Andersen must give up IT consulting

An independent review board is mandating that accounting giant Arthur Andersen stop offering services that are unrelated to audit work, including most IT consulting.

Arthur Andersen, struggling to survive after its role in the Enron debacle, must avoid real or perceived conflicts of interest by ridding itself of nonaudit services that might throw into question the independence of its audit activities, the board said in a report issued Monday.

Arthur Andersen provided both audit and nonaudit services, including IT consulting, to bankrupt energy trader Enron. Questions swirl over whether Arthur Andersen provided sloppy and possibly illegal auditing to Enron in order to win and protect its lucrative nonaudit contracts with the energy company.

The so-called Independent Oversight Board, created by Arthur Andersen in early February, released its first report earlier than anticipated, due to the company's "rapidly changing circumstances," the report said, referring to the company's rapid loss of clients, likely federal criminal charges, its long list of civil lawsuits and a possible takeover by competitor Deloitte Touche Tohmatsu.

The report mandates that in order to protect "the independence of the auditing function," Andersen should separate from its core audit business its consulting services in the areas of information and communication technology (ICT), strategic planning, law, executive recruitment and certain areas of "aggressive" tax planning and advocacy unrelated to auditing. How this separation occurs would be up to Arthur Andersen, and options for these consulting units could include spinning them off into totally independent and separate companies or selling them to an existing company, said Bill Mutterperl, the board's executive director, in an interview.

The report recognizes there will have to be a transition period for Arthur Andersen to accomplish this separation, but indicated that once the reorganization is completed "there will be no partner interlocks, no revenue or profit-sharing, and no cross subsidies" between Arthur Andersen and its consulting spin-off or spin-offs.

Previously, Arthur Andersen had hinted at taking steps in this direction related to IT consulting services, when it announced in February that it would "no longer accept assignments from publicly traded U.S. audit clients for the design and implementation of financial information systems." However, the company had stopped short of committing to spinning off into a separate company its IT consulting work.

The report suggests allowing Arthur Andersen to continue to provide "limited ICT design and implementation for small and medium-size businesses" that it doesn't audit.

Arthur Andersen has traditionally provided very good IT consulting services, thanks to its thorough understanding of IT issues and to its base of talented consultants, said Ted Kempf, a principal analyst at Gartner's Dataquest unit who covers the IT services market.

Chief information officers and IT managers who are clients of Arthur Andersen's IT consulting practice should get in touch with the embattled company and try to find out as much about this situation as possible, but shouldn't rush to any conclusions, Kempf said.

"There's nothing worse than a knee-jerk reaction," he said.

IT decision-makers should know that it's highly unlikely that Arthur Andersen's IT consulting practice will dissolve; it will probably survive as an independent company or as part of another company, Kempf said.

"This report is confirming what was expected," he said.

Moreover, IT decision makers shouldn't view the IT consulting practice of Arthur Andersen in a bad light simply because of the missteps of the audit team that handled the Enron account, he said. In a company as big as Arthur Andersen, it's very likely that the IT consulting unit operated with a high degree of independence, Kempf added.

The board's decision to force Arthur Andersen to separate its IT consulting practice "is an unfortunate byproduct of the Enron scandal" and something that the market may need, as proven by recent efforts from other accounting firms to separate their IT consulting business, Kempf said.

The Independent Oversight Board, chaired by former Federal Reserve Board Chairman Paul Volcker, was given full authority to mandate changes to Arthur Andersen, according to a press release the company issued in early February announcing the creation of the board.

Chicago-based Arthur Andersen didn't return calls seeking comment on the report on Tuesday. The board hasn't yet received any feedback from Arthur Andersen, said Mutterperl, who added this isn't surprising since the company is dealing with so many issues at once.

Arthur Andersen is one of the so-called Big Five accounting firms. The other four are taking or have already taken steps to separate their core audit business from all or some of their consulting work in order to calm conflict-of-interest concerns.

In January, PricewaterhouseCoopers announced it would spin off into a separate company via an initial public offering its management consulting business, PwC Consulting, which offers a wide variety of IT consulting services. A week later, Deloitte followed suit, announcing it would separate its consulting arm, although it hasn't said how it will do that.

Ernst & Young and KPMG had already taken steps before the fall of Enron. Ernst & Young sold its IT consulting business to Cap Gemini in 2000, while KPMG spun off KPMG Consulting via an IPO early last year.

While there now seems to be a consensus among accounting firms that most IT consulting belongs outside of their core business, the main point of contention right now is in tax planning consulting services, which some Big Five executives argue their companies should be able to continue providing, Mutterperl said.

Monday's report is the first issued by the board, and it doesn't cover all the areas the board expects to address in future reports, nor was the report reviewed by the board's advisory panel, because it was released in such a hurry. The advisory panel expects to meet on Wednesday, according to the report.

In an interview on cable television channel CNN Monday night, Volcker said he hoped Arthur Andersen would survive as an independent company, implement the changes mandated by the board and "become the epitome of the reformed auditing firm," according to a CNN transcript.

He also hinted that while other accounting firms have taken steps to separate consulting from audit work, some may not yet have gone as far as they should. "We think the nature of the things that we are saying are relevant beyond Andersen," he said during CNN's Moneyline program.

The IDG News Service is a Network World affiliate.