An Analysis of the Economic Impact and the Anticipated Reactions of Clients to Management Consultants' Defections from Public Accounting Firms

Article excerpt

Over the past few years, the issues of compensation and firm direction have become increasingly important to management consulting partners of major public accounting forms. While growth in the audit and tax practices has slowed, rapid expansion has occurred in the consulting divisions. The Wall Street Journal reported that "At major accounting firms, consulting revenues are ballooning at an average 30% annual rate, about double the growth of auditing and tax work" (July 26, 1988, p. 1). Clinton A. Alston, a consulting partner with the international public accounting firm of Ernst and Whinney (now Ernst and Young after merging with Arthur Young & Co.), reported that at his firm, "Information-systems consulting revenues are exploding, with 40% annual growth, compared with only 17% to 18% for total firm revenues" (The Wall Street Journal, July 26, 1988, p. 14).

At the same time that this rapid growth in consulting has occurred, numerous consulting partners have left public accounting firms, apparently in hopes of keeping their compensation more in line with the growth that has occurred in consulting revenues, avoiding the rising litigation costs associated with faulty audits, and seeking to enhance their influence within the firms by which they are employed. For the most part, the departing consultants have accepted positions with established consulting firms or have started their own firms. James Kennedy, publisher of Consultants News, stated in The Wall Street Journal that "Recent defections of consultants will frighten the accounting firms, so they will pay more attention to their consulting arms and give them a fairer share of the take" (July 27, 1988, p. 2).

Several heavily publicized defections involving influential consulting partners have occurred, and some accounting firms have responded with lawsuits or by firing partners suspected of considering future defections. For example, Arthur Andersen & Co. lost its partner in charge of systems integration to Goldman Sachs & Co., and a number of other consulting partners formed a new consulting venture that has been embroiled in lawsuits with Arthur Andersen. Coopers & Lybrand also has failed suit over the defection of consulting personnel. Arthur Young & Co. fired five partners and filed suit, charging that the five consulting partners were planning to leave the firm and take consulting business with them.

The issue of consultants' defections from public accounting firms is important because of the possible implications. Consultants provide clients with such services as the design and installation of information systems, market research, plant layouts, and management training. Clients often rely on their audit firms to provide a unified package of services including the necessary audit, tax, and consulting services. The departure of consultants from public accounting firms obviously could hurt those firms because of the loss of key personnel who are not easily replaced. In addition, the departures could prove detrimental to accounting firm clients who find continuity of service or consistency of consulting personnel important and who look to public accounting firms to provide topflight consultants.

In some instances, audit clients might feel compelled, following defections of key consulting personnel from their accounting firms, to seek consulting services from firms other than their audit firms, resulting, in the "unbundling" of accounting firm services. Such a forced unbundling would be viewed as an undesirable effect from the perspective of the accounting firms. Worse yet, consulting clients might also shift their audit and tax business elsewhere when changing consulting firms. Additional implications of consulting personnel defections from public accounting firms may involve questions of how competition among consulting firms will be affected and what impact there might be on the price of consulting and other services provided by accounting firms. …