New York: Four of the five biggest accounting firms have said they will reject the industry practices that have prompted extensive criticism of Arthur Andersen, which audited financial statements of the Enron Corporation, The New York Times has reported.
PricewaterhouseCoopers and Andersen said they will no longer provide certain technology consulting services to clients whose books they audit and will stop providing internal and external audit functions at the same company. Ernst and Young and KPMG, which have shed their consulting businesses, said they will support the same measures, which are intended to avoid perceived conflicts of interest.
The remaining big firm is Deloitte and Touche, which has repeatedly stated its intention to keep consulting and audit services under one roof, a position that Andersen had supported until now. The scramble by most of the big firms to bolster their image shows just how worried accountants are about the prospect of new regulations or legislation. By acting now, the firms' executives hope to preempt such moves and preserve as much business as possible.
"They're under the gun," said Arthur Levitt, a former chairman of the Securities and Exchange Commission, adding that the proposals were constructive. "It suggests that the firms have gotten the message. Well have to see the details of what theyve agreed to and how its brought about." Enron's use of partnerships and other financing vehicles, and the role played by Arthur Andersen, remains sketchy. Legislators have complained that Enron, which has filed for bankruptcy protection, has refused to turn over important records.
Executives of the firms are trying to head off legislation or regulation that they regard as too tough, said Arthur W Bowman, editor of Bowman's Accounting Report. Even if the Big Five firms fail to deter the SEC from issuing new rules, he said: "This will mollify Congress, and Congress won't pass laws. If the SEC sets up a rule, the SEC can change a rule. If Congress passes a law, it's hard to change."
The three companies that still provide extensive consulting services PricewaterhouseCoopers, Deloitte and Andersen are not big in the global consulting market, accounting for less than 9 per cent of the $387 billion spent in 2000 on 'information technology professional services', which includes consulting and other services not related to auditing, according to Gartner Dataquest, a market research firm.
Still, consulting services remain significant sources of revenue for them, and the idea of separating consulting from auditing is symbolic because it was championed by Levitt when he was the nation's top securities regulator.
PricewaterhouseCoopers went the furthest of the large accounting firms, stating that in addition to discontinuing the practice of providing internal audit services and technology consulting services to companies that it audits, it will disclose more information about its business, compensation and audits to investors and clients even though it is not publicly traded.
One PricewaterhouseCoopers client, the Walt Disney Company, has said it will no longer buy consulting services from the same firm that audits its book, one of the first major companies to make such an announcement. Joseph Berardino, Andersens' chief executive, has said the firm is engaged in a comprehensive review of its policies and its services, and the announcement may be only one result. Patrick Dorton, a spokesman for Andersen, said "We will shortly be announcing a package of measures that will substantially change the way Andersen does business."
Accenture, formerly known as Andersen Consulting, was separated from Arthur Andersen in 2000 by an arbitrator who resolved a longstanding dispute between them, and Andersen has since worked to build its own consulting practice. Andersen was paid about $27 million by Enron for consulting and about $25 million for audit services in 2000.
Over all, slightly more than half of Andersen's $9.3 billion in revenue in the year ended 31 August 2001 came from consulting services. Along with providing both types of services, the firm served at times as internal auditor, reviewing Enron's finances, and external auditor, putting its seal of approval on Enrons annual financial statements.
The latest moves are intended to address perceived conflicts of interest at accounting firms, said Samuel A DiPiazza Jr, chief executive of PricewaterhouseCoopers. "There's a perception issue," DiPiazza said in an interview. "While providing consulting or other services is not necessarily a problem for auditors", he continued, "that perception needs a response."
Stephen G Butler, chairman of KPMG, said in a conference call that the firm is willing to concede on the separation of consulting services to shift attention to improving what he described as outdated financial disclosures. A spokeswoman for the American Institute of Certified Public Accountants said the association will support a ban on selling consulting to audit clients.
"We need an accounting model that appropriately recognises the value of intangible assets, which make up more and more of the value of today's corporations," Butler said. Corporate financial information should also be released more frequently than once a quarter, he said. He acknowledged that the steps will not necessarily have prevented a disaster like Enron, where executives took steps to keep the companys debt-load hidden.
Deloitte and Touche released a statement responding to the other firms' announcements, saying, "It is premature to accept or reject any single proposal, whether we agree with it or not, because the effectiveness of a complete set of reforms is what ultimately needs to be assessed."
The steps proposed by the four big firms will not have prevented Enron's collapse, Bowman said. "Scope of services is where everybody's looking, but that is not the real problem", he said. "It's analysts pushing quarterly results," he added, "i'ts corporate America paying people in stock incentives - all those things are driving everyone to aggressively push the accounting rules, to show increased revenue and increased profits."
Giving up consulting will be less of a hardship for KPMG and Ernst and Young, because both have already shed their consulting practices but still provide some non-audit services. Nor will it cause much pain at PricewaterhouseCoopers, which plans to spin off consulting through a public stock offering in the spring, DiPiazza said. Lucrative tax advisory services will probably be kept by the accounting firms because they are closely related to auditing.
If the big firms do less technology consulting, of course, it could be a boon to other firms in that industry, like Accenture and IBM Global Services. Alternatively, the accounting firms could still provide consulting services to one another's clients. Connecticut's attorney general, Richard Blumenthal, has called for his state to review accountants practices, and perhaps to suspend Andersen's license to practice in the state.
New York States' comptroller, H Carl McCall, has joined the chorus of critics of accounting as it is now practiced, urging the SEC as well as the governor to prohibit accountants from selling consulting services to the companies they audit and also requiring companies to rotate auditors every seven years. McCall also proposed prohibiting companies from hiring accountants away from their audit firms for two years. Executives at the accounting firms said their announcements were made in response to concerns by lawmakers and investors about the trustworthiness of financial disclosures.
Andersen is under intense scrutiny after reports that its employees destroyed Enron-related documents earlier this month. The firm has acknowledged that it is losing business because of adverse publicity, and in particular, will have trouble signing up new clients. "It's a national tragedy that what happened with Enron brought a great company like Arthur Andersen to its knees," Levitt said. "I would hope that Andersen doesn't fail."