeping its head down as it worked out how to avoid a sell-off. When Levitt retired in 2001 after a three-year war of attrition, Deloitte’s hesitancy appeared to pay off.

The SEC had already passed rules substantially limiting the amount of consultancy work that large accountancy firms could offer their audit clients. But the final version of the rules was widely seen as half-baked – a compromise with which few were happy.

Today, the past looks as though it is about to be replayed. E&Y, we understand, is considering stepping back into the consulting arena next year, once the terms of its sale agreement with Cap Gemini lapse. It won’t be long before others follow suit.

There is an uncomfortable familiarity and circularity to all this. Most industry-watchers said – privately at least – that the firms that had sold off their consulting arms would, in time, look to build those businesses back up. In 2005 it appears that will happen.

Independence and impartiality are accountancy’s greatest strength. Few other professions can offer companies the same degree of external assurance.

But as firms continue to seek revenue streams that can offer double-digit growth to counteract flat markets elsewhere, they are also its greatest weakness.

Running consultancy operations alongside audit arms will not be an issue for a few years. But if a big firm is able to build up a strong consulting practice once again, it will have some tough questions to answer about independence. And then the cycle will begin again.

Email comment@accountancyage.com.

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