Battle of the Big Five threatens to force auditors out into the cold

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The Independent Online

Two titanic rows are reaching their climax at the same time, and they both involve auditors. Audit used to be a boring subject - all that box-ticking. Now the bean-counters are front-page news.

Two titanic rows are reaching their climax at the same time, and they both involve auditors. Audit used to be a boring subject - all that box-ticking. Now the bean-counters are front-page news.

The first of these very public disputes is between Andersen Consulting (AC) and its semi-detached partner Arthur Andersen (Arthurs). AC is suing for divorce, while Arthurs is demanding a cash sum before letting it walk away. The International Chamber of Commerce (ICC) in Paris has spent the past two-and-a-half years arbitrating the case, and is due to announce its verdict as early as today.

The second confrontation is between the Securities and Exchange Commission (SEC), America's most senior financial regulator, and those in the accounting industry who object to the SEC's demand that audit be separated from many other types of lucrative business, especially IT and management consultancy.

The SEC has always had tough rules aimed at stamping out conflicts of interest. It has now become concerned that some of the Big 5 accounting firms are selling too many other services to their audit clients, thus endangering the independence of the audit report.

Three of the world's Big Five accounting firms - Arthurs, KPMG and Deloitte & Touche - are taking on the SEC. The SEC and its chairman, Arthur Levitt, have their own allies, including the Consumer Federation of America, four former SEC chairmen and two Big Five firms - Ernst & Young and PricewaterhouseCoopers - which are moving to separate their auditing and consulting businesses or already have done so.

The stakes are high because non-audit work, including many kinds of consulting on computer and software systems, is among the fastest-growing and most profitable business at some of the biggest accounting firms.

You might ask - why is Arthurs arguing the point, since it has already separated out its own consultancy arm, in the shape of AC? The answer goes to the heart of the argument between Arthurs and AC. Since the two decided to become semi-detached in 1989, Arthurs has started building a second management consultancy practice within itself. Arthurs' engaging global head, Jim Wadia, says that Arthur Andersen Business Consulting has simply been created to do all the small stuff for Arthur's audit clients that firms like AC would never look at. They don't compete, he insists.

AC, however, says that by building another management consultancy arm, Arthurs has reneged on the original 1989 contract, and that therefore AC should be able to walk out of the marriage. Since the contract stipulated that if AC wanted to leave it would have to pay a sum of money to Arthurs and give up the Andersen name, this is a big issue. Mr Wadia and the Arthur leadership maintain that AC is trying to walk out of the contract for free.

Theoretically, since 1989, AC and Arthurs have been co-operating with each other. In reality, AC, under its former global head George Shaheen, has struck out on its own, and barely concealed its wishes to be rid of the Arthurs connection. To add insult to injury, under the 1989 contract AC has to pay a portion of its fees each year to Arthurs. This has become a running sore.

Two-and-a-half years ago Mr Shaheen and his board declared that Arthurs had broken the contract and that AC should be allowed to walk out for free. The 1989 agreement called for any disagreement to be decided by arbitration. The case was heard by the ICC, which appointed Dr Guillermo Gamba from Columbia to hear the case. The extensive hearings have been confidential.

The ICC has never before been used to arbitrate a case even approaching this size. Mr Gamba was chosen because the ICC decided that the arbitrator would have to come from a country where neither Arthurs or AC had a presence. Columbia fitted the bill.

In the business world, people who work for AC are nicknamed "Andersens androids" because of their intensive training and the strong culture of control within the firm. If this divorce drama has proved anything, it is that AC people are all too human. In its submissions to the arbitrator AC has accused Arthurs of "dysfunctionality". Arthurs accuses AC of having "secretly planned a separation for the past ten years". Both sides have used video clips of the other's partners' meetings. There has even been a "battle of the binders", with AC compiling exhaustive lists of quotes from Arthurs personnel showing that, yes, their management consultancy arm did compete with AC after all.

Bizarrely, the architect of AC's attempted separation, and Arthur's arch enemy, George Shaheen, is no longer even with AC. He left last year to head up a successful online retailing venture, WebVan. AC's new global head, Joe Forehand, a Texan based in Houston, reportedly pondered settling with Arthurs when he took over, but concluded that the arbitration process should be allowed to run its course.

Whatever Mr Gamba's decision, AC wants separation. This brings problems. If AC is forced to pay a separation fee, likely to be in the hundreds of millions of dollars range, how will it meet the bill? There are rumours that it might attempt an IPO to raise the required cash.

There is another problem high on AC's agenda. It is desperately worried about its more ambitious younger talent defecting to dot.com start-ups. AC plans to double its partner numbers as soon as possible to staunch the exodus.

Jim Wadia insists there is "absolutely no animosity between us and the AC rank and file". He would be quite happy to continue with the current arrangements, or to see AC walk away - as long as they pay.

In a way, the SEC's wish to separate out the Big 5's audit functions from their other businesses could prompt another spate of AC/Arthurs type divorce problems.

How on earth do you start separating the audit business out from the rest? Audit is seen as the loss-leading part of the business that produces a range of clients, which can then be cross-sold all the other services, such as tax, IT and management consultancy. This raises another question. If audit is dragged out on its own, who will pay for it? It's all very well saying that audit should be an independent regulatory function, but if the auditors have to rely on audit fees alone, they would suffer a squeeze on income and resources.

One last thought. Isn't it strange that a profession that earns its living from advising other people how to run their businesses can't seem to sort out its own?

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