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Big Four consultancies face life in separation - again
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Big Four consultancy: Did anyone say independence?


When is it appropriate for an audit firm to offer other services to its clients? While the answer should be obvious to anyone with a rudimentary knowledge of audit independence, the question has been kicking around the profession for a surprisingly long time.

8th Jun 2022
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Last week’s news that EY was planning to separate its global advisory operations from its audit wing brought back memories of a familiar recessionary business cycle going back to AccountingWEB’s early years in the dotcom boom and bust – and even further than that.

As Mark Taylor reported, EY may have “blinked first”, but splitting up is something all the other Big Four firms have been mulling in recent years. This time around there is a simple explanation. In July 2020 the Financial Reporting Council (FRC) ordered the Big Four audit firms – EY, Deloitte, KPMG and PwC – to separate their audit functions from the rest of their businesses to prevent conflicts of interest. 

The pattern is familiar from previous slumps. The sequence goes like this: economic hard times trigger corporate failures and market shock that auditors were asleep at the wheel. Compromised audit independence is uncovered and calls of “something must be done” go up. Give or take five years and a few regulatory fines, reforms are put in place to separate audit and non-audit services and the big firms go back to where they were… quietly regenerating those same services in the same way that crabs and lobsters regrow missing claws.

What over-riding factor could possibly explain this recurring ritual?  The answer from accountancy’s long-time scourge Lord Sikka is money, and lots of it. According to Sikka’s estimates, the global consulting revenues of the Big Four in 2003–4 were $55bn.

And Prem Sikka wasn’t alone. Back in 2000, news of an ICAEW guide to setting up Chinese Walls within accountancy practices, prompted a bracingly cynical comment from AccountingWEB: “If an auditor gets a sniff about a new technology sell, don’t be surprised if the consulting wing suddenly pay a visit. Why? Consulting is far more lucrative than auditing! Of course firms will protest loudly about this... but until consulting is legally divorced from traditional audit activities, with compensation going to those that earn and not introduce, only the naive would believe that Chinese walls exist in the real world.”

Chinese Walls – remember them? The phrase itself even has a tinge of political incorrectness that recalls different times when, in the phrase of 1998–99 ICAEW president Chris Swinson, “chaps regulated chaps”.

Consulting booms and busts

As in so many things to do with accountancy, Arthur Andersen led the way, using its accounting services as a springboard to recruit clients for its more lucrative consulting business in the 1980s.

The runaway success of its efforts in this growing market led to the formation of Andersen Consulting in 1989, a separate division operating independently of Arthur Andersen. As revenues continued to grow during the 1990s, the two entities bickered over residual payments the consultants were forced to pay to their accounting and auditing counterparts. The simmering resentments ended in divorce in 2000. Andersen Consulting won its independence, but at the cost of a $1.2bn alimony payment to compensate the accountants for lost fees. Forced to relinquish the valuable Andersen brand, the consultancy changed its name to Accenture at the start of 2001.

The famous “millennium bug” was a symbolic peak for enterprise system consultancy work. The economic winds shifted in the new century and consultancy work plummeted after the shock of 9/11.

A string of corporate failures and Big Four audit independence violations followed, culminating in the biggest scandal of the era – Enron – which led to Andersen’s demise. While UK legislators and regulators dragged their heels, the US Congress passed the Sarbanes-Oxley Act in 2002. Sarbanes-Oxley – or  SOX as our US peers like to call it – increased the responsibilities and potential penalties for company executives for fraudulent financial reporting, and dictated stronger internal controls – facilitated by independent auditors – to enforce more diligent compliance.

SOX also proscribed the separation of audit duties from a specified list of non-audit services to lessen potential conflicts of interest.

In the UK, it took another 18 years and another global financial crisis before the government acted. Yet the prescriptive, Draconian nature of the US response was not much of an advert for the legislative approach. While the SOX rules were designed to punish wayward auditors and curb their extramural activities, the Big Four coined it in during the years that followed, advising clients on how to improve their systems. Their recommendations often pushed more robust technology solutions to replace lax, spreadsheet-based internal controls.

