Professional Services: Cleaning Up By Cleaning Up

-- Uncle Sam's crackdown on fraud has been good for auditors and lawyers -- Consultants can expect steady work from health-care and government clients

America's gray-suited ranks of accountants, consultants, and lawyers have Uncle Sam to thank. Increased government spending on consulting and new federal regulations on auditing proved a bountiful combination for professional services in 2004. And 2005 should see a repeat.

For lawyers and accountants, the Sarbanes-Oxley Act continues to be a boon. Its requirements for sharper audits, better-informed board members, and tighter internal financial controls all play to professionals' strengths. Inside Public Accounting predicts global growth for all Big Four accounting firms will be 9% to 12% for fiscal 2005. The cost of a typical audit has already jumped by up to 60% since the law's passage in 2002. And provisions that today apply only to the 4,000 largest companies will expand to encompass 10,000 more next year.

That's good news for firms large and small. Giant Deloitte Touche Tohmatsu, whose global revenue last year jumped 9%, to $16.4 billion, has forecast a 7% climb in 2005. Grant Thornton LLP, a second-tier firm, did even better with a 23% revenue increase in the U.S. last year, and a 15% spurt is forecast for 2005.

But what has been good for audit firms hasn't been good for their clients' wallets, and companies are pushing back. In a 2004 study by Financial Executives International, companies with over $5 billion in revenues reported spending an average of $8 million each complying with Sarbanes-Oxley. Many complain there's not much value for all that spending. The backlash has been strong enough that Deloitte & Touche USA LLP CEO James H. Quigley has called for an assessment of the rules' costs and benefits after the first year of compliance. "You just can't have clients this unhappy," he says.

Still, auditors' biggest challenge is to increase staff fast enough to meet demand. In the late 1980s and early 1990s, more than 50,000 accountants graduated each year in the U.S. But as college grads flocked to the tech sector and Wall Street in the late 1990s, interest in accounting as a career waned. In 2002, fewer than 35,000 degrees were awarded. That has climbed some in the years since, but not enough to match the rising demand.

Consulting isn't having the same growing pains. Growth there has been much more modest, but bright spots such as government and health-care consulting promise to keep the sector moving upwards in 2005. According to Kennedy Information Inc., which tracks the consulting industry, global revenues dropped 6% in 2002. But they grew 1% in 2003, an estimated 3% in 2004, and Kennedy projects another moderate rise in 2005.

Demand for professional-services outsourcing has been much stronger. Gartner Dataquest (IT ) estimates that the worldwide outsourcing market, $241 billion in 2004, will grow to $324 billion by 2008. Some Asian firms have begun to move up the consulting food chain thanks to the outsourcing boom, with Indian firms like Infosys Technologies (INFY ), Tata Consultancy, and Cognizant Technologies (CTSH ) doing nearly $2 billion of development and integration work in North America in 2003, according to Gartner.

International competition isn't the only pressure on profits. Clients increasingly are forcing firms into government-style competitive bidding that drives up the cost of getting new business, says Heather Burns, a Booz Allen Hamilton senior vice-president. Contracts are also getting shorter. And clients are demanding more evidence that their investment is generating a return. Still, consultants are happy to have the work.

By Nanette Byrnes in New York

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