Accounting Firms Taking Large Market Share of Consulting Contracts

Accounting firms and CFOs in the U.S. are now saddled with the Public Company Accounting Oversight Board. In addition, the Sarbanes-Oxley Act (often called “Sarbox”) placed an immense financial reporting compliance burden on CFOs and CEOs of publicly held corporations that list their stock on American exchanges. The burden was staggering as corporations and their accountants and consultants scrambled to comply.

The Securities and Exchange Commission (SEC) reworked Section 404 of the Act (which stipulates the requirement for publicly traded companies to ensure reliable and accurate financial reporting) so that firms and their auditors are less likely to be overburdened by compliance yet are still likely to minimize the potential for fraud. Nonetheless, Sarbox has been a major revenue booster for big accounting and consulting firms, especially when conducting work for clients that are new to the reporting process. Many people argue that Sarbox has restrained the ability of young companies to go public in the United States and is driving firms to list their stocks on exchanges in other nations. In May 2019, the SEC proposed certain reductions in Sarbox requirements for firms (other than banks) with less than $100 million in annual revenues. In March 2020, the SEC voted to approve the reductions, which came into effect in late April of that year.

Next came a vast array of daunting compliance problems for banks, investment firms, credit card issuers and insurance companies, as the governments of the U.S. and UK along with EU regulators issued a flurry of new regulations aimed at the financial industry. These include the Dodd-Frank Act in the U.S., along with a stringent new global rules covering risk capital at banks and investment firms. Another recent regulatory labyrinth in the U.S. was caused by the creation of the Consumer Financial Protection Bureau (CFPB) to oversee and regulate the issuance of things like mortgages, credit cards, personal loans and retirement plans.

Consulting work is a vital component of the overall business strategy of accounting firms. In fact, each of the big accounting firms generate more revenue from consulting services than the total revenues at the largest management consulting firms, such as McKinsey & Company, Boston Consulting Group (BCG) and Bain & Company.

Since the demise of accounting giant Arthur Andersen, LLP, the global accounting industry has been reduced from the Big Five firms to the Big Four, which together account for the vast majority of the audits at publicly held companies worldwide. These accounting giants are PricewaterhouseCoopers, Deloitte, EY and KPMG.

History—The divestiture of accounting firm consulting units: During the early 2000s, regulators and financial leaders became concerned that a lack of accounting objectivity could occur when a firm bills a client as much for consulting services as it does for financial auditing. All major accounting firms except Deloitte divested themselves of their general consulting units in an effort to stave off any possible conflicts of interest. The fact that there was a rash of accounting scandals, including the infamous 2001 failure of the energy company Enron, added fuel to the fire.

PricewaterhouseCoopers sold its consulting business, PwC Consulting, to IBM for $3.5 billion in 2002. It was then incorporated into IBM Global Services, one of the firm’s fastest growing and most important units.

KPMG Consulting was spun off from its accounting firm parent as a freestanding company, which acquired the new name of BearingPoint. With 15,200 employees and 2008 revenues of $3.19 billion, BearingPoint was one of the world’s largest consultancies. However, the firm elected to take Chapter 11 bankruptcy protection in February 2009. The company was a victim of both the global economic slowdown and a heavy debt load (around $1 billion) made unmanageable during the global credit crunch. Accounting problems had also taken their toll on the company, which is ironic considering it was an offspring of an accounting company many years ago. In 2009, BearingPoint sold the majority of its North American public services business to Deloitte for $350 million, its commercial services business to PricewaterhouseCoopers for $44 million and its Europe, Middle East and Africa practice to its European management team for $69 million. BearingPoint also sold its BearingPoint China Consulting unit to Perot Systems Corporation in 2009.

Ernst & Young, in early 2000, agreed to merge Ernst & Young Consulting with Cap Gemini, a well-established global firm noted for IT consulting, among other practices. The merged company changed its name to Capgemini. (Accounting firm Ernst & Young Global Limited changed its name in 2013 to EY.)

Accounting & Consulting Today: Accounting firms are once again operating giant consulting practices. The Big Four accounting firms in the U.S. (Deloitte Touche Tohmatsu, PricewaterhouseCoopers, EY and KPMG) are generating the bulk of their revenues from consulting and advisory services. At first, the focus was specialized consulting relating to Sarbanes-Oxley and other compliance needs. More recently, however, accounting firms have been willing to expand their consulting operations. PricewaterhouseCoopers (PWC) acquired management consulting firm Booz & Company in 2014, changing the acquired firm’s name to Strategy&.

During 2000, Andersen Consulting had the good fortune to be spun off from the now defunct Arthur Anderson accounting firm (Enron’s accountants) to become the free-standing Accenture. Today, Accenture is a 500,000-employee consultancy with offices and operations in more than 200 cities in 51 countries. Fortunately, Accenture was already well distanced from its former parent company, Arthur Andersen, before its demise. Today, Accenture remains one of the world’s most successful consulting firms.

Second-tier accounting firms, such as BDO USA, LLP (formerly BDO Seidman LLP), Grant Thornton International and RSM US LLP, have historically served smaller clients since they do not have the employee counts or prestige often needed to serve companies with vast revenues. However, with the passing of the Sarbanes-Oxley Act, tier-two firms are successfully bidding on audits for major corporations, since the Big Four initially had a limited number of auditors available to handle the increase in hours necessary for compliance. The shift opened doors for smaller accounting firms, especially for BDO USA (a member of the BDO International group of firms).

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was a landmark piece of legislation in the U.S. Dodd-Frank is having a profound impact on investment and banking firms which must provide regulators with staggering amounts of data regarding their practices and overall stability. Accounting firms, law firms and a host of technology firms were offered tremendous opportunities to assist these institutions in meeting Dodd-Frank requirements. For example, bank consultancy Invictus Consulting Group advises banking institutions as to how to comply with the need for annual stress tests. Technology consultants are participating as well by designing software systems to automate data collection, compliance and reporting.

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