Writing about SOX for in 2012, Verisage’s Ron Baker commented: “It was passed in haste, and its costs have far exceeded its meagre benefits... Not only would SOX not have prevented Enron, WorldCom etc, it punishes the very people it is designed to protect – shareholders – by imposing regulatory burdens that reduce profitability and stock values. Further, it rewarded, with over $1bn worth of regulatory revenue, the very profession – auditors – that played a part in the failure of Enron.”

Happy days are here again

As our consultancy timeline below shows, the Big Four found ways to circumnavigate independence restrictions after Enron by regrowing their internal consulting capabilities. When the capacity wasn’t growing fast enough to keep up with demand, they bought into existing operators.

By 2014, the Big Four consultancies were back, earning an estimated $17.5bn in the US consulting market and executing a string of acquisitions. Globally, revenues from PwC’s advisory practice rose 10% to $10bn in 2014. The firm’s advisory revenues had doubled over the previous five years and accounted for 29% of the Big Four firm’s total global revenues. KPMG was not far behind, with global advisory revenues up 10.4% to $9.09bn for the same year.

And now here we are in 2022, once again fired up with disillusionment and corrective zeal. Given what we’ve seen from previous audit independence crises, George Santayana’s comment about those who can’t remember the past repeating it springs to mind.

Successive generations of auditors and consultants are no doubt aware of the repercussions, but operating in the twilight zone of independence doesn’t seem to have fazed them. The six-figure bonuses and windfalls reaped during the good times might help soothe their misgivings.

But as other critics such as Prem Sikka and Richard Murphy have already said, until we get a regulatory response that changes the assumptions and structures underpinning audit and consultancy work and properly defines the boundaries between them, it won’t be long before those hybrid practitioners will be back plying their trade in the UK’s boardrooms.

Big Four consulting timeline: The independence hokey-cokey

 Aug 2000 – Ernst & Young sells its consulting wing to French consultancy Cap Gemini.

Jan 2001 – After separating from Arthur Andersen in a $1.2bn divorce, Andersen Consulting changes its name to Accenture.

Feb 2001 – The global KPMG Consulting operation spins off from its accounting parent in a $2bn initial public offering, most of which goes back to the parent firm partners. The UK & Netherlands consulting wings remain with their national partnerships.

Crisis One – 9/11 and Enron repercussions

Oct 2001 – Enron’s collapse triggers a legislative and regulatory crackdown on audit independence in the USA. To emphasise its newfound independence from KPMG, Bearingpoint unveils its new brand. It loses $26.9m on a turnover of $2.37bn in its first financial year.

Jan 2002 – PwC sells its consultancy wing to IBM for $3.5bn and signs a five-year non-compete agreement as part of the deal.

Feb 2002 – Deloitte announces plans to separate its consulting and auditing divisions after holding to the line for several years that a combined offering delivers a better service to clients.

Jul 2002 – PwC pays $5m to the US Securities and Exchange Commission to settle audit independence violations at 16 firms. Sarbanes-Oxley Act passed.

Aug 2002 – Arthur Andersen parcels out different portions of its operations to rival accounting firms around the world after the SEC withdraws the firm’s right to practice. The Enron auditor is ultimately acquitted of criminal charges by the US Supreme Court, but its professional reputation is fatally damaged. Cash-strapped Bearingpoint steps in to acquire the remnants of Andersen’s consulting operation.

Mar 2003 – Deloitte breaks ranks with its Big Four rivals and announces that it will halt the separation of its consulting wing from the core accounting business, due to economic uncertainty in the wake of the Iraq war. Deloitte Consulting focuses instead on serving non-audit clients.

Sept 2003 – KPMG’s UK and Dutch partnerships sell their consultancy operations to Atos Origin for £424m in cash and bonds.

