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August 1994

Our profession's "Jurassic Park." (consulting services) (Industry Overview)

by Briloff, Abraham J.

    Abstract- The rise in the revenues derived by large accounting firms from management advisory services has led many to overlook the potential conflicts of interest that arise when a firm is retained by a client as both an auditor and a management advisor. This preoccupation with the bottom-line has also led many accounting firms to jeopardize the profession's standards by allowing the entry of non-CPA partners and owners. These non-CPAs, who are largely responsible for the widespread adoption of aggressive client-serving stratagems, tend to promote practices that undermine the independence of those involved in audit activities. As a result, the conflicts inherent in the provision of unregulated advisory services along with restricted public accounting services, are fast evolving into the biggest ethical challenge facing the profession. One possible solution would be to force large firms to divest themselves of their interests in the consulting services arena.

By way of an opening gambit, the UN Survey provides data regarding the management consulting revenues realized by the world's 40 largest management consulting firms. The data for the largest eight firms in the industry are shown in Table 1.


The magnitude of these revenues for the Big Six accounting firms in relation to their gross worldwide revenues was brought into clearer focus by introducing some additional data developed by the International Accounting Bulletin and from an earlier UN Study, Survey of the World's Largest Service Companies, 1990, as shown in Table 2.


And then, to bring the data closer to the present, and even more intimately, the tabulation in Table 3 was developed from data provided by the Public Accounting Report, March 31, 1993, and the International Accounting Bulletin, December 1992.












($ Amounts in millions)

It is noteworthy that all of these tabulations indicate a critical disparity between Arthur Andersen's proportion of revenues derived from consultative services from the proportion realized by its five cohorts. A priori, it is suggested there may be less of a divergence than is made to meet the eye. AA has created a somewhat autonomous entity, Andersen Consulting, for the pursuit of the activities here involved. As a consequence, the data which are made to evolve would be less compromised by the problems inexorably inherent in the allocation and attribution of jointly-derived revenues.

Further, the data provided publicly by the major accounting firms are characterized as Accounting and Auditing, Tax, Management Advisory, and Consulting and Other. This last can stand for anything and everything. Probably of greater import is that subsumed in the initial category would be a nexus of services that would, with a more refined standard, find their way into the MAS hopper.

In this connection, an observation included in the UN Survey of World's Largest Service Companies, 1990, relating to the Accounting Industry, is noteworthy:

The 1980s have seen disproportion-

ate growth in such areas as tax ser-

vices, management consulting, and

information technology consulting rel-

ative to traditional accounting and

auditing services. Hence, by the late

1980s, accounting and auditing ser-

vices represented less than 60% of all

fees in almost all of the top 20 firms,

and was even less than half in several

of them.

Also indicative of the blurring of the numbers is an observation in the December 1993, International Accounting Bulletin, "World Survey":

KPMG is spearheading the develop-

ment of multi-disciplinary, industry-ser-

vice groups to serve its clients...One

consequence of KPMG's move to multi-

disciplinary practices is that worldwide

fee income is no longer reported along

functional lines. The observation continued:

KPMG has a world leadership position

in audit and tax services and is currently

addressing its management consulting

strategy, however, our services are

increasingly delivered to clients on

an integrated, multi-disciplinary basis

which blurs the lines between our core

services of audit, tax, and management


Delotte & Touche also, we were told, declined to give details of the composition of its fee income, either on a functional or geographic basis, claiming the absence of common criteria among the firms for the disclosure of such information means comparisons are not meaningful.

In short, the statistics demonstrate that all our major firms are driving a significant portion--and in the case of Arthur Andersen, almost one-half--of their revenues from their management advisory consultative involvements. And they are not alone. Developing and increasing revenues from management advisory consultative services are the focus of many leading regional and local firms. The Public Accountant Report (PAR) in its March 1994 issue reported that New York- based Richard A. Eisner & Co., named Kenneth Fischer, head of its consulting practice, as one of its three managing partners. According to PAR:

The appointment in part reflects the

stellar performance of MIS consulting,

which under Fischer's tutelage grew

from a $1.8 million practice to $7 mil-

lion in billings last year and now

employs 85 staff.

The PAR article reported the Eisner firm's revenue at $37 million for its most recent fiscal year, of which consulting would therefore comprise approximately 20%.

