Last Two Of Big Five Firms Say They Will Sever Audit, Consulting Ties

The ripple has become a flood.

In the wake of the Enron debacle, the last two of the Big Five accounting firms said they will sever ties between their accounting and consulting businesses.

Deloitte Touche Tohmatsu the second-largest accounting firm, on Tuesday reversed its position and said it would separate its consulting business. Previously, the company had maintained that it could better service its clients by keeping the two operations together.

Also on Tuesday, Ernst & Young said it would stop selling IT services to companies it audits and will no longer act as both internal accountant and external auditor for a single customer, Reuters reported.

The moves came just a day after embattled Arthur Andersen said it would take preliminary steps to at least partially separate its own consulting business. Andersen is under fire for its role in the continuing Enron meltdown. Many observers said the company's dual role as audit firm and consultant posed a huge conflict of interest in the Enron situation. Andersen has brought on Federal Reserve Board chief Paul Volcker to chair an Independent Oversight Board to monitor Andersen's audit business.

Last week, the largest accounting firm, PricewaterhouseCoopers, said it will to launch an IPO for its consulting branch. The company failed in its attempt to sell its consulting business last year to computer giant Hewlett-Packard.

KPMG got a head start on its competitors last year, launching KPMG Consulting as a public company last February. Also last year, Cap Gemini bought the consulting arm of Ernst & Young.

The dual roles played by these big companies has long been an issue. Several years ago, former Securities and Exchange Commission chairman Arthur Levitt tried to mandate a separation of audit and consulting functions, but was thwarted.

The Enron mess, and subsequent problems at Tyco and elsewhere, have thrown the world of audits and accounting under a laserlike spotlight. The scandal has caused a crisis of confidence, said consultant Frank Dzubeck, president of Communications Network Architects, Washington. "The fear, uncertainty and doubt is the worst thing I've ever seen. ... You're talking about the credibility of every public firm. It used to be you were questioned if you were a private institution, right? Now everybody is all over you if you are a public institution," he said.

But even as the Big Five rush to counter bad press and parse their businesses, pure consultancies stand to gain business, many observers said. "This is an awesome opportunity to attack. We have targeted many companies for whom we've identified the auditor and we're going after the consulting business," said one Boston-area consultant who requested anonymity. Companies like Accenture, AnswerThink, EDS and IBM Global Services could all reap benefits, he said.

Ted Fernandez, chairman and CEO of Answerthink, agreed. "Do we see a big impact now [from Big Five customers]? No. Do we expect it to have a significant impact? The answer is yes. I think this is a meaningful opportunity, and organizations need to sort this out. ... I think we'll see an impact in the second half of the year."

MARIE LINGBLOM contributed to this story.

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