Don’t Purchase Consulting Services from Auditor, Say Money Managers

New survey reveals investors may discount shares of companies that buy nonaudit services from their auditors.
John GoffMarch 18, 2002

Generally speaking, surveys put out by special interest groups tend to be more self-serving than instructive. A few weeks ago, for example, was sent the results of a poll showing conclusively that corporate executives felt a return to proper business attire would make their companies more productive. To be honest, we probably we would have given this survey more credence if hadn’t been sponsored by the Men’s Apparel Alliance. Really, how likely is it that such a group would send us a press release proclaiming: “New Poll Reveals Worker Most Efficient When Wearing Loincloth and Sandals.”

But a new survey of some 50 asset managers and analysts may actually give CFOs something to think about. The poll, conducted by public relations firm Citigate Dewe Rogerson, revealed that almost 52 percent of the respondents believe investors might have concerns about companies that purchase consulting services from their auditors.

More worrisome, over a third of that group felt investors will, in fact, discount the share prices of such companies. Further, a number of the asset managers and analysts in the survey believe the even the perception of a conflict of interest between a corporation’s auditor and consultants could cause investors to apply a discount to that company’s stock price.

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Admittedly, around 48 percent of the respondents didn’t feel the markets would punish companies that purchased consulting services from their auditors. Nevertheless, when more than half of the asset managers and analysts in a survey seem to think corporates could suffer from not separating audit from non-audit assignments, it might be prudent to start separating.

Managers at Walt Disney must feel that way. Last month, executives at the company announced they would no longer purchase consulting services from the company’s auditor, PricewaterhouseCoopers. According to a Disney proxy, PwC took in $8.7 million in auditing fees from the Magic Kingdom in 2001. By contrast, the Big Five firm booked $32 million in non-audit fees from Disney.

“We’ve been very prudent in this area over the years, with close and active oversight by the Audit Committee,” Eisner told Disney investors at the company’s annual shareholder meeting. “But, in the current world, it’s become more important than ever to make sure that our shareholders — and the market as a whole — have full confidence in our financial reports, including the integrity of the auditing process.”

SPVs Not the Raiser’s Edge

But if the Citigate Dewe Rogerson poll is any indication, institutional investors clearly have doubts about corporate reporting these days.

One for-instance: Over 40 percent of the asset managers and analysts surveyed see widespread inconsistencies in the presentation of off-balance-sheet items. Although nearly 60 percent believe accounting irregularities with third-party transaction are confined to a few companies, nearly one-third of that group believe that accounting issues exist both in industries that typically use off-balance sheet items or special purpose vehicles (SPVs) and those that do not. Of those surveyed, 40 percent said that they (or their firms) are focusing on accounting issues within four sectors: energy, banking and financial services, telecommunications and biotechnology.

Of the respondents who believe that problematic accounting practices are widespread, three-quarters called for further regulation. “Wall Street doesn’t usually think government has the answer,” notes John McInerney, senior director at Citigate Dewe Rogerson: “Yet nearly 75 percent of the people we spoke to think new regulations are needed to sort out uncertainties surrounding off-balance-sheet items and SPVs.”

In an ideal world, said the respondents, they would want the following information about SPVs:

Separate financial statements for off-balance-sheet entities or total liability disclosure.

Actuarial assumptions underlying the valuation of securities that are marked to market.

A limit to the number of SPVs that can be used.

A discussion of the triggers for contingent liabilities.

Clearer disclosure of non-operational income and liabilities.

Breakdown of line items that comprise several businesses.

Clearer discussion of liabilities relating to stock options.

Greater clarity of revenue recognition (for SPVs).

A discussion of counterparts or partners.

Not surprisingly, few of the respondents believe that companies already offer enough information about SPVs. Only 4 percent of the asset managers and analysts surveyed said that all necessary information was already available in federal filings and that analysts simply needed to produce more thorough research. Says McInerney: “We find it especially compelling that a majority of the respondents who characterized the accounting problem as ‘limited in scope’ either call for additional regulation or think that companies should present this information more transparently.”