by Bill Carlino

New York - Deloitte Touche Tohmatsu’s about-face decision to retain its consulting arm despite the scope of service restrictions imposed by the passage of Sarbanes-Oxley will require the Big Four firm to tread gingerly between servicing clients and adhering to the restrictions of the landmark reform act.

The lone holdout among the former Big Five to still retain a consulting unit, Deloitte had been working over the past 15 months to spin off the business via a buy-out of the practice by the consulting group’s partners. But it abruptly shelved plans to jettison the unit in the wake of what it called “harsh” conditions in capital markets.

In a statement, DTT chief executive James Copeland said, “We gave this our very best efforts, but concluded, with advice from our outside legal and financial advisors, that it is just not prudent to complete this transaction in this environment. We began this process at a time of more robust consulting, capital and credit markets.”

Deloitte Consulting executives were not available for comment.

However, the decision leaves the door ajar for other options, including an outright sale, said consulting industry observers.

“This announcement does not preclude them from selling it,” opined Dean McMann, chief executive of New York-based firm Ransford, an advisor to consulting firms. “Deloitte Consulting is the last player in that space for big firms.”

Deloitte had initially set a completion target for the end of calendar 2002. Under the original plan, Deloitte Consulting would have become an independent firm, privately held by its partners, and been rebranded Braxton. Deloitte would have retained roughly a 20 percent stake in the entity for a period of about five years.

A firm representative said that the unit, which employs some 15,000 people globally and nearly 8,000 in the Americas region, would continue providing a broad set of services, primarily to the 75 percent of public companies that are not audit clients. Deloitte Consulting, which is headed by Doug McCracken, generated about $2.14 billion in revenues in the Americas region last year. McCracken will retire in June.

Many had expected Deloitte to follow Big Five firms Andersen, Ernst & Young, PricewaterhouseCoopers and KPMG in unloading their consulting business, particularly in the wake of the passage of the Sarbanes-Oxley reform act, which severely restricts the consulting services that firms can offer to audit clients.

Legally, Deloitte does not have to divest the arm, but under Section 201 in Sarbanes-Oxley, auditors are prohibited from offering nine consulting services to audit clients - bookkeeping, human resources, financial information systems, legal services unrelated to the audit, investment banking, appraisals or valuations, actuarial services and internal auditing. The ninth restriction is left open to the determination of the recently established Public Company Accounting Oversight Board for services deemed “inappropriate” by that five-member body.

A call to the office of Sarbanes-Oxley co-author Sen. Paul Sarbanes, D-Md., was not returned by press time.

A representative of the PCAOB said that the group “could not comment on specific firms” but indicated the group would “monitor the [Deloitte] situation very closely.”

“If they can get away with this, it’s marvelous,” said Eustis, Fla.-based accounting industry consultant Allan S. Boress, CPA. “There’s basically nothing these big firms can sell except tax consulting and internal control work. That’s like taking everything out of your store except bread and Diet Coke. You can bet the other big firms are going to monitor this closely, and if it’s working, expect them to revive their consulting businesses.”

“None of the Big Five consulting firms have done particularly well,” McMann said. “For instance, Cap Gemini/Ernst & Young [which merged in 2000] today is worth less combined than they were individually before. And now that PwC [Consulting] is part of IBM, it’s basically been dismantled.”

McMann also stated that publicly traded consultancies haven’t been a real plus either, citing the protracted share-price difficulties of Accenture, BearingPoint and Korn Ferry.

Should the company consider a sale, McMann mentioned several potential suitors such as H-P, Dell and Microsoft, but none, he speculated, would be “a particularly exciting parent for Deloitte Consulting.”

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