No Poaching from KPMG, Say Audit Firms

Deloitte & Touche, Ernst & Young, and PricewaterhouseCoopers will observe a hands-off policy regarding KPMG's clients while it resolves federal lit...
Craig SchneiderAugust 24, 2005

It appears that the Big Four are willing to put the industry’s future ahead of their own profits.

Deloitte & Touche, Ernst & Young, and PricewaterhouseCoopers have reportedly ordered their partners not to poach clients from their battered rival KPMG while it resolves federal litigation problems, according to Bloomberg, citing unnamed industry sources.

KPMG faces a penalty of up to $500 million as it attempts to negotiate a settlement with the Department of Justice over its marketing of questionable tax shelters — an agreement, sources say, that could come as early as this week. Reportedly, the hands-off policy is intended to help KPMG avoid the fate of Arthur Andersen,
which was accused by federal prosecutors of obstructing an investigation into audit client Enron Corp. The firm’s conviction reduced the number of large accounting firms to four, leaving its rivals to pick up many of Andersen’s auditing clients and partners. A similiar fate for KPMG might incline regulators to intervene for the sake of competition and possibly break up the remaining firms, sources suggested to Bloomberg.

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To be sure, the effort to keep the Big Four intact could backfire. While the firms reportedly acted separately to avoid capitalizing on KPMG’s troubles, Bloomberg sources also fear that the behavior could raise antitrust questions about how each came to the same decision. “Antitrust as a discipline is always very nervous when competitors work together to achieve ends not flowing from market forces,” Stephen Calkins, a professor at Wayne State University Law School in Detroit, said in the report.

Sarbanes-Oxley rules governing auditor conflicts of interest, which forbid companies from using the same accounting firm for auditing and consulting services, are also a concern to Deloitte, E&Y, and PwC. Since many companies use at least one of the Big Four for non-audit work, Bloomberg notes, the conflict-of-interest rules limit the firms’ ability to pick up KPMG clients.

Edward Nusbaum, chief executive officer of Grant Thornton LLP, told Bloomberg the attempt to save KPMG is “in the best interest of the profession and of the capital market system” but added that he was unaware of the agreement.

In June, KPMG issued a statement saying it was cooperating with the government probe and that it no longer provides questionable tax shelter services. Spokesmen for KPMG, PwC, and Deloitte declined to comment for the Bloomberg story; an E&Y spokesman didn’t return calls requesting comment.