Spinning off e-business consulting

Large accounting firms are moving quickly to spin off their consulting units to better serve the e-business needs of their enterprise accounts and to avoid scrutiny by the Securities and Exchange Commission.

In recent months, many of the of the large consulting companies have taken steps to recast themselves as enterprise e-commerce solution providers in order to better address the growing demands for e-business solutions from their clients. KPMG LLP, PricewaterhouseCoopers, Ernst & Young LLP and others all are moving ahead at full speed to convince their enterprise accounts they are e-business savvy.

But behind this push is the urgency that the consulting businesses of large accounting firms must divorce themselves from the tax-and-audit side of the company in order to avoid regulatory intervention from the SEC. At issue is auditor independence and the SEC's independence rules and interpretations. According to the SEC, tax-and-audit firms are not allowed to hold a financial interest in the companies they audit. But the growing need to provide complex e-business solutions to enterprise accounts is leading the consulting side of the accounting firms to forge alliances with e-business partners that may include equity stakes.

"The audit tax firm is committed to comply with those [SEC independence] rules," said Rod McGeary, co-chief executive of KPMG Consulting, the corporate entity split off from KPMG last month. KPMG Consulting is 80.1 percent owned by KPMG LLP and 19.9 owned by Cisco Systems Inc., San Jose, Calif.

"Part of our strategy is to become less tied to the independence rules, and whatever it takes to get that done, we will do it," McGeary said.

In a letter sent last year to KPMG concerning the possible spin-off of its consulting business, SEC Chief Accountant Lynn Turner said, "The staff believes that ownership by an audit client or by an affiliate of the client . . . of an equity interest in KPMG or its affiliates is inconsistent with the language and purpose of these [independence] provisions."

And, an SEC spokesman said, "Our rules are fairly rigorous about what constitutes independence for an auditor. Basically any connection between the auditor and the company that is being audited is a threat to the independence of the auditor."

Independence questions have been around ever since the Big Five consultants expanded into IT consulting, and the independence question should not hamper KPMG Consulting's quest to provide e-business solutions to enterprise accounts, McGeary said.

All of the large accounting firms are racing to divest themselves of their consulting businesses in anticipation of SEC action, said Tom Rodenhauser, industry analyst and president of Consulting Information Services LLC, Keene, N.H. "What you have is a dual push, " he said. "You have the market pushing them to be more reactive, and then you have the SEC pushing them with the whole conflict of interest issue. Some of the Big Five will survive and some will not. They have to [divest] now, or in six months or a year the SEC will force them to."

Ernst & Young, for its part, late last year said it was in discussions with Cap Gemini S.A., Grenoble, France, about a possible combination of their global consulting businesses.

And PricewaterhouseCoopers, which also is working on a separation strategy for its consulting business, declined to comment on reports that it was in discussions with IBM Corp., Armonk, N.Y., about a possible alliance. "We can't comment on the pending restructuring," said a spokesman for PricewaterhouseCoopers.+CRN

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