PricewaterhouseCoopers LLP's acquisition of consulting firm Booz& Co., completed this week, has U.S. regulators eyeing thepotential for conflicts of interest in the auditing industry —again.

The deal, one of the biggest by a major accounting firm inrecent years, has focused new light on an aggressive push by theindustry into more lucrative consulting work. The Securities andExchange Commission and the oversight board for auditors are takingnote, pledging to step up their scrutiny to prevent any impact onindependent audits.

“This is a problem that will not go away,” said James Doty,chairman of the Public Company Accounting Oversight Board, whichwas set up in the wake of the Enron Corp. accounting fraud.

It has been a little more than a decade since Enron auditorArthur Andersen was indicted and collapsed after being accused ofgoing easy on the energy trader's books because of the substantialconsulting fees it reaped. A rash of other scandals followed andlarge accounting firms, including PwC, rushed to spin off theirconsulting arms.

Doty said he remains concerned that companies will put pressureon auditors by enticing them to cut fees in exchange for moreconsulting work. The PCAOB has been discussing the issue privatelywith the largest accounting firms and may hold a public hearinglater this year, Doty said.

Accounting firms globally have announced about 36 acquisitionsof consultants since June 2012, according to one regulator'sestimate. The deals have stirred debate in Washington over whetherauditors should serve investors as well as corporate clients. Atthe major firms, revenue growth from auditing, which spiked afterCongress passed the Enron-inspired Sarbanes-Oxley Act in 2002, hasslowed.

U.S. securities laws require independent audits of publiclytraded companies, and accounting firms fall under SEC oversight andenforcement authority. The five-member PCAOB was created as afront-line auditing regulator by Sarbanes-Oxley, which overhauledcorporate accounting rules.

The law also limited the kinds of work that firms can do foraudit clients. As a result, much of the consulting done by the bigaccounting firms is for companies they don't audit.

Conflicts Prevented

Such protections have helped prevent the kind of conflicts seenbefore Enron's bankruptcy, said Daniel Goelzer, a former PCAOBmember now at law firm Baker & McKenzie in Washington.

“It's not clear to me personally that this is a problem,”Goelzer said.

Some longtime accounting industry observers disagree, saying itseems the firms are taking advantage of Washington regulators'short memory to, in essence, go back to the future.

“I've seen this movie before,” said James Cox, a Duke UniversitySchool of Law professor who has written books about accounting andsecurities regulation and calls the consulting trend “an accidentwaiting to happen.” Audit firms “wouldn't have thought about doingthis 10 years ago,” he said.

PwC, which is renaming Booz “Strategy&,” said it bought thecompany to obtain a deeper set of consulting services for clientsand a larger presence around the world. The Booz deal adds 3,000employees to PwC's 184,000 employees in 157 countries.

Even before the acquisition, PwC had been in regular talks withDoty's board and the SEC to explain its views on the growth inconsulting, said Bob Moritz, U.S. chairman and senior partner atthe New York-based firm.

The purchase of Booz will help PwC maintain high-quality auditsby diversifying revenue, and bringing in new technology andexpertise, Moritz said.

“The world has changed dramatically” since the accountingscandals in the early 2000s, he said in a telephone interview. “Theobligation is on the profession to make sure that we continue toinvest in the audit business and comply with Sarbanes-Oxley.”

PwC went through a painstaking review to identify conflictsbetween its auditing clients and the consulting firm's business,Moritz said. In the end, it dropped a small number of audit clientsand decided to forgo “significant” consulting revenue, he said.

While Moritz declined to name the clients, one of thosecompanies, Hillshire Brands Co., said in a securities filing inFebruary that PwC was no longer its auditor. The company cited aconsulting agreement with Booz as the reason.

$32.1 Billion

PwC reported $32.1 billion in revenue last year. Less than halfof that came from its assurance arm, which includes the auditingbusiness. The firm didn't disclose the terms of the Booz deal.

As closely held partnerships, accounting firms only providegeneral financial information to the public. That has also troubledsome regulators.

Last month, PCAOB member Steven Harris called for firms torelease audited financial statements, in part so regulators canmonitor the impact of consulting fees.

In his speech, Harris said the four largest firms — PwC,Deloitte LLP, Ernst & Young LLP and KPMG LLP — announced 19acquisitions of consulting businesses in the U.S. from June 2012 toNovember 2013, and 36 acquisitions globally. Consulting revenue wasup 33 percent over the past five years for the firms, whileauditing revenue increased by 6 percent, he said.

“How these diversified lines of activity affect audit quality,auditor independence, conflicts of interest and investor protectionis something I believe the board must carefully monitor andanalyze,” Harris said.

Critics express concern that the drive to expand consultingcould take the focus off delivering top-caliber audits. That couldhappen, for example, if consulting partners get better pay packagesor firms begin to promote leaders that aren't steeped inauditing.

The worry “is auditors not recognizing that they are auditors,”said Paul Miller, an accounting professor at University of ColoradoColorado Springs. “If they wanted to be entrepreneurs, they shouldhave gone into a different business.”

In December, the SEC's chief accountant Paul Beswick told anindustry audience that “the public considers audit firms to begatekeepers and not consultants.” The expansion into consulting, hesaid, had the potential to distract firms' leaders from “providingthe appropriate attention to their audit practice.”

Beswick didn't propose any policy changes, saying he wanted hisremarks to “encourage reflection” in the industry.

The PCAOB's Doty said in the interview that the board'sinspectors will monitor the impact of consulting on auditorindependence and will call out any problems to the firms if theysee them.

The board's options may be limited because the law only allowsit to supervise a firm's auditing.

“They are in charge of their business model,” Doty said. “We aresitting there as an umpire, a judge.”

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