Deloitte, Off, Consulting, Business

Deloitte changes its mind on spinning off consulting business

02 Sep 2003 | (News)

Deloitte Touche Tohmatsu, in a surprise move, has called off its planned spinoff of its consulting business, opting to keep the unit instead.

The No. 2 accounting firm, which had targeted spinning off the unit as an independent company by the end of the first quarter, blamed unfavorable market conditions for the change of plans.
"Conditions deteriorated due to the general decline in the economy," while the war with Iraq exacerbated the situation, James Copeland, chief executive of both Deloitte Touche Tohmatsu and its U.S. arm, Deloitte & Touche, told Dow Jones Newswires late Friday.
Deloitte, which announced the spin-off plans in February 2002, originally had hoped to complete the deal by the end of last year. Under the plan, Deloitte Consulting would become an independent firm, privately held by its partners, and renamed Braxton. But financing hurdles pushed out that target date, and ultimately foiled the deal.
Mr. Copeland said Deloitte Consulting and its parent recently considered all other options for the unit, including a possible sale, "but our consultants very much wanted to continue as a private, independent consultancy. We continually reviewed the waterfront, but opportunities for M&A or an IPO got worse instead of better."

Keeping the unit "is the best option for both" Deloitte Consulting and the parent firm, he added.
Deloitte & Touche is the only Big Four accounting firm not to have shed its consulting business. The firm agreed reluctantly to do so last year, a decision spurred in large part by the Enron Corp. (ENRNQ) accounting scandal, which put a spotlight on the possible conflict of interest that arises when an auditor also sells lucrative consulting services to an audit client.
Despite sweeping accounting reforms signed into law last year, Deloitte wasn't required to shed the business. Such a move made sense, however, because new Securities and Exchange Commission regulations forbid accounting firms from selling certain non-audit services, such as legal advice and systems design, to their audit clients.
"We wanted to stay together all along," said Mr. Copeland, "but there was a price to be paid in terms of loss of consulting revenue."
With that consulting revenue from audit clients already lost, he noted the firm sees "real power and advantage in being together." Deloitte, which has a roughly 25% share of the audit market, can focus on offering lucrative consulting services to the 75% of companies it doesn't audit.
"Now I think we can rebuild our revenue base by focusing on non-audit clients," said Mr. Copeland. "As an overall organization, this decision leaves us stronger in terms of offering a broad range of competencies."
Deloitte's decision may raise eyebrows among critics who insist that accounting firms should focus on auditing and audit-related services, not consulting.
Mr. Copeland, who plans to retire at the end of May as both global and U.S. CEO, said new accounting legislation takes care of such concerns by limiting the scope of non-audit services accounting firms are allowed to provide to their accounting clients.
"That was sorted out through Sarbanes-Oxley," he noted, referring to the new accounting legislation. "That part of the issue really is pretty much behind us now."

Deloitte "clearly is going to comply with the letter and spirit of the law," added Mr. Copeland.

Deloitte's decision marks the second time over the past year that a Big Four accounting firm has changed its spinoff plans for its consulting unit.
Last year, PricewaterhouseCoopers, the No. 1 accounting firm, had planned to spin off its consulting unit in an IPO. But then it chose to sell the unit to International Business Machines Corp. (IBM) for $3.5 billion.

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