Four of the nation's largest accounting firms said Thursday that they would be willing to give up at least some of their lucrative but controversial consulting work in an effort to restore confidence in their industry.
Similar limitations, considered by the Securities and Exchange Commission two years ago, failed to win support after lobbying by the accounting industry.
The stance was announced individually by KPMG, Pricewater-houseCoopers, Ernst & Young and Andersen. Deloitte & Touche, the other member of the Big Five accounting group, remained uncommitted and called for more discussion.
The announcements come as lawmakers are calling for new restrictions on accounting firms after the bankruptcy of Enron Corp. and questions about auditor Andersen's role in the failure.
"These firms and the industry are attracting tremendous heat and they want to placate their critics and the public," said Rick Antle, a Yale University accounting professor.
Meanwhile, Walt Disney Co. became the first major corporation to say it would no longer use its outside accounting firm for new consulting projects and would review those underway.
Chief Executive Michael Eisner said the debate over auditor independence had convinced the entertainment giant to "take decisive action," even though current safeguards had worked well.
In 2001, Disney paid its accounting firm, PricewaterhouseCoopers, $8.6million for its auditing and $32million for other services, according to its proxy statement.
The proposed policy on consulting discussed Thursday would apply to information technology and internal audit consulting by accounting firms, but not necessarily on all types of consulting work.
A spokesman for the American Institute for Certified Public Accountants, the profession's largest trade organization, said there is no evidence that limiting consulting work will improve the quality of audits or prevent Enron-style meltdowns. Nonetheless, they would support the proposal.
Accounting firms often earn more for consulting than auditing and provide a wide range of financial services, tax advice and other corporate guidance. Enron, for example, paid Andersen $25 million for its audit and $27 million for consulting.
Critics of the accounting industry, however, question whether the push Thursday to restrain consulting would limit potential conflicts of interest in audits.
Of the top five accounting firms, all but Deloitte & Touche have sold or are divesting their consulting units that performed much of the information technology consulting.
Yet at the same time the companies maintain other types of consulting relationships with their clients.
"I think this is a first step, but we can't lose sight of the other types of consulting work that are of concern and we can't ignore the need to strengthen oversight of the profession," said Lynn Turner, former chief accountant for the SEC and one of the main proponents of limiting consulting work.
Sens. Jon Corzine (D-N.J.) and Christopher J. Dodd (D-Conn.) plan legislation that would restrict a broad range of the consulting work that accounting firms do for audit clients. They said through a spokesman that limiting just the two types of consulting is a positive step but does not go far enough. Corzine is a former co-chairman of Goldman Sachs.
Certainly, work classified in SEC filings of public companies as "non-audit" generates tremendous billings for the large accounting firms.
For example, General Electric Co. paid KPMG $23.9 million for its 2000 audit, but it also paid the accounting firm $11.5 million for financial information systems design and implementation, $13.8 million for tax services, $15.5 million for "nonfinancial statement audit services" and $38.9 million for information technology consulting not associated with the financial statements, according to SEC filings.
"Some of this is really hard to sort out," Antle said. "When a client that is considering a merger asks the accounting firm how the deal would be treated, is that auditing or consulting?"
Although opposed to the proposal when it was first broached by the SEC in 2000, KPMG Chairman Stephen Butler said Thursday that he believes it is now in the best interests of the accounting profession.
"Concerns over perceived conflicts between audit and non-audit services have so far dominated the public debate over the role of the auditor," Butler said. The "red herring" of the conflict-of-interest issue, he said, has limited debate over what he believes is a more important issue for investors--an auditing and financial reporting system that has not kept pace with dramatic changes in business.
He said a financial reporting system "designed for the Industrial Age" no longer works in the Information Age.
"I believe we should accept previously proposed limits on non-audit services and move forward," Butler said.