Juggling act: Accounting firms offering business consulting services

New Orleans CityBusiness, Jun 30, 2008 by Fritz Esker

From an outsider's perspective, accounting firms offering business consulting services could confront conflicts of interest.

For instance, could a CPA steer a business owner toward a practice that creates more work for his firm? Where do accountants draw the line on services that present a conflict of interest?

Industry leaders say it depends on the extent of business consulting, often hard to define it because it can cover a wide variety of services. Examples include creating a system of internal controls, providing opinions on financial matters and, in some cases, making decisions on financial matters.

"It really depends on the individual facts and circumstances," said Ted Mason, president and CEO of Laporte Sehrt Romig Hand.

Ralph Cox, managing member at Bourgeois Bennett, said it is acceptable for accountants to give advice about certain matters. If a company is wondering whether it should lease or buy equipment, the accountant can weigh in as long as the client makes the final decision.

However, when the consulting goes beyond the realm of advice and heads into the realm of decision-making, the conflict is definite.

"You can't make management decisions without affecting your independence," Cox said.

The logic is simple, accountants say. For an audit, a fresh set of eyes is needed to make a thorough and honest assessment of the work, meaning a company should hire separate firms to provide consultancy and auditing services.

"You can't audit yourself ... you lack independence," said William Legier, managing director of Legier and Materne.

Independence concerns are not as great in tax accounting since all firms must abide by the same tax laws, Cox said.

For publicly traded companies, independence is especially important because of the Sarbannes-Oxley Act of 2002 that was enacted as a response to corporate accounting scandals at Enron and WorldCom. The legislation is aimed at protecting shareholders and the public from accounting errors, whether they are honest mistakes or fraudulent practices.

"In the Sarbannes-Oxley environment, independence is critical to the auditing function," Mason said.

In the wake of Enron and WorldCom, accounting firms are avoiding even the slightest appearance of a conflict of interest. Even if accountants make unbiased decisions for a business, experts say they run the risk of clouding the waters if they also audit the same business.

"It would seem to be giving the fox the keys to the henhouse," said Linda Sherry, spokeswoman for Consumer Action, a consumer advocacy group.

"It's an appearance thing," she said. "If it's a publicly traded company, there's even more of a conflict of interest. Stockholders trust the proceedings to be above board."

Even though Sarbannes-Oxley created a rigid set of guidelines for auditing practices, Cox, a 38-year industry veteran, said accounting ethics have always emphasized independence for audits.

The area where accounting firms rely more on their own judgment is in dealings with smaller, private companies. Since they are not publicly traded, they do not fall under the Sarbannes-Oxley umbrella and it is at the owner's discretion as to how the accounting work is done.

"The owner is the boss and can do whatever he wants within the law," Sherry said.

Even so, some private companies are following the example set by Sarbannes-Oxley.

"A lot of companies, even if they're not forced to by Sarbannes- Oxley, are looking to split up services (much more so than five years ago)," Mason said.

The companies are farming out accounting and advisory tasks to different firms not because they're legally bound but because they feel the separation of duties is good business practice, he said.

For businesses that co-mingle their accounting and advisory services within the same firm, the decision is based largely on track record.

"We do general consulting with most of our clients because they view us as trusted business advisors," Mason said. "We're familiar with their operations. "Most of our smaller clients need our (consulting) help and expect our help."