Jul 2008 – PwC’s US advisory strategy leader Joe Duffy tells a Gartner analyst meeting, “We are full scale in the implementation and integration business.” Since as early as 2005, PwC has been partnering former audit client, scandal-ridden Indian consultancy Satyam, on implementation projects.

Oct 2008 – KPMG recruits Atos chief executive Bernard Brown, a former KPMG partner, to lead its return to the consulting sector.

Feb 2009 – Bearingpoint files for Chapter 11 bankruptcy protection. AccountingWEB reports that the independent consultancy “has laboured under some kind of corporate curse since it spun out of KPMG during the heady days of the dotcom boom”.

Jun 2009 – PwC officially returns to consultancy work after acquiring BearingPoint for $44m and the addition of around 1,500 Oracle and SAP professionals.

Crisis Two – Lehman Brothers collapse triggers global financial slump, 2008–9

Sep 2010 – The FRC criticised the Big Four for lack of “professional scepticism” and failure to meet ethical standards in its latest audit inspection report, including possible conflicts of interest arising from non-audit consultancy work.

Feb 2011 – KPMG acquires outsourcer and shared services provider EquaTerra to expand its consulting services across Europe, Asia Pacific and the US. In her to re: The Auditors blog, Francine McKenna comments: “The conflicts that drove three out of four of the firms to sell [their global consulting businesses] after Enron are a bigger problem than ever before.”

Mar 2011 –  Picking through the lessons learned from the banking crisis, the House of Lords Economic Affairs committee identifies concentration in the audit market as a significant risk factor and calls on the Office of Fair Trading to launch an investigation.

Oct 2013 – Two years after responding to the prompt from their Lordships, the Competition and Markets Authority publishes the results of its investigation into the UK audit market, potentially jeopardising hundreds of millions of pounds in restructuring, M&A and IT consultancy fees.

Dec 2014 – The Big Four consultancies earned an estimated $17.5bn in the US consulting market. Globally, revenues from PwC’s advisory practice increased 10% to $10bn in 2014, accounting for 29% of the Big Four firm’s total global revenues. KPMG, too, reported global advisory revenues up by 10.4% to $9.09bn.

Jan 2018 – The Financial Reporting Council (FRC) launched an investigation into KPMG’s work on the Carillion audit, for which it ultimately paid £14.4m in penalties.

Jul 2020 – FRC publishes its outline guidance on audit separation, setting a deadline of 2024 for large audit firms to divest or separate their consultancy operations.

Aug 2020 – Deloitte Consulting acquired international technology consultancy Keytree to cement its position as a leading SAP consultancy. The deal is Deloitte’s seventh that year as it continues to expand its ERP implementation capabilities.

Nov 2020 – Amid chatter of a full-blown UK version of SOX, KPMG and Deloitte inform the Competition Markets Authority that they will shut down all non-essential services for large listed audit clients to “remove even the perception of a possible conflict”.

Nov 2020 – PwC sells eBam fintech subsidiary due to potential “limitations of PwC continuing to own the software as a result of audit independence requirements”.

Jun 2022 – EY announces that it will split its audit and advisory functions into different companies.

Replies (2)

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By matthewleitch
10th Jun 2022 09:58

Thanks John. This is a good article that uses facts to highlight a clear historical pattern.

I had an idea about how to conduct the auditor-auditee relationship back in 2003 (, almost 20 years ago, but your coverage has gone back even further, into the period when I worked for PwC on the audit side, but often with contact in the consulting side. I saw the problematic behaviours first hand at that time.

Thanks (2)
By Arcadia
10th Jun 2022 11:04

It should be pointed out that auditors of Public Interest Entities have been banned for some years now from offering consultancy or other services, other that a 'white list' of things like reporting on the half year/covenant reports etc. The Carillion case had nothing to do with offering other services. There seems to me to be nothing wrong with firms having consultancy arms, provided they cannot offer their services to audit clients.

Thanks (2)