Line in the sand

THE FIRESTORM ENGULFING accounting company Andersen is setting off alarms for enterprise CTOs, intensifying the examination of whether or not enterprises hurt themselves when they have one company handle both financial auditing and IT consulting services.

And CTOs are concerned: More than two-thirds of 73 InfoWorld CTO Network members polled report that they hold reservations about a single firm providing both financial auditing and IT professional services to their companies.

The self-examination, in many cases, involves other C-level executives as well. One-third of the CTOs polled have advised or are planning to advise other executives and/or board members about the conflicts of interest that can arise when one firm handles both IT and financial auditing functions. Still, more than 70 percent of these CTOs report that their companies already have separate firms for IT services and financial auditing.

Andersen said it will split its consulting and auditing divisions, following the recommendations of Paul Volcker, former chairman of the U.S. Federal Reserve, who led a review of the firm’s practices following its disastrous relationship with now-bankrupt energy giant Enron.

“CTOs are saying, ‘Should I continue to purchase consulting from companies that do our auditing?’ ” says Michele Cantara, principal analyst for consulting and systems integration services at San Jose, Calif.-based Gartner’s Dataquest. Several of the major accounting firms have already split, or are in the process of splitting, their consulting and auditing practices, Cantara says.

In essence, CTOs face two issues: whether or not service is undermined by contracting with a company that offers both consulting and auditing, and whether or not the appearance of such an arrangement will hurt public perception of a CTO’s company, experts say.

Anthony Hill, CTO of San Francisco-based Golden Gate University and a former consultant, says there can be real problems with receiving consulting and auditing services from one company.

“It’s very difficult to have an audit team focused adequately on their audit findings and not be influenced by the fact they have a billable consulting team in the account who are selling their work to fix the findings produced by the audit,” Hill says.

When one company handles both sides of the house, the CTO should assess his or her company’s relationship with the firm and decide if it is an issue worth taking to the board or to other executives, Hill says. “It’s the CTO’s responsibility to assess the risk, assess the exposure, assess the level of dependency, and then make recommendations to the COO or to the board.”

“I would only feel compelled to [advise the COO or CEO] if we were experiencing a possible conflict of interest by having auditing and consulting in the same entity,” Hill says. “I wouldn’t take it to my board unless I felt I had an issue or unless I felt I had a need to change that relationship with the vendor.”

Still, issues are arising in the current market — even when the enterprise contracts only for IT services from a firm that provides those services as well as financial auditing. Reports that some Andersen employees are seeking jobs elsewhere is another factor to be considered by Andersen clients, Hill says.

When the IT consulting team is in trouble, churn tends to increase, Hill says. “I would expect their quality would remain the same, except it might be affected by departure of quality people.”

Monitoring service firms

Hill recommends a hands-on approach to consulting services by monitoring the arrangement carefully.

Jim Barrett, vice president, executive committee for North America of Cap Gemini Ernst & Young, says his company’s decision to seek independence as a consulting entity has paid off, as some competitors now must deal with customers re-evaluating relationships and projects in progress.

“In most large companies, the CTO is a fairly influential executive,” Barrett says. “Today most companies recognize that they a have a risk using an accounting firm. The question is, Do they relatively see an alternative? A CTO doesn’t want to be a long-term manger of an accounting firm.”

Barrett says the Andersen fallout is forcing CTOs to wrestle with benefits and drawbacks associated with separating financial auditing and consulting service providers. This includes the risk that big changes may add costs to projects, and stretch schedules beyond their original scope. “What’s happening more right now is people are wrestling with the fact that the project [they] have going on that [they] can’t imagine stopping, could go on for quite a while,” he says.

Phil Wiser, CTO of Sony Music Entertainment in New York, says it’s up to the CTO using the consultant to make sure projects are successful. “I’m always managing [consultants] in my projects very closely,” he says. “I’ve used them in smaller projects, and I still use them.”

Preferring not to discuss details, Wiser says he has used Accenture. However, he often puts out requests for proposals to the various IT services arms and spin-offs in addition to smaller firms.

“We have procedures in place so that [conflicts] won’t impact us. I’m not using [Accenture] to audit my business,” Wiser says. “They are making technology recommendations. … I’m careful to get outside opinions,” Wiser adds. “You have to be confident they are not selling themselves.”

But for large enterprisewide projects, changing a consultant can be difficult, says Kurt Walker, president and CTO of theFinancials.com, a business-to-business financial content provider based in Huntingdon Valley, Pa. “[A consultant contract] is very difficult to change a lot because people use these outsourced services as a replacement for employees,” Walker says.

“If you have to get rid of them, it involves significant start-up costs,” Walker adds. “And any consulting company knows your business more than the average guy within your business.”

This shifting alignment has left CTOs feeling uncertain. “We are seeing our clients struggling with what is going on,” says Paul Hammond, principal at Deloitte Touche management solutions and services, in Chicago.

Perception is reality

Hammond says that in the current controversy, CTOs need to consider the public perception of affiliation with the big consultancies that may also be offering auditing services.

“If you’re a CTO, you don’t want to be part of a situation where you are creating something that causes embarrassment for the company, even though it may be fine,” Hammond says.

The CTOs of public companies should be particularly aware of public perceptions and act accordingly, he says, and private corporations are also increasingly being examined for perceived flaws.

“We are seeing many [nonpublic] clients choosing not to buy consulting from the audit firm to avoid coming under any kind of spotlight because at some point a private company may want to go public,” Hammond says.

Deloitte Touche follows guidelines established five years ago for clients using auditing and consulting that include a caution against using the company for both auditing and business process outsourcing such as billing and paying vendors. In such cases, the auditors would be examining their own work, Hammond says.

Even with keen interest and concern expressed in the CTO community, some executives see no reason to change their relations. Sanjay Kumar, president and CEO of software titan Computer Associates (CA), of Islandia, N.Y., says that the blurring lines between auditing, insurance, and consulting companies have put unnecessary pressure on their customers.

“I think to whitewash the entire industry of many thousands of accounting professionals is not very fair,” Kumar says. “You can’t take one example and generalize.” Kumar says KPMG is CA’s audit firm and does no consulting work for the company. That responsibility is entrusted to Deloitte & Touche, among others.

Although he believes customer concern will eventually subside, Kumar acknowledges the damage.

“I think the world is trying to tackle a very complicated issue, and I sympathize with the people who are trying to bring confidence back into the fold because confidence has been shaken,” Kumar says.