Crain’s Chicago Business Focuses On Big Four Auditors And Consulting

Last week Crain’s Chicago Business and journalist Steve Strahler produced a series on the reemergence of the consulting arms of the Big Four audit firms with a particular focus on the Midwest and Chicago firm leadership.

As regular readers of this site know, Deloitte never left the consulting business and has been growing its technology consulting practice in particular by leaps and bounds, servicing the US federal government especially the Defense Department, other sovereign governments and state and local governments. Lately that hasn’t been going very well. I criticized the firm quite a bit regarding its obvious conflicts in the consulting engagement at JP Morgan for the OCC/Fed foreclosure reviews. My criticism was heard by Congress and others. Deloitte has been taking a beating in the press lately on some major state and local government systems implementation failures. The Boston Globe’s Pulitzer-Prize winning journalist Beth Healy has been running story after story about two disastrous Deloitte projects for the State of Massachusetts.

But that’s not all, according to Healy’s latest, “Mass. IT project is latest black eye for Deloitte”:

From Florida and Pennsylvania to California, multimillion-dollar projects managed by the New York company have come in behind schedule, over budget, and riddled with problems. It is a situation that has been repeated in Massachusetts this summer; Deloitte was two years late and $6 million over budget in delivering a system to manage unemployment claims, and, separately, the Department of Revenue fired the firm for falling behind on a $114 million tax-system overhaul mired in errors.

In Florida’s Miami-Dade County, school officials fired Deloitte in 2009, partway through an $84 million contract to overhaul the district’s computer system. After paying Deloitte $30 million and having “virtually nothing” usable they could rescue, Superintendent Alberto Carvalho said, the district turned the project over to its in-house technology department, which completed it on time and within the budget.

Don’t forget, Deloitte’s Financial Advisory Services consulting arm took a big hit earlier this year on lack of independence when it was banned by the New York Department of Financial Services for one year a d fined $10 million for its “misconduct, violations of law, and lack of autonomy during its consulting work” at Standard Chartered Bank on anti-money laundering (AML) issues.

Steve Strahler at Crain’s has written three stories:

In the story, Big Four bulking up consulting muscle, Strahler quotes me on the impact of this auditor independence conflict on companies and their audit committees. Strahler focuses on the growth of the firms’ consulting arms in the Midwest and the conflicts that creates. Deloitte and PwC did not comment for the articles.

At Deloitte, the first of the Big Four to report fiscal 2013 revenue, consulting and financial advisory revenue now exceeds audit’s, which grew less than 1 percent during the period, while the firm made some 30 acquisitions. Three years ago, the consulting and financial advisory segments combined were four-fifths of audit revenue.

“There are companies that are pushing the envelope and waiting to be caught,” says Francine McKenna, a Chicago-based CPA and PwC and KPMG Consulting Inc. alumna who writes industry blog “Re: the Auditors.”

Last month, Deloitte’s U.K. parent was fined an equivalent of $22 million by a British tribunal reviewing audit and tax work for MG Rover Group and Deloitte’s simultaneous, and much more remunerative, consulting services for the failed automaker’s owners. A “disappointed” Deloitte said it disagreed with the tribunal’s “main conclusions.”

“There are companies that are pushing the envelope and waiting to be caught,” CPA and blogger Francine McKenna says. - Stephen J. Serio

“There are companies that are pushing the envelope and waiting to be caught,” CPA and blogger Francine McKenna says. Photo by Stephen J. Serio

PwC, meanwhile, declines to comment on a subpoena it received in an ongoing New York investigation into chummy relationships between consultants and Wall Street clients.

The Big Four can ‘call the shots’ is the second story and it’s an interview with Mark O’Connor of Monadnock Research who also provided the data and charts backing up the numbers in the articles. Regular readers of this site will be familiar with Mark’s work and point of view on this subject.

The third article is an interview with the new vice chairman and Midwest managing partner of Ernst & Young LLP, Rick Fezell, Big Four’s shift crimps small firms.

For more on this subject from me, go back to my remarks at the NYU Stern School of Business Ross Roundtable on the reemergence of consulting practices in the major audit firms last November. The panel included Bob Herz (a former FASB Chairman and current audit committee and PCAOB SAG member), former Fed Chairman Paul Volcker, professors from Stern, and Christopher Davies of Wilmer Hale who pinch hit for PwC’s Brendan Dougher who canceled at the last minute. Davies represents PwC and Ernst & Young in auditor liability matters.

My full remarks from November are here.

Here’s the quote NYU chose to put up on their site, with a nice photo:

1 reply
  1. Ric Teal
    Ric Teal says:

    Nice report. I have seen some failures at other companies, but could not relate it to anything. Thanks for validating some of my questions.

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