Do Consulting Services Threaten Audit Performance?

By Verschoor, Curtis C. | Strategic Finance, June 2014 | Go to article overview

Do Consulting Services Threaten Audit Performance?


Verschoor, Curtis C., Strategic Finance


Audit firms are once again placing more emphasis on providing clients with consulting services to help enhance business strategies. This renewed activity can easily lead down the same road that led to the Enron fiasco, the demise of Arthur Andersen, and the Sarbanes-Oxley Act.

The Sarbanes-Oxley Act of 2002 (SOX) prohibits independent auditors from providing to their audit clients specified nonaudit services, primarily management consulting. But auditing firms, including the Big 4, appear to be moving back toward providing more consulting services in order to benefit their bottom line. The ethics culture that drives the deliberate strategy to provide more of these highly profitable and rapidly growing consulting services could very well lead to the same conflict of interest that brought about the SOX legislation--that is, diminished efforts by audit firms to perform high-quality audits for the benefit of investors and the public.

The language in SOX Section 202 specifically bars audit firms from providing to their audit clients consulting services involving "management functions or human resources" and "expert services unrelated to the audit" Yet PricewaterhouseCoopers (PwC) announced in 2013 that it was acquiring Booz & Co., a global full-line commercial management consulting firm, closing the deal this past April. With this acquisition, PwC significantly adds to the nearly one-third of total revenue it earns from providing consulting services. Former Securities & Exchange Commission (SEC) Chairman Arthur Levitt said, "We are slipping back. As the accounting profession becomes more committed to consulting, their audit activities have got to be questioned."

PwC's press release broadly describes the purchase of Booz as providing "an enhanced range of services for our clients" and announces the new name for Booz is Strategy& (pronounced "Strategy and"). The release also says that the acquisition "reflects the strength in strategy consulting that Booz & Company brings to the PwC Network and the benefits this deal will bring to all clients and stakeholders." It isn't clear how consulting clients about strategies doesn't expressly conflict with both the language and intent of SOX to preserve the independence of audit firms from their clients.

The website for Strategy& contains information about the types of services the firm provides and articulates what it means by "strategy consulting." Some of the statements on the site include:

* "What PwC and Strategy& create together will be unique."

* "We'll offer clients something they can't get elsewhere: a combination of strategy consulting expertise, and a proven track record of delivery, with unrivalled global scale and experience."

* "Clients will be able to get practical strategy advice from people who understand the opportunities and risks involved in implementation--and strategic execution skills from people who understand the context."

These suggest that one of PwC's primary growth strategies is to provide broad-scope consulting that involves the kinds of strategic business decisions only management and the board of directors can make and then facilitate the tactical implementation of those decisions.

In a May 1, 2014, speech at Baruch College's 13th Annual Financial Reporting Conference, James R. Doty, chairman of the Public Company Accounting Oversight Board (PCAOB), noted that "Audit is a declining portion of accounting firms' business models." This is a sharp turnaround from the practices firms adopted a decade ago shortly after SOX was passed. Most of the then-Big 5 accounting firms divested their consulting businesses, and PwC was no exception.

In October 2002, PwC sold its consultancy business to IBM for approximately $3.9 billion in cash and stock. But beginning in 2009, PwC began to backtrack by acquiring firms--including Paragon Consulting Group and BearingPoint, the North American commercial practice that succeeded KPMG Consulting--to rebuild its consulting practice. …

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