The traditional practice areas of audit and tax compliance are not growing, and firms of all sizes are seeking new areas for client service. Niche practices are becoming common, and as firm's develop and demonstrate expertise in an industry or specialty, the natural expansion of service is into related consulting and other non-attest areas.

For over a quarter of a century, I have lamented the accelerated involvement in management advisory-consultative services by our colleagues, especially those firms that are crucially involved in third- party independent audit responsibility and, as a consequence, compromising their independence.

Contamination of Audit Services

In various contexts over the decades I pointed out instances where I discerned the potential contamination of the auditor's independence where the firm was concurrently involved in the performance of management, consultative, or advisory services.

I maintain our colleagues are guilty of the sin of hubris, of arrogance. When we reflect on the judiciary, legislators, journalists, historians, government officials, scientific researchers (especially those with third-party responsibility, e.g., drug testing), we insist that all those committed to these callings be free from conflicts of interest--we insist they be virginal, not only in fact, but also in appearance. But for our profession, we arrogate unto ourselves the right to determine unilaterally whether we have "crossed the line."

In any event, despite the fact that study after study, including those undertaken under the aegis of the AICPA or the Public Oversight Board, disclose that the public, the world of statement users, looks with disfavor on our expanding of our areas of involvement to a proliferation of peripheral service, we bend our book of rules governing our conduct so as to rationalize this expansiveness.

And then there is the determination on the part of many in our profession's hierarchy to deprofessionalize our pursuit. Aside from my traditional lament that such services compromise the primary commitment of our CPA certificate, namely the independent audit responsibility for the benefit of third parties, this aggressive drive toward expansion of the MAS dimension of practice brings a nexus of perversity, including:

* Admission to partnership in CPA firms of persons who do not have that degree.

* Infusion into the firm's professional environment of the intensely aggressive, competitive proclivities of the MAS cohorts.

* The denigration of the independent audit responsibilities of the firm, and those engaged in that activity.

* This accelerating "race for the bottom line" has also had an inimical effect on those responsible for framing and implementing our standards of professional conduct.

This "headless horseman" phenomenon of running off in all directions at once is discernible also in the profession's relation of its rules against contingent fees and commissions. This will encourage those who have an aggressive bent for self-aggrandizement to enter into pursuits that, judged by traditional standards, would be deemed to be incompatible with professional stature and especially with our much- cherished independence.

The ultimate tragedy of this development is that it has been pursued by the most-affluent sector of our profession, rather than by those who require the additional revenues for their economic survival. It is those in our profession's hierarchy who are presumed to set the standards for excellence who are principally responsible for the debasement of our professionalism.

The blind sightedness afflicting our profession's leadership is discernible from the promulgation of the AICPA's MAS Executive Committee entitled Consulting Services: Definitions and Standards. Under the caption "Consultation Services for Attest Clients" we are informed:

The performance of consulting services for an attest client does not, in and of itself, impair independence. However, members and their firms performing attest services for a client should comply with applicable independence standards, rules and regulations issued by the AICPA, the state boards of accounting, state CPA societies, and other regulatory agencies.

That precatory, self-serving judgment is not, in my view, supported by research studies, including those sponsored by the AICPA and the Public Oversight Board. Most certainly, the performance of consulting services for an attest client would, in and of itself, impair the public's perception of the auditor's independence.

Beneath the Surface

The UN Survey, while not especially concerned with the implications for the accounting profession, did nonetheless, provide some commentary on the underlying controversy, including:

* Although management consultants are expected to be qualified, entry to the management consulting profession is not restricted. Unlike other professions such as accounting, law, or medicine, there are no barriers to the management-consulting profession and no licensing or certification is required to operate as a management consultant.

* Clients often have at least as high credentials as consultants; they can control the consultants' work and decide whether to accept or reject it--a situation very much different than that of the relations between, for example, a patient and a medical doctor. Presumably also the subject entity and the independent auditor.

* While management consultants are not regulated, public accounting firms are. These companies are limited in the kind of consulting they can offer to their audit clients.

The UN Survey then provided the following by way of a conclusion and a statement regarding the "Industry on the verge of the twenty-first century":

The types of services demanded by clients are also changing. Management consulting began with efficiency studies, then evolved to organization structure design. In the 1960s, the major theme was strategic planning; in the 1990s, the major thrust is and will be information technology; its related services are now a major portion of consulting. Management consulting is moving from a strictly advisory service to a personnel function in some specialized areas.... This may increase the culpability of consultants if their advice turns out to be erroneous. It may also mean an increased tendency to share enhanced profits with clients through contingency contracts, "value for money" or fee-based work-results arrangements.

