It's a heady period for auditors. As a result of the 2002 Sarbanes-Oxley Act and the creation of a new regulator, the Public Company Accounting Oversight Board (PCAOB), they're spending 40% to 60% more time to complete each audit, estimates Jim Quigley, chief executive of Deloitte & Touche, the U.S. arm of global audit and consulting giant Deloitte Touche Tohmatsu. Last year, the Big Four firm -- a private partnership -- had global revenue of $16.4 billion, a jump of $1.3 billion from the year before.
In early December, Quigley met with BusinessWeek Senior Writer Nanette Byrnes at the firm's midtown Manhattan offices to discuss the audit boom. Edited excerpts from their conversation follow:
Q: Your staff has never worked harder. This year you gave special mid-year pay raises just to keep people happy. But is it possible that the increasing demand for auditors could be a blip that will settle after this year, once the new regulations become familiar?
A: The setter for auditing standards is the PCAOB, and the way their standard is written requires that you complete this work every year. So there's nothing in the standard that creates the opportunity for you to rotate systems. There's nothing in it to allow you to use cumulative knowledge for the basis of coming to your conclusion. Therefore, under the standard that we are held accountable to, we are required to perform this work every year. So it's not a peak, but a kind of a new plateau.
Q: You personally attend a lot of board meetings -- something like 40 a year. Have you seen big improvements in how they perform?
A: Huge progress. I'm very, very pleased with what I've seen. My only concern is that they become very defensive on the legalistic point of view, so then all they're trying to do is prepare the paper trail to prove they have complied with the law.
I want them to be able to stay focused on the principle and the objective of improving trust and confidence in the efficacy of the financial statements. I don't want them to become very compliance-driven, very checklist-oriented. I don't want them to focus on how they can defend themselves if they are challenged.
Q: Are they less likely to argue with you over fees?
A: There still continues to be some of that stress [on audit price], but it's not quite as unusual as it once was for an audit-committee member to ask me "Jim, do you have enough hours and fees to perform your professional services here?" That used to be a very unusual question. That's what an audit-committee member should always ask.
Q: As a result of the audit failures at Enron, WorldCom, and elsewhere, accountants have lost self-regulation and are now, for the first time, subject to oversight from the PCAOB. Is that a tense relationship?
A: We do have some tension between the regulator and the regulated in the inspection process. But I support the inspection process and hope there will be confidence from the existence of that inspection process and its contribution to the overall audit process. We're in very early days. We're just completing our first formal inspection.
Q: What has the scope of that been?
A: It's huge. [Deloitte auditors] looked at 160 engagements, they visited 24 offices. Interviewed the people on those engagements. I wouldn't go so far as to say we have added significantly to the number of people we have today [in quality control]. But it's definitely an expansion of their workload, and maybe what we have done is given them something to do on Saturday and Sunday, rather than add 20% more staff.
Q: Business is booming, and for you that's great, but for clients it's expensive. Are you getting a lot of pushback on that?
A: I think it's a privilege to have access to the public capital markets. And in order to have that privilege and become the steward of the public's money, you have to be ready to step up and comply with all of the costs that come along with that privilege.
I hear the range of views on [the Sarbanes-Oxley Act's section] 404 costs from significantly out of line with the benefits gained, to "I don't see what people are complaining about, we should have effective controls in place in our business, we should have been doing this all along." But for the most part, many, many execs are concerned about the cost. Inside the enterprise, there's probably $10 of cost for every $1 they pay us as advisers. Which is the amount of effort required to document those controls, test them, and complete the remediation.
Q: You have said you think companies, regulators, and auditors this spring should get together and assess which of these reforms are yielding a return on the money invested. That's counter to your own financial interests, since you're making so much money doing this. Why are you in favor of that?
A: It's not sustainable for large numbers of companies to believe that they're paying something they're not getting a benefit for.
Q: Deloitte is the only one of the Big Four audit firms that didn't spin out or sell its consulting practice in the past few years. Now regulations prohibit auditors from doing certain consulting for audit clients. Why are you still in it?
A: For companies we audit there's a list of nine services we won't provide to those clients. We have in place processes and systems, as do our clients, to be sure no prohibited services are being performed for those audit clients. The risk of that occurring is zero.
I actually believe that the value proposition in the marketplace is enhanced by the broad capability. So when we are doing a project for a client, we can actually create greater value for that client because of the breadth of capabilities we can bring to that.
And I believe the way our consulting service is and the way we are serving our clients -- I believe we have the right strategy. Time will tell. But if you look at the recent performance of some of those [firms] that became pure-play consultancies, I'm not convinced they have the right model. It wouldn't surprise me if our competitors start to look more like we do, rather than us moving in the direction of looking more like they do. I think there's evidence some of them will begin building their consulting business when their noncompete agreements begin to expire.
Q: Wouldn't it just look better not to offer consulting services too? In many of the biggest blowups, including Enron, the audit firm was doing so much consulting, it almost seemed the client had become too valuable to say no to. And auditors are supposed to challenge the companies whose books they review.
A: I believe we are the most independent firm. One of the things that makes us the most independent firm is that our practice model is so balanced. A chunk of our revenue comes from consulting services, a chunk comes from tax services, a chunk from audit services. The simple math is the audit services will be a smaller percentage of our total fees than that audit fee will be for any of our competitors.