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February 25, 2010

FRC keeps watch on consulting growth

UK Financial Reporting Council (FRC) chief executive Stephen Haddrill has warned the regulator is monitoring the Big Four’s consulting services growth.

Haddrill told a UK Treasury Committee hearing this month that the FRC wants to see the majority of fees coming from audit.

One committee member pointed out that before the Arthur Andersen collapse that followed the Enron bankruptcy in 2001, fee income from consulting at the largest accounting firms was 300 percent as much as fee income from audit. This raised concerns about independence and concerns about firms slashing audit fees in order to win audit work as a leader for consulting work.

Changes in strategy

Following the Enron scandal, all of the Big Four except Deloitte sold their consulting arms. However, they are now heavily reinvesting in the lucrative consulting market.

Haddrill said the FRC will watch the firms closely to see whether the growth in consulting revenues encroaches upon audit.

PricewaterhouseCoopers UK (PwC) head of audit Richard Sexton told The Accountant that the firm doesn’t see an issue with the firm providing consulting services to non-audit clients.

He said PwC is the largest audit firm in the UK market, but still only provides audit services to about 30 percent of listed companies.

“This means there is a very big chunk of the market where we are not auditors and frankly we have skills that we derive from both our audit work and other aspects which people in the rest of the market wish to buy, and some of that is consulting activity,” Sexton said.

“We don’t see an issue with that frankly, we are very careful in relation to the services we provide to audit clients. We believe that the ethical guidelines in the UK and indeed regulatory guidelines around the world… are clear. We follow those stringently; they are there to protect investor interests but also to recognise that there are certain non-audit activities which are best done by the auditors because of their knowledge, skills or efficiency.”

Sexton also warned it is important to not generalise about consulting as it is a vast and complicated marketplace

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