Changes Since 2007
NYU professor Jones pointed out that when Sarbanes-Oxley was passed 10 years ago, accounting firms were not supposed to provide consulting and many other non-audit services for their audit clients, although there were some exceptions, such as tax services.
“The firms, particularly the major firms that do work in the federal environment, were asked to give up consulting,” he said. “That’s the way it’s been for about 10 years, or at least it seems that way. The idea was that the major firms could not do consulting work for their audit clients. They could do consulting work for their non-audit clients, but they could not mix the two together for the same client. That kind of reduced the income level for them. Lo and behold, what happened?”

Jones described a recent newspaper article that piqued his interest in the growth of consulting practices at the major firms. “In the year just passed, all four bore some degree of condemnation from the PCAOB and the article said the reason why was that the big firms had now gone back into the consulting business,” he said. “From 2007 on, the major firms started to develop some significant revenues based on consulting. How did they get so big in consulting again given the prohibition in 2002? It seemed odd to me how they could have come back that fast after five years, and then in the next five years leading up to the current time, they were doing extremely well in consulting. And when I dug deeper into the subject, it seemed that they were developing personnel and the capabilities to go out and do consulting work and really focusing a good deal of their time on it. One critic in effect came to the conclusion that when the PCAOB came to review some of these big firms, they found problems with them, and in essence what the critic was saying is that now that the big accounting firms, who are known primarily for audits, should have been focusing on audits in the last 10 years, suddenly there were problems with the work that they had done. I just couldn’t buy that. It didn’t seem logical to me.”

Second Coming of Consulting
McKenna, who writes for American Banker, Forbes, the Financial Times and other publications, as well as her own blog, re:The Auditors, noted that she has worked at two of the Big Four firms, KPMG and PwC, as well as KPMG's spinoff consulting firm BearingPoint.

“I am now watching the second coming of consulting for the Big Four auditors,” she said. “Consulting never left Deloitte. It only grew bigger while the other three large firms went back to being semi-pure audit firms because they were worried about trouble with regulators. Their concerns were misplaced.”

She described how Deloitte has grown its revenue from consulting. “I think it’s too late, for Deloitte and the rest of the Big Four,” she said. “The auditors’ consulting businesses have recovered from the post-Sarbanes scare. Deloitte has been building its business all along including via acquisitions like the carcass of BearingPoint’s public sector business. I reported in American Banker that PwC, who bought the industry side of BearingPoint after the bankruptcy to jumpstart its systems integration practice, has its best Advisory set of engagements ever with four OCC/Fed mandated mortgage servicer foreclosure reviews, expected to bring in more than $1 billion in revenue before it’s over. And there are numerous examples of audit firms still earning at least as much of their fees from audit clients, or multiples of their audit fees, from what were, in my mind, supposed to be prohibited services to those companies. For example, auditors provide non-audit related advice on GAAP and SEC reporting for specific transactions and get paid extra for it. Who goes back to check and see if they audited their own advice?”

McKenna noted that KPMG had sent its tax staff to its audit client GE to help with their tax returns for a few months every year. “This had been going on for a while, for $10 million extra per year,” she pointed out. “Less than a year after I wrote about it, the engagement stopped. There were reports of the beginning of an investigation. An order to preserve documents referring to the ‘loaned staff’ was circulated. But we’ve not heard anything from the PCAOB or SEC about any disciplinary actions or sanctions for this clear violation of Section 201 auditor independence rules. Wal-Mart and News Corp use their auditor, Ernst & Young, for tons of tax services. They’re in big trouble for bribery, an illegal act, but we didn’t hear about it from Ernst & Young. If Ernst & Young knew at some point about the illegal acts, did the firm file a Securities and Exchange Act Section 10A report with the SEC when it was obvious those companies weren’t stopping on their own or self-reporting but instead covering them up?”

McKenna contended that the SEC and PCAOB have not even minimally enforced the Sarbanes-Oxley Section 201 auditor prohibited services rules against the Big Four and have stopped enforcing compliance with existing rules against inappropriate financial interests and strategic alliances. “When was the last time you heard about an independence violation by one of the Big Four other than the insider trading scandals?” she asked. “Clearly they are occurring. But it’s wildly unpopular for regulators to even suggest they may force companies to cut off a favored vendor—the one you can “work” with—as we have seen whenever the subject of auditor rotation comes up. Almost everyone who speaks out in public on the auditor independence issue has a vested interest in not pushing back too hard. Audit committees more often feel it’s their job to help management produce results and keep costs for vendors down instead of acting as the check and balance on auditor independence.”

Sky Isn’t Falling
Davies of WilmerHale has been representing accounting firms for 15 years as a litigator, and he disagrees with blaming audit firms for their consulting work. “I don’t believe the sky is falling,” he said. “I don’t believe we’re at a point of crisis as we might have been in 2002. I think that crisis at the time really involved two separate issues that we need to disaggregate. One was about audit quality, and the question of whether the services being delivered were what the client intended to purchase or what the market desired. That had a whole bunch of subsidiary problems and if you look at Andersen’s performance on Enron, I think there are a series of different questions about how Andersen organized its national office and how consistent they were in the application of professional standards and all those kinds of things which go to audit quality and then the performance of the team. The second thing is the independence question and a bunch of the stuff that you saw coming out of Sarbanes-Oxley really grew out of an SEC order in January 1999 relating to PwC. That order was about having a financial interest in audit clients. That order is an interesting and useful lens through which to examine the question of auditor independence and how to think about when you should fix things. What that order and the subsequent look-back that all of the firms were subject to revealed was that across the profession there was pervasive noncompliance with financial interest rules that had been in place for decades effectively, unintentional for the most part. People didn’t know they were out of compliance, but they were not in compliance.”

Davies noted that consulting services are not entirely proscribed by Sarbanes-Oxley. “Rather the kinds of consulting services that go to audit quality were curtailed,” he pointed out. “So, for example, you can’t provide systems-oriented services to your audit client. You can’t go in and install the accounting system that your client is subsequently going to use and that you’re subsequently going to audit from a controls or a financial statement standpoint, such as testing your controls. That’s an important distinction."

“It’s not a question of delivering services or independence,” Davies said. “It’s a question of what is the service supposed to be and how is it supposed to be communicated to the market. If you want to change that, however, you can’t just amplify the obligation on the auditor.”

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