February 28, 2002 4:00 AM PST

Will techs gain from auditor scrutiny?

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Consultants might make friendlier auditors

August 29, 2001
As the Enron scandal unfolds, the intense scrutiny on the practice of using the same firm to handle auditing and consulting jobs may eventually benefit a handful of tech services companies.

In recent days, companies such as Apple Computer and Lucent Technologies have announced that they will no longer use the same firm for both auditing and consulting. There is even talk of government regulators requiring that the businesses be separated. At issue is whether auditing companies go easier on customers that also buy consulting services.

Much of the consulting work performed by the so-called Big Five accounting firms is actually technology-related. And the new scrutiny could prompt a significant amount of new business for tech consulting firms, especially big names like Electronic Data Systems and IBM. But smaller companies also are hoping to get into the game and snap up some of the business.

The Big Five accounting firms--Arthur Andersen, Ernst & Young, KPMG International, PricewaterhouseCoopers and Deloitte & Touche--derive about 29 percent of their total revenue from IT consulting and management and financial consulting, according to Montgomery Securities analyst Prakesh Parthasarathy. He estimates that as much as 4 percent to 6 percent of that revenue could be at stake, or up to $4 billion.

Worries about conflicts of interest when using the same company for auditing and consulting aren't new, but the Andersen-Enron case has added fuel to the fire. A recent study found that the more a company paid auditors for consulting and technology services, the more likely it was to meet or beat earnings projections.

And given Wall Street's increased sensitivities, companies are loathe to give investors any hint of financial impropriety.

Breaking up
Lucent Technologies announced earlier this month that it would no longer use PricewaterhouseCoopers for consulting work, but would retain the company as its auditor. A company representative said that while they were pleased with PwC's work and had "no reason to believe their independence has been impaired," the move will "further strengthen our confidence in the procedures that we have in place and assuage any concerns about objectivity."

In some cases, the auditing firms aren't even waiting for their customers to ask for the separation. Three of the Big Five--KPMG, Ernst & Young and Andersen--have already spun off or separated their consulting arms. And PricewaterhouseCoopers has registered for an initial public offering of its consulting division.

Those separated divisions will likely get some of the business being split off, said Merrill Lynch analyst Stephen McClellan.

He said Accenture (formerly Andersen Consulting), Cap Gemini Ernst & Young, and KPMG consulting, all of which are separate entities from their accounting counterparts, could grab more business, as well as EDS, IBM Global Services and Computer Sciences.

But given the size of those businesses, he thinks that it's "not that material a windfall or that noticeable in bookings or new contracts."

It's also not that easy to switch consultants at the drop of a hat.

"Clearly, relationships have been built with these consulting firms for years and years," said Dave Munn, CEO of the IT Services Marketing Association. "Some (companies) will spend time internally saying, 'Look, we have governance controls systems; we like these two entities we're working with; why fire our consulting arm when in six months they'll be a separate entity anyway?'"

But, he pointed out, other companies don't want "any questions in the public realm of improprieties...and in a couple of cases, they might not have been happy anyway. So it's a way of looking publicly like they're above reproach."

Tech gains?
John W. McCain, president of the E-Solutions division at EDS, said he's already seen some activity, although he would not name specific companies.

"I think there are a lot of different timetables going on, but I would bet a majority of the changes will go on in the next six to 18 months," he said. "There's relationship activity--things people will want to work out to make a more natural transition--but this will happen."

Smaller companies are hoping to get in on some of the action too. Adam Honig, president of customer relationship management firm Akibia Consulting, said his company has already gotten "half a dozen" leads from companies that are concerned about using the same firm as their auditor and their consultant.

While their independence may be what makes firms like Akibia and EDS interesting, it's not necessarily something the companies will be pushing that strongly, executives said.

"Companies looking for independent companies like EDS, and not many of the major consulting firms are independent," McCain said. "But we're not using fear, uncertainty and doubt as a strategy. It's a business decision. Not all (consultant clients) will change companies. But I think a lot of them will make a change and separate church and state."

 

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