Deloitte & Touche has announced it will spin off its consulting practice as a separate company in a bid to restore public confidence in the accounting profession in the wake of the Enron Corp. scandal. The company made the decision "very, very reluctantly" and considers it "a step backward," James Coupland, chief executive officer of parent Deloitte Touche Tohmatsu, said yesterday.
The Toronto Star
February 7, 2002
Deloitte splits consulting, audit divisions
Move to restore confidence hit by Enron scandal
Dana Flavelle
Deloitte & Touche has announced it will spin off its consulting practice as a separate company in a bid to restore public confidence in the accounting profession in the wake of the Enron Corp. scandal.
The company made the decision "very, very reluctantly" and considers it "a step backward," James Coupland, chief executive officer of parent Deloitte Touche Tohmatsu, said yesterday.
Deloitte is the last of the Big Five accounting firms to make the move in response to industry-wide criticism that auditors' independence could be compromised if the same corporate clients whose books they scrutinize are also the source of lucrative consulting fees.
"We believe that effective auditing of large companies requires teams with a wide range of experience," Coupland said, in explaining his regrets. "But we're still confident we will be able to bring these teams together.
"Our concern is our clients will be forced to choose their auditor of choice and their consultant of choice," he added.
In Canada, Deloitte employs 5,600 people in its auditing and consulting operations, which last year had combined revenues of $895 million, making it this country's second-largest accounting firm behind PricewaterhouseCoopers.
Details of how the divisions would be separated have yet to be worked out, a spokesperson for the firm said later. In Canada, the two practices are owned by separate partnerships with "significant overlap," a spokesperson said.
The global company said it hoped to have the details worked out by May.
Deloitte also announced it would no longer provide internal auditing services to companies whose books it audits, another industry-wide practice that several big firms have jettisoned since the accounting irregularities at Enron came to light.
Questions about the role Enron's outside auditor, Arthur Andersen, played before its $15 billion U.S. bankruptcy protection filing Dec. 2 has cast a long shadow over the entire profession.
Simply splitting the consulting from the auditing functions won't be enough to restore public confidence in the profession, experts said yesterday, and a lot depends on how it's done.
Arthur Andersen's consulting division "divorced" the accounting practice two years ago in a dispute over which entity was to perform which services. But the accounting side continued to provide certain consulting services, which have now raised conflict-of-interest questions industry-wide following the Enron fiasco.
"The spin-off of the consulting practice is only part of the puzzle," said Leonard Brooks, a professor of business and professional ethics and accounting at the University of Toronto's Rotman School of Management.
Another problem that needs to be addressed involves the rules surrounding the use of an accounting creation called a "special purpose entity." Originally intended to allow companies to create joint ventures for economic purposes, Enron was apparently using them to simply move debt off its own books, Brooks said.
"It's pretty clear the rules related to these need to be re-examined to ensure they're not just a device used to mislead investors," he said.
Publicly traded companies should be required to provide more detailed information in their annual reports about the services outside accounting firms have performed for them, he said.
He added that the biggest problem at Enron, however, appears to be that management "failed to follow corporate policy."
Regardless of what new rules are adopted, he said, "there will continue to be cases where management tries to manipulate the financial statements and where the boards of directors and auditors are hard-pressed to keep up.
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