Now, it's official.
As CFO.com predicted yesterday, PricewaterhouseCoopers announced it will spin off its management consulting business, PwC Consulting. PwC plans to launch the initial public offering within the next few months.
This is not exactly a big surprise. PwC management has been mulling the sale or separation of the consulting unit for a couple of years. As you recall, the company tried to sell the unit to Hewlett-Packard, but that deal fell through in late 2000.
PwC has been selling off bits of its consulting practice over the past few months. The company sold its U.S. Corporate Value Consulting business to Standard & Poor's last year. Also in 2001, Mellon Financial Corp. purchased Unifi Network, PwC's human resource outsourcing business.
Other Big Five consulting firm's have already gone down this path. Last year, KPMG spun off its consulting businesses, KPMG Consulting, and Andersen also took its consulting practice public, dubbing it Accenture.
Those spin-offs were widely seen as attempts to maximize shareholder value. In the wake of the Enron scandal, PwC's move appears to be more about public relations. "We recognize that there is a crisis of confidence in the profession and that there's a concern over the scope of services that firms such as ours provide," PricewaterhouseCoopers spokesman David Nestor told Reuters. "We don't think that those concerns are real, but the appearance is real and the concerns are real, and that certainly influenced our timing."
So how will PwC's consulting service fare on its own? Well, on Thursday, KPMG Consulting Inc. reported that revenue fell 16 percent in the fiscal second quarter ended Dec. 31. The consultancy did earn $6.6 million in the quarter, however, compared with a year-earlier net loss of $37.6 million. The results included $12.8 million in charges, mostly related to 325 layoffs, or about 3 percent of the company's work force. Excluding the charges, management at KPMG Consulting said the firm would have earned $19.4 million--in line with Wall Street consensus estimates.
Of course, given the Enron fiasco, Big Five firms are undoubtedly looking to steal away business from Andersen and Accenture. Certainly, Andersen, the industry heavyweight, is about as vulnerable as it's ever going to be. One example: Gerald Luterman, CFO at Keyspan, a New York power company audited by Anderson, told CFO.com that the utility is in the process of reevaluating its relationship with the auditor. More ominously, Luterman thinks other finance chiefs are doing the same thing. "You have to," asserts Luterman. "There's not a company in the United States that's not doing this."
PwC Consulting Exiled From Magic Kingdom
In a related story, management at the Walt Disney Co. yesterday said the entertainment and media giant will no longer use its auditor, PricewaterhouseCoopers, for any new consulting work. It also said it would evaluate whether to retain PwC for current consulting work the accounting firm is currently doing.
"Going forward, we will not be entering into any new consulting assignments with our outside auditors," Disney CEO Michael Eisner reportedly told analysts in a conference call on Thursday. "We are currently evaluating the consulting assignments between our auditors and Disney that are already in place."
In 2001, Disney paid PwC $8.7 million in audit fees and around $32 million in non-audit fees, according to its proxy. "Until now Disney has engaged our outside auditors for consulting services only with the approval of the board's audit committee, which is composed of independent directors," Eisner said. `"I believe this approach has served the company well."
Of course, Eisner's statements could be seen as a pre-emptive strike aimed at heading off investor concerns about the veracity of corporate financial statements. Over the past few days, investors have been hammering companies that restated earnings in the past due to reporting irregularities. It's possible Wall Street's next target will be corporations that use the same acccountancy for both audit and non-audit services.
KPMG Chief Calls Non-Audit Flap a "Red Herring
KPMG Chairman Stephen G. Butler said the accounting industry, regulators, standard setters and all other interested parties need "to come together in the public interest" to rapidly address the changes that need to be made.
"KPMG has for several years urged the modernization of the current system of investor information. It's finally time to move the accounting model of the Industrial Age into the Information Age," Butler said in a press release. "Specifically, we can no longer ignore the intangible assets of knowledge-based companies or be satisfied with a leisurely, quarterly, after-the-fact reporting cycle. Even a perfect audit of less-than-relevant and out-of-date information will not do investors much good." As CFO.com reported yesterday, a source at the SEC says the Commission is considering requiring companies to file 8Ks within 24 hours, not the current fifteen day time frame. A corporation must file an 8K if it experiences an unquestionably material change to its business.
Butler called the controversy over non-audit services a red herring. "This issue, raised anew by the Enron matter, is making it difficult to move on to the larger issues of modernizing the financial reporting system. Therefore, KPMG supports prohibiting auditors from performing systems integration consulting and internal audit outsourcing services for public audit clients. I believe we should accept previously proposed limits on non-audit services and move forward."
Reader Comments» Post a comment