Consulting grows, but trust still an issue - By the Numbers - accounting firms still reeling from scandals - related article: Coming Clean - Industry Overview

Chief Executive, The, March, 2003 by Dan Tynan

The major public accounting firms would probably rather write off the year 2002. Big Five firms were at the center of the Enron, WorldCom and Tyco scandals, among others. The result? Tarnished reputations, federal accounting reforms and, in the case of Arthur Andersen, total financial collapse. Yet despite the scandals, the professional services industry continued to grow, albeit more slowly.

Conflicts of interest between the big firms' consulting and auditing divisions were only part of the story. In many cases, audit firms were unable to forecast financial trouble brewing for their clients. Weiss Ratings examined 228 public companies that went bankrupt between January 2001 and June 2002. Eighty-five percent of them were audited by one of the then-Big Five -- and more than 42 percent were issued a clean bill of health by auditors within a year of their failure.

For 33 public companies that reported accounting irregularities in 2001 and 2002, the report was even worse. Accountants gave a thumbs-up to 94 percent of the companies. Six of them--including Enron, Global Crossing and Adelphia--went on to declare bankruptcy, while the combined market value of all 33 corporations dropped from $1.8 trillion to $627 billion.

The remaining four accounting giants still grew in 2002, but at a much slower pace. The pack was led by KPMG, whose 3.9 percent growth (on revenues of $10.7 billion) was its worst showing since the recession of 1994. Last year, three of the firms (KPMG, Deloitte Touche Tohmatsu and PricewaterhouseCoopers) also shed profitable business consulting divisions, a process already under way but accelerated by corporate scandals, notes Michelle Cantara, principal analyst for consulting and systems integration at Gartner Dataquest.

Business consulting, particularly with regard to information technology, will enjoy steady growth for the next four years as companies focus on integrating prior investments in new technologies, says Cantara. In the short term, the Big Four will get a boost from the collapse of Arthur Andersen, as they capture business from former Andersen clients. But the big firms will have a hard time regaining the public's trust, says Judy Hopelain, a partner with Prophet, a consulting firm specializing in brand and business strategy.

"They've got to demonstrate competency, show their motives are pure and deliver what they say they're going to deliver," says Hopelain. "That's not something a quick marketing campaign can fix."

MISSING THE BOAT ON BANKRUPTCIES

More than 40% of bankrupt companies received a clean bill of health from
their auditors within a year of failing.

Warnings issued before bankruptcy


KPMG                    43%
Deloitte & Touche       56%
Arthur Andersen         56%
Ernst & Young           65%
PricewaterhouseCoopers  59%
Smaller Firms           63%
Overall                 58%

Source: Weiss Ratings

Note: Table made from bar graph

THE BIG FOUR GROW MORE SLOWLY

The Big Four grew more slowly last year, but the balance sheet may look
brighter in 2003, as the firms book revenues from former Arthur Andersen
clients.

                             2001  2002

KPMG                        10.3%  3.9%
Deloitte Touche Tohmatsu *   5.0%  2.5%
Ernst & Young                7.9%  2.7%
PricewaterhouseCoopers *     3.2%    1%

* Includes revenue from consulting business

Sources: Public Accounting Report, Washington Post

Note: Table made from bar graph

WORLDWIDE BUSINESS CONSULTING SERVICES

According to Gartner Dataquest, the market for business consulting
services will see an average annual growth rate of about 5% from 2002 to
2006.

$ Millions


2002  $14,725
2003  $15,141
2004  $15,797
2005  $16,869
2006  $18,125

Sources: Gartner Dataquest IT Services Forecast, December 2002

Note: Table made from bar graph

RELATED ARTICLE: Coming Clean

* Percentage of firms that have formally addressed implications of scandal: 17

* Federal campaign contributions from accounting firms in 1990: $3.1 million; in 2000: $14.8 million

Sources: AccountingWEB Inc., and the Center for Responsive Politics