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Spike in Consulting Review Leads to Public Debate

December 12, 2013

Regulators are becoming more concerned about audit firms’ growing consulting practices. PCAOB Chairman James Doty thinks the issue needs to be debated in public and said a roundtable will help regulators understand the effect nonattest services are having on audit work. At the same time, SEC officials are reminding public accounting firms of their responsibility to act as gatekeepers for investor protections and not as consultants looking out for client interests.

Accounting firms are increasingly boosting their revenues by expanding their consulting practices.

Now regulators want the firms to explain the trend and assure them that their audit work isn’t being shortchanged in the process.

PCAOB Chairman James Doty said on December 9, 2013, that he wants to hold a roundtable next year to discuss what the developments mean to the financial markets.

“What are the implications for independence of the audit function?” Doty asked on December 9, 2013, during the AICPA’s National Conference on SEC and PCAOB Developments in Washington. “What will firm management do to meet the compensation and cultural challenges that destabilized Arthur Andersen?”

The Sarbanes-Oxley Act of 2002 doesn’t allow an audit firm to provide consulting services for clients that they audit without the approval of the client’s audit committee. The restrictions were intended to end the conflicts of interest that were seen as undermining the auditor’s role as a protector of investor interests.

For their part, auditors have maintained that they can keep both businesses separate and successful.

Still, the increased reliance upon non-audit work has been a concern to regulators and investor advocates. The trend has accelerated recently, as exemplified by the acquisition of Booz & Co. by PricewaterhouseCoopers LLP that is expected to be finalized by the end of the year.

PCAOB member Steven Harris said in November that consulting revenue for the Big Four firms has increased over the past five years by 33%, compared to a 6% rise in audit revenue. He said based on acquisitions and other activities, it’s likely that consulting will continue to grow relative to other practice areas. The Big Four global firms and their affiliates announced more than 36 acquisitions of consulting businesses, including 19 deals in the U.S.

Harris said the PCAOB should monitor any sources of risk to the profession, a recommendation made by the Treasury Department’s Advisory Committee on the Auditing Profession in 2008.

The SEC has also been sending signals the past few years that the agency is closely watching the developments and reminded the accounting profession that auditors have a duty to act with integrity and high ethical standards.

Paul Beswick, the agency’s chief accountant, said he reviewed a few press releases on acquisitions in the past year and compared the firms’ statements about growth in areas outside of their audit and tax practices with statements by firms when they sold their consulting arms a decade ago.

In the early 2000s, audit firms sold consulting practices because of regulatory constraints. Now, the same firms believe that similar “consulting practices can achieve greater growth… notwithstanding significant challenges,” Beswick said at the AICPA conference.

“I would like to remind everybody, in addition to specific rules, ‘independent auditors have an important public trust.’ That was the commission speaking from its 2000 release adopting revisions to the auditor independence rule,” Beswick said in reference to Release No. 34-42994, Revision of the Commission’s Auditor Independence Requirements.

“The public considers audit firms to be gatekeepers and not consultants,” he added. “You earn the public’s trust by improving audit quality and by strengthening the firm’s audit function.”

Meanwhile, Doty told reporters on the sidelines of the conference that he expected “firms will have a lot to say…will want to explain what they are doing” during a public forum.

“It’s an important time… to articulate… what they have done by way of preparing to identify conflicts, identify impermissible client relationships, and how they are managing it,” he said.