UK: Caveat on the consultants. (2 of 3)

UK: Caveat on the consultants. (2 of 3) - In fact the practice of being both auditor and consultant to the same client has itself been subject to question. When accountancy firms entered the consultancy market in an attempt to add value to their audit se

Last Updated: 31 Aug 2010

In fact the practice of being both auditor and consultant to the same client has itself been subject to question. When accountancy firms entered the consultancy market in an attempt to add value to their audit services, they did so quite naturally through their existing client lists. Rassam and Oates note, for example, that some 70% of consultancy work at Deloitte was traditionally derived from its audit base.

But in recent years there has been growing concern over two issues in particular: the difficulty in preserving confidentiality between two branches of the same company, and the potential conflicts of interest. Hugh Lang, executive chairman of PE-International, thinks that these fears well founded. He recently wrote in The Times: "However effective the Chinese walls may be claimed to be, the clients will feel increasingly that the same company cannot be both judge and advocate on their business affairs."

Needless to say, the perspective of the accountancy-related firms is somewhat different. Coster bluntly defends the practice by pointing out that "auditors now do general financial advisory work and therefore, because of their role, are consulting". Moreover: "The bulk of clients positively want this consultancy function." He argues that legislation to separate the two roles would ultimately only harm clients and that market forces will be sufficient safeguard, since "the focus is on value for money".

However, the Government has clearly decided that market forces are not forceful enough. Part 2 of the Companies Act 1989, due to come into effect from July 1 this year, states that a firm which audits a public company may not derive more than 10% of its income from that company through non-auditing fees, while a firm which audits a private company may not derive more than 15% of its income in this fashion.

Yet, problematic though the dual role of auditor and consultant may be, it is arguably a less invidious threat than the issue of product independence. The term "independence" is itself beset with difficulties, for, as Coster points out, it has in the past "been associated by clients with ignorance". What they really want, he believes, is "to buy knowledge with integrity".

But in the mushrooming business of high-tech systems consultancy, that integrity may be in question. Some firms, Andersen Consulting for one, have "own brand" systems devised in house. Others have ties with a particular manufacturer. Thus Coopers Deloitte has just signed a deal with IBM, while Easams, which advises the Ministry of Defence, is a wholly owned subsidiary of GEC with £15 million of defence-related advisory work a year. Given such vested interests, it is hard to see how management consultants can offer entirely impartial advice.

The issue is particularly dear to the heart of Chris Elliott, a director of systems engineering consultancy Smith Associates and someone whose suntan is every bit as immaculate as his suit. From its inception Smith Associates took pains to preserve its independence. It has no manufacturing interests, is wholly owned by its working directors and employs staff with the technological expertise to evaluate any commercially available solution within its areas of business. Where no such solution is available, the company will actually build a prototype with which the client can then approach the manufacturer of its choice.

Much of Smith Associates' work is for the public sector, and as a result more rigorously evaluated, but elsewhere too, Elliott argues with persuasive eloquence, product independence is "crucial". He is frankly amazed by the attitude of private sector clients, who "almost desire to see a link-up with a manufacturer because (they think) you will know (the system) better". In fact a number of private sector clients do share his outlook. At Laura Ashley, for example, Mike Smith argues that "there should be more independence on products and no vested interest in the solution".

A further cause for concern among clients is the frequent absence of an explicitly drafted brief. The code of practice laid down by the Institute of Management Consultants, a professional body established in 1962, actually specifies that the "terms of an assignment should always be evidenced in writing". It also, incidentally, asserts that advice must be given on the basis of "thorough impartial consideration of all pertinent facts and circumstances".

But, as Stainer points out, producing a comprehensive written brief is easier said than done. The consultant's job may change during the course of the project, either because other problems surface or "because the client hasn't really identified what he wants". As a result, Coopers Deloitte builds regular milestones into a project, at which points client and consultant evaluate its progress.

Smith Associates adopts a similar safeguard, though working in the public sector means that, in any case, procedures are more formal. But the downside to such formality is primarily cost. Drafting a brief "is about 10% of the cost of the contract", notes Elliott, though he acknowledges that, without such measures, "vast sums of money have been spent on ill-defined projects".

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