Closer to the 21st century, there might be increased consolidation, higher concentration and a blurring of the distinctions, between giving advice and performing other services. There will be more efforts to integrate strategy and change management and information technology. The diversity of clients and markets will create many types of consultants.

Consultants analyze business situations and address genuine client needs. Management consultants' interventions, jointly with their clients, will solve distinct problems, implement desired changes and help shape many important decisions in private and public firms.

It should be patently self evident from the foregoing that a firm undertaking the management consulting responsibility has, in effect, allied itself with management and has become an integral part of such management. To presume such a firm could then don the robes of an independent auditor for that enterprise would be to perpetrate a hoax.

Proceeding further, the UN Survey provided "profiles" of 14, not necessarily the largest, of the firms in the industry. The presentation for Andersen Consulting, the only one from the accounting profession, included the following:

* Andersen Consulting was established in 1989 as a legally separate business unit from the accounting firm Arthur Andersen. The firm consists of private, locally-owned partnerships in 46 countries. Its headquarters are at 69 West Washington Street, Chicago, Illinois, i.e., Arthur Andersen's headquarters.

* By way of background, the original public accounting firm of Andersen, DeLany & Company was founded by Arthur Andersen and Clarence DeLany in 1913 and changed its name to Arthur Andersen & Company after DeLany's departure in 1918.... The firm's consulting practices grew gradually as the firms' auditing practice spread through the United States and overseas. In order to more closely reflect the firms' international scope, Arthur Andersen & Company transferred the headquarters of its overarching entity to Geneva, Switzerland, in 1977.

* During the 1970s and 1980s, Andersen's consulting services, which concentrated on information systems, accounted for an increasing portion of the firm's revenues (40% by 1988). Tension between the consultants and the auditors forced a restructuring in 1989. As a result, Arthur Andersen and Andersen Consulting were established as distinct entities.

* As of 1990, Andersen Consulting was the world's largest consulting organization, with 157 offices in 45 countries and over 20,000 professionals.

* The firm's expertise involves strategic services, systems integration, systems management, and change management services. Those services might be applied separately or together for any given client situation.

A Call for Divestiture

Time and again over the past quarter of a century I have called for a divestiture by our major accounting firms of their management advisory consultative constituencies. In good measure that is precisely what AA had accomplished by the creation of Andersen Consulting. But it has yet to cut the "umbilical cord".

Nor should such an absolute divestiture proposal be deemed inimical to the material objectives of the members of the respective firms. Thus, having been set free, the partners of the consulting entity could proceed to its incorporation to be followed by a public offering of shares or a merger into a financial institution. As many of the profiles included in the UN Survey make clear, there are no restrictions on the ownership of the firms in the industry. For example, Mercer Consulting Group, Inc., the fourth largest, is a subsidiary of the publiclyowned Marsh & McLennan Companies, Inc., the Alexander Consulting Group, Inc. is a subsidiary of Alexander & Alexander Services, Inc. It is not entirely presumptuous to suggest that Andersen Consulting could find "synergy" by being merged into say Citicorp, Chubb, or AIG. The Andersen people would, as a consequence, be enriched beyond the dreams of avarice of most mortals.

In this connection the concluding paragraph of the UN discourse is relevant, thus:

As attitudes about con-

sulting change from one

of the client as a sick firm

in need of assistance, to a

perception of the consul-

tant as a partner in gener-

ating new ideas and man-

aging change--the need

for secrecy may be

reduced. Because of the

complexities of owner-

ship in transnational cor-

porations, partners in

large consulting firms may be eager to

cash in on past successes, marketing part

of their shares in the firm on stock

exchanges. The goal of increased profes-

sionalism and attempts by management

consultants to be more business-oriented

are often incompatible.

Clearly, I do not begrudge the affluence being derived by my colleagues from their management peripheral proclivities. Instead, I am importuning the firms compromising the accounting oligopoly to abandon their "accountants and auditors" appellation and, instead, return to the traditional professional fold of "certified public accountants." And here, be it remembered, that the profession's very special statutory license extends to but one area, and one area only, to wit (ellipses omitted): "services which involve the issuing of financial, accounting, or related statements or any opinion on, report on, or certificate to such statements where the practitioner is acting as independent accountant or auditor having expert knowledge in accounting or auditing."

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