Deloitte To Split Off Consulting Arm

Deloitte Touche Tohmatsu

The move is a sharp reversal from the No. 2 accounting firm's prior stance on the issue. So far, the firm had steadfastly maintained that it provided better service to clients by keeping its auditing and consulting business together.

Deloitte had clung to this position even as its other Big Five counterparts agreed in recent days to limit the consulting services they provide to the clients they audit as the industry came under attack following the Enron debacle.

"The heart of the challenge is the increasing reluctance of U.S. clients to purchase both consulting and audit services from the same firm," Deloitte Consulting Chief Executive Doug McCracken told staff in a memo sent on Tuesday and obtained by Reuters. He noted that the "Enron situation has presented our firm and the accounting industry with an unprecedented set of challenges."

The firm "intends to separate Deloitte Consulting to enable audit clients to continue to use the talents and skills of Deloitte Consulting without raising public concern about auditor independence," a Deloitte spokesman told Reuters on Tuesday.

Pressure has mounted on the accounting industry to reform its practices following the collapse of Enron and the subsequent revelations about the role of its auditor, Andersen, in the saga.

'"They might have concluded that given the changes in the accounting industry, (it's) the safest thing for them to do in terms of having outsiders view their commitment to their audit practice as very serious," said Joseph Carcello, a professor of accounting at the University of Tennessee. "The best thing they could do to signal that is to do what the others have done - to divest the consulting practice."

Critics have renewed calls for prohibiting accounting firms from providing their audit clients consulting services, a move regulators had unsuccessfully pursued a couple of years ago.

Accounting experts and other critics say earning lucrative fees from offering consulting services and then auditing the same client risks impairing the auditor's independence. Many were also quick to point a finger at Andersen, which earned $27 million in non-audit fees and $25 million in audit fees from Enron in 2000.

In last few days, the other four Big Five accounting firms announced they would support proposals preventing them from providing technology consulting and internal audit services to clients they externally audit.

"I think there are still a lot of people, particularly people in the Big Five, who don't really believe that this will improve audit quality," said Carcello. "But I think they feel that that issue is being so focused on right now that unless they deal with that issue, some of the other issues that may be there won't get attention."

Deeper issues on financial reporting, for example, still remain, he said.

MULLING SEVERAL OPTIONS

The memo sent to Deloitte staff said that the options to separate its consulting arm included an inti public offering, a merger with another firm or the creation of a separate consulting company owned by the partners.

Another option includes creating a strong "firewall" between Deloitte Consulting and Deloitte and Touche, the U.S. practice of Deloitte Touche Tohmatsu, according to the memo. A time frame for the move has also not been finalized, the memo said.

Deloitte declined to comment on how or when it will split off its consulting arm. Deloitte Consulting brought in total revenues of $3.5 billion for its most recent fiscal year ended May 31.

Last week, PricewaterhouseCoopers, the No. 1 accounting firm, said it would spin off its consulting unit in an initial public offering in a move aimed at avoiding the perception of a conflict of interest.

Other accounting firms have pursued similar options in the past, particularly after the Securities and Exchange Commission sought to clamp down on auditors providing management and technology consulting services to their clients.

KPMG spun off its consulting unit, KPMG Consulting which went public in February last year. Arthur Andersen split in 2000 from its sister firm Andersen Consulting, now known as Accenture.

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