This article was first published in the January 2014 international edition of Accounting and Business magazine.
PwC’s recent offer to purchase/merge with management consultancy Booz & Co and KPMG’s creation of a capital investment division has once again put the subject of auditor independence in the spotlight.
On 30 October 2013 PwC announced that it would acquire the Booz name, along with its 300 partners and 3,000 employees, if a December vote of Booz partners supported the acquisition and anti-trust regulatory approval was forthcoming.
Not two weeks later on 11 November, KPMG announced the formation of KPMG Capital, an investment fund that would support data and analytics companies in helping KPMG clients unlock tangible value from their big data. The fund is purported to be the first of its kind and the largest investment fund (an estimated US$100m initially) ever set up by any of the accounting firms. The fund is internal to the firm, so there are no regulatory constraints on the type or size of deals made, as long as there is no consulting/audit/financing relationship between KPMG and the companies it invests in.
While increasing their foothold in the consulting community is not new (all the Big Four have been on the consulting firm acquisition trail for some time), the size of the Booz deal and KPMG’s groundbreaking foray into financing begs the question, is auditor independence dead?
For the auditors, the independence question seems to be trumped by the prospect of improved service to clients, or so says Dennis Nally, chairman of PwC International: ‘We believe this proposed combination of Booz & Co with our existing assurance, advisory and tax capabilities would create a stand-out professional services organisation that delivers first-class quality services to a broad range of stakeholders.’
However, the Sarbanes-Oxley Act bars audit firms from many types of consulting work for their US clients, suggesting that conflicts of interest are highly likely to occur with both PwC’s Booz acquisition and the KPMG analytics investment fund. This is particularly true for the PwC acquisition, as some of Booz’s existing consulting clients have their yearly audit done by PwC.
Others have pointed out that the accounting firms could gradually take their collective eyes off the audit ball, and become consulting firms that do audit – rather than the other way around – shifting the focus from serving investor security to serving senior management.
So where are the regulators in all this?
Despite what seems to be clear risks of conflicts of interest emerging from increased non-audit work, some observers doubt that the regulators will take much action, pointing to the limited practical effect of the audit independence rules laid out in Sarbanes-Oxley, and therefore nothing is expected to change.
Notable pundit on the topic of auditor independence Francine McKenna says: ‘It’s wildly unpopular for regulators even to suggest they may force companies to cut off a favoured vendor – the one you can “work” with – as we have seen whenever the subject of auditor rotation comes up.’
When it comes to regulating consulting firms, the US Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) claim it’s not within their purview – the deals are not subject to their approval. As to how this bodes for the future of auditor independence, former SEC chairman Arthur Levitt
warns in a Bloomberg News interview: ‘We are slipping back. As the accounting profession becomes more committed to consulting, their audit activities have got to be questioned.’
The December vote by the Booz partners was expected as Accounting and Business went
Ramona Dzinkowski is an economist and business journalist