IT consulting post-Enron

When Ernst & Young Consulting merged with Cap Gemini Consulting in May 2000, the separation from the auditing and accounting side of its business received mixed reviews.

That was before Enron.

Two years later, that same decision looks like a stroke of genius.

Twenty-twenty hindsight will do that, but the uproar over the relationship between Arthur Andersen and Enron has certainly catapulted the question of auditor independence to the top of the agenda as the big accounting companies gauge their future. Andersen's difficulties have also handed Cap Gemini Ernst & Young an opportunity to engage in obvious self-promotion.

In recent years, Andersen, Deloitte & Touche, KPMG and PricewaterhouseCoopers have evolved into major players in the IT services business. These companies derive about 29 percent of their total revenue, or roughly $4 billion, from information-technology consulting and management, according to Prakesh Parthasarathy, an analyst at investment bank Montgomery Securities.

But with mounting questions from clients about the potential for Enron-like conflicts of interest, the pressure may well force a revamping of the IT consulting landscape, according to Terry Jost, vice president of business development for the Americas at Cap Gemini Ernst & Young.

"There's enough concern about the conflict of interest, and most of those organizations will split in some way," Jost says. "It's a difficult thing to master."

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That's especially true in such a fluid situation. Just last month, the House Committee on Financial Services approved a bill that would give Harvey Pitt, chairman of the U.S. Securities and Exchange Commission, jurisdiction over the creation of an accounting-consulting oversight committee. This is the first such legislative response, but it probably won't be the last.

CNET News.com recently chatted with Jost about how the Enron investigation might recast the IT consulting field and the risks and benefits of sticking with the same company for auditing and consulting services.

Q: The SEC's Harvey Pitt is going to have jurisdiction over the creation of an oversight committee. What's your reading on how that might translate into policy as far as separating accounting and consulting functions?
A: That's anybody's guess, isn't it. We made a decision to take consulting out of Ernst & Young and make it part of Cap Gemini close to two years ago because we saw that as a looming issue. I think regardless of where it goes from a political standpoint, the potential of perceived conflict of interest will drive most major firms to find ways to separate. I would expect some form of legislation around this, though we will have to get around the near-term issues of Enron and Andersen first. I think it will happen.

How do you think the Enron episode affected the way customers view doing business with IT consulting companies that double as auditors?

"I don't agree that there's a good marriage between consulting and auditors."

Companies paused and looked at what projects they were doing with their auditors. Then they looked at whether there was any exposure or perceived conflict of interest. At that point, they decided to either ride it out or greatly eliminate or reduce projects--or transition immediately.

But hasn't the IT service component been an innocent bystander in this drama? That is, the problem centers around the failure of one company--in this case, Andersen--to separate its auditing and consulting functions.
In most cases, it is impossible to do an IT-oriented project without also doing a re-engineering or redesign of the business processes. I think the issue is the perceived conflict of interest. Whether there is or not, the market perceives that there is. That's a bigger issue.

What are you hearing from clients about separating auditing from consulting? Is there a consensus one way or the other?
Clients are behaving in different ways. Some maintain there's no problem and want to maintain long-lasting relationships with their auditors...It's not an easy change.

IT consulting is a big chunk of the Big Five's aggregate revenue. I think it's close to 30 percent. Historically, when did the IT business become such a large component for the Big Five?
It started in the 1990s with the advent of software systems that were more robust and complete. SAP was the first industry end-to-end solution that required hundreds of millions of dollars to implement. During those times, the auditing companies were perfectly positioned because of their relationships with the executives from those companies. These were not small buys.

What are the risks and benefits to companies that keep the same company for auditing and consulting services?

"The issue is the perceived conflict of interest. Whether there is or not, the market perceives that there is. That's a bigger issue."

You first have to start with the impression that the market will have of your organization if there is a perceived conflict of interest. I'm not going to argue that it's real or not, but how do you control that? The more ways you try to explain it, the more the financial analysts question the reality of the situation....A consulting firm that's not linked to the test or audit (side) can better focus on the complexity of the issue at hand and not be influenced in any way by anything going on in the organization in terms of an audit.

But if I run a clean shop, aren't there advantages to having a unified consulting and auditing organization? Isn't bigger better?
I don't agree that there's a good marriage between consulting and auditors. At the end of the day, auditing has to satisfy not only the needs of the organization but also the SEC and shareholders. If I were to do an IT project and had a cash-flow situation and engaged our auditor in a change in the way I might account, is that a conflict of interest, or am I trying to sell more work?

How does this work with IT projects that may already be under way? It sounds like there's potential for a massive headache.
We have a transition service where we'll put our people on site at our expense to understand the complexity of a project. After you do that, we may decide that you may have to stay with that organization. But every project has a break point.

When you decide to make a change, you have to look to an organization that has breadth and depth, because some of these IT projects are very complicated.

If a company decides to transfer one of those functions, which is the one most likely to go: auditing or consulting?
I think in most cases because of depth of relationship and the value that the auditor has because of its past history, auditing is not likely to change. Probably, the services from the consulting side will change, but that varies by industry--and we've seen it vary if Andersen is the auditor.

In those sorts of cases, can you guarantee to a client that you'll be able to keep the projects on time and within budget?
Actually, you would be surprised. I think in most cases, assuming the project is scoped appropriately and there's a reasonable work plan, we would be able to guarantee that.

Apropos of customers, what about the $64,000 question everyone's asking: With everyone talking about the timing of a tech spending rebound, what are your clients saying about their tech budgets for the rest of this year?
We look at it week to week. It's something we watch really closely. What I've seen in my discussions is the expectation of in increase in capital expenditures in the second half. I'm still holding to that. We haven't seen increased spending in (the first half of the year). I would say the expenditures we're seeing are in traditional projects where companies can expect to get a return (on investment).