The Big 4 accounting firms are increasingly relying on consulting and advice to increase profits and boost their partners’ salaries, but it comes at a price.
The resurgence of consulting, which now accounts for the largest portion of the Big 4’s revenues, comes with potential conflicts of interest that could threaten their once core business of auditing.
U.S. regulators are closely monitoring corporate commerce, warning that the sheer weight of such advisory work could undermine the work of auditors. Ernst & Young has considered possible business splits to avoid such ethics crackdowns, including making his record $100 million settlement with the Securities and Exchange Commission for ethics violations.
“What if you essentially had a consulting firm that also did audit work? What would that bring to the culture of the company?” Stephen Lowe, associate professor of accounting at the University of Arkansas and former Big Four auditor Mr. “This is a problem, and the culture itself may deteriorate to the point where we see large-scale fraud again.”
Auditors act as a check on management to provide reliable financial reporting to investors. These defenses collapsed under the weight of the lucrative advisory business at the turn of the 20th century. Four major companies, including Ernst & Young, split up their services before a series of accounting scandals forced Congress to take control of industry and corporate reporting.
A growing global advisory client roster is now testing 20-year-old safeguards aimed at preventing the sale of lucrative work to audit clients.
Fees and restrictions
Revenues from advisory work, from supply chain strategy to technology platform installations, outstripped audit costs in the boom years following the financial crisis. As of last year, consulting accounted for nearly half of the company’s overall revenue.
According to data from Monadnock Research LLC, the Big 4’s global advisory fees exceeded $77 billion last year, surpassing audit fees of nearly $53 billion. These fees reflect a list of governments, private companies and wealthy individuals, as well as publicly traded corporate clients.
Since 2010, revenue from consulting services has more than doubled, and taxes and legal fees have increased by 67%. Data show that audit work for his four companies worldwide increased by 24% during this time.
Mark O’Connor, CEO and co-founder of Monadnock Research, which tracks the consulting industry, said: “It will fly towards you.”
O’Connor said a steady stream of acquisitions, often by smaller companies, has boosted consulting revenue for the four firms in areas such as data, artificial intelligence and marketing.
EY expects its advisory lines to generate $10 billion in revenue as a separate business. By contrast, the company’s consulting work brought in about $16 billion last year. The company did not respond to a request for comment.
But growing revenue at a similar pace may be difficult for independent consulting businesses. Limited client pool Independent audit work without advisory services could grow rapidly, but companies looking to change auditors may choose to hire ‘pure auditors’ he said.
Following the Enron and WorldCom accounting scandals, Congress has banned auditors from providing certain services to clients. This allowed me to limit profitable consulting work that could taint reviews and avoid auditing my own work. And few companies hire audit firms for services other than tax and other assurance-related work.
under pressure
Auditing has improved steadily since the Public Company Accounting Oversight Board, the US audit regulator, was launched 20 years ago. But the risks have shifted from what firms sell directly to audit clients to the range of advisory services they offer, said Robert Nechell, director of the International Center for Audit and Audit at the University of Florida.
Knechel said auditing, including investments in core systems and training, may not get the same level of attention as management is more focused on the consulting business.
Recognition and compensation can change how partners view client relationships. Auditors may have less incentive to “do the right thing,” Lowe said.
Douglas Paul, a partner at Akerman LLP, who represents companies and audit firms, said the “pressure to sell ancillary services” coupled with hybrid work in the era of the pandemic has encouraged auditors to question client transactions and decisions. It is challenging corporate-level checks and regulations to ensure that. in a government investigation.
take advantage of the gap
The Big 4 have built extensive systems to track customers and their affiliates around the world to prevent the sale of restricted services to audit customers. These systems also track the personal finances of global employees to comply with SEC and international ethical requirements.
Managing the independence requirements of the company’s 327,000 staff requires “a huge investment, but it’s worth it. We want to provide high quality audits to our stakeholders and the best experience for our employees.” We believe that a multidisciplinary model is the best way to deliver,” said PwC’s global division. said in a recent statement to the Bloomberg tax authority.
Despite these processes and controls, audit firms should be concerned about “if they are moving towards splitting up those businesses, is it working?” Paul said.
New ethics rules may emerge, including new categories of prohibited services, as independence rules have also not kept pace with market growth and the expanding line-up of consulting services offered by companies, he said.
SEC Chairman Gary Gensler said in late July that the PCAOB wanted to strengthen its independence standards, and the board added a project to update that requirement to its rulemaking agenda.
The SEC under the Trump administration has taken a lighter approach to ethics violations and relaxed certain conflict of interest rules. Enforcement cases reveal that the pendulum has once again swung on Wall Street regulators.
Cracks in these compliance systems can be exploited. His PwC partner in the US named Brian Sprankle fined the company $7.9 million for selling consulting work to audit clients, hiding the work and misidentifying it as audit-related. The US company responded with additional checks, training, and policy changes.
Longtime audit industry critic Francine McKenna called Sprankle’s evidence of auditor independence “epidemic.” “I think there are more Sprinkles out there,” she said.
McKenna, who teaches financial accounting at the Wharton School of Business, said that allowing companies to regrow such a large consulting sector contributed to the audit failures that led to the Sarbanes-Oxley Act of 2002. accusing regulators of
“We’re back where we started,” she said.
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