It wasn't too long ago that consulting firms rooted in Big Five accountancy were entrenched in a heated battle against the U.S. Securities and Exchange Commission. It was a battle brought on by a string of auditing failures that ultimately energized the regulatory mission of SEC chief Arthur Levitt, who roused efforts to expose the conflicts of interest that existed when accountancies generated additional revenues by selling their audit clients consulting services.
Before he retired in February of this year, Levitt's measures ultimately fell a number of yards short of the goal line. The new auditor independence rules issued by the SEC do not call for an outright ban on audit firms doing consulting work for their clients. Instead, the SEC settled for a requirement that public companies disclose in their proxy statements all fees paid to their audit firms for non-audit consulting work. Moreover, the SEC issued a list of nine types of consulting services, including financial information systems design and implementation, that can impair independence when performed by a public company's audit firm. Once again, the SEC did not ban firms from doing IT consulting for their audit clients as long as those projects meet certain criteria.
Just what kind of impact these rules are likely to have on the Big Five firms and their business development efforts remains to be seen. However, as public companies digest these new rules and their implications, the consulting industry is waiting to see whether the rules will have a chilling effect on a company's willingness to award consulting work to its audit firm.
"I think there's some value in avoiding a potential conflict between the audit firm and the consulting arm of that audit firm," says Dave Wilson, CFO of PolyOne Corporation, a $1.9 billion polymer services company based in Cleveland.
"One prospective conflict is to what extent are the auditors being used for information systems design and implementation? In this scenario, internal conflicts can arise when the firm that is charged with auditing and ensuring such controls have been put in place has a vested interest because of previous IT structural activities. It would be a good idea and an appropriate practice to discuss this and other types of potential conflicts with the audit committee."
