The consulting industry
Accounting firms enter the business
Guillaume Carton, PhD
carton@em-lyon.com
MSc in SCO
7 THEMES THAT STRUCTURE THE INDUSTRY
1. From optimizing the shop floor to selling an expertise
2. Increasing fees by advising the executive suite
3. From knowledge management to thought leadership
4. Accounting firms enter the business
5. Stabilizing the activity by contributing to IS projects
6. The rise of independent boutiques and change management
7. The blurring of the consulting industry
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LEARNING GOALS / CLASS OBJECTIVES
• How did accounting firms enter the
consulting business?
• What are the implications of the links
between audit and consulting for today’s
consulting business?
• What are the main characteristics of
accouting firms?
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AGENDA OF THE DAY
• Introductory lecture
• Group presentations
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AGENDA
• Entering and leaving consulting over time
• Structure of the accounting industry
• The human resources strategy
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ACCOUNTING FIRMS ENTERED THE CONSULTING BUSINESS:
CASE STUDY OF ANDERSEN (NOW ACCENTURE) (1/2)
• 1831: first worldwide recognition (UK) of the legal work of accounting (for
bankruptcy)
• 1933: Securities Act: financing should be preceded by due diligence
(requiring consultants); requirement of independent audit (leading in
1934 to the creation of the SEC)
– Following the Securities Act, accounting firms restructured around corporate
audits (for independence requirements) as did Arthur Andersen that left the
management engineering practice for audit work
– Given their knowledge of clients’ businesses, audit firms began offering
additional services (‘management advisory services’)
• 1950s: the mechanization of the accounting functions pushes Andersen to
build a professional practice around the use of computer systems for
accounting and creates a distinctive practice area around the installation
of information technology
– 1952: installation of an electronic information system for GE by A. Andersen
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Sources: McKenna, 2006; McDougald & Greenwood, 2012
ACCOUNTING FIRMS ENTERED THE CONSULTING BUSINESS:
CASE STUDY OF ANDERSEN (NOW ACCENTURE) (2/2)
• 1960s: the US department of Justice prohibited IBM from offering
computer consulting advice for anti-trust reasons, leading to cede the
emerging field of IT consulting to all the large accounting firms (incl.
Andersen)
• Late 1970s: following the rapid growth of information technology in
corporations, management consulting contributed to more than 1/5th of
Arthur Andersen’s revenue and grew for more than 20 years
• 1970s-1980s: Given lower clients fees of audit, continuation of the
diversification toward business advisory to « add value » to audit services
• Mid-1980s: Liability crisis
– Commissioning of consultants to assess the legitimacy of the board of directors when in
court against class action lawsuits to be co-defendants with their clients
– Arthur Andersen was involved in taking side in class action lawsuits
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Sources: McKenna, 2006; McDougald & Greenwood, 2012
HOW IT LED TO A FAILURE: THE ENRON CASE
• 2001: collapse of Enron (energy industry) due a
“systemic and creatively planned accounting fraud”
– Andersen’s malfeasance (accused of destroying proofs
of malversations) given the 25 millions that the
auditing company earned for its audit work
– To some extent, McKinsey was also aware of what was
going on… (the firm consulted for the TMT)
• 2002: Sarbanes-Oxley Corporate Reform act :
forbidding accounting firms from offering consulting
within any company in which they were
simultaneously performing an audit
– Avoid potential conflicts of interest
• All the auditing firms sold their consulting activities
to other firms (and Anderson disappeared)
– Birth of Bearing point (KPMG), Capgemini (previously
Gemini) (EY), Ineum Consulting (now Kurt Salmon)
(Deloitte), PwC Consulting (PwC)
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Source: McKenna, 2006
ACCOUNTING FIRMS RE-ENTERED THE CONSULTING INDUSTRY
• 2008-2009: EY questioned for Lehmann Brothers’ bankruptcy
• 2010s: Audit companies re-create their consulting practices and add a focus on
strategy
– Deloitte: buyout of BearingPoint Public Services US (2009), Monitor (2013)
– EY: buyout of Parthenon (2014), Greenwich Consulting (2013), OC&C France, creation of
EY Strategy (2016)
– PwC: buyout of Booz & Co (Strategy&) (2014)
➔ Leveraging Big 4’s clients to offer added-value strategic services
➔ Conflicts of interest become unavoidable
• 2019: Pacte law (France): simplification reform leading to audit to small firms not
compulsory anymore (revenue lower than 8M€ / less than 50 employees).
– To compensate the loss of earnings for small auditing firms, auditing company are
allowed to provide audits of risks, conformity and management (performance, CSR,
internal audit, due diligence)…
– This contributes to blurring the frontiers between consulting and audit
• 2020: The UK and Germany question the porosity between audit and consulting
(e.g. following the Wirecard scandal, EY has been banned from Germany for 2
years) MSc in SCO
Source: Xerfi
TOWARDS A NEW SEPARATION?
• 2020: the UK regulator (FRC) asked for separating audit and consulting by 2024
• 2022: The bankruped crypto platform FTX was audited by Armanino (top 20
accounting firms) and Prager Metis (which opened a headquarter in the
metaverse), questioning (again) the role of audit
• 2022: EY launches the Everest project to break up its audit and advisory businesses
– The argument is that not being able to provide consulting services to firms EY audits is
detrimental to the advisory business’ growth
– Synergies between the two divisions destroy more value than they create value
– The consulting division is supposed to do an IPO to fund the split (i.e., pay the audit
partners)
– The remaining Big 3 have not made any move towards a separation
– The split has finally been discontinued (with an important sunk cost), certainly partly
due to the enviromental turmoil that proves the benefits of having an ambidextrous
strategy
• 2024: Reorganization of Deloitte (announced March 17th 2024) illustrates the
complexity of maintaining global partnerships
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Source: FT.com & other newspapers, esp. FT March 17th 2024
AGENDA
• Entering and leaving consulting over time
• Structure of the accounting industry
• The human resources strategy
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THE BIG EIGHT/FIVE/FOUR
• They originate from firms founded in the 19th/20th and are the produce
of mergers mostly with non-auditing firms
• As a result, they became hegemonic
– In 1966, they audited 464 of the 500 largest firms in the US
• Arthur Andersen was a centralized one-firm vs. others that are federations
of independent national firms
• Mergers within the Big 8 led to the Big 5 in the 1980s: PwC, KPMG,
Deloitte, EY, Arthur Andersen
– Economies of scale in terms of technology development
– Economies of scope by looking for complementarity
– Staying at the top of the Big 8
– Getting access to more clients and more consulting opportunities
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Source: McDougald & Greenwood, 2012
CONSULTING AND ACCOUNTING FIRMS
• Consulting has been a growing source of revenue for the accounting firms
in comparison to audit
• However, it led to tensions regarding the independence of audit and
between accountants and consultants
– By the 1990s, non-accountants represented 2/3 of the employees of PwC
• From a way of diversifying and enriching services provided by accountants,
consulting outgrew the firm and fundamentally altered the way that
services were regarded and provided
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Source: McDougald & Greenwood, 2012
ECONOMIC MODEL OF THE BIG 4
• Since the 2010s, comeback of the audit firms
• Model of audit / consulting (unable to consult for the firms they audit)
• Strategic assets:
– International brands
– Normalized internal processes
– Financial resources
– Large client portfolio
• Issues:
– Attempts of splitting consulting and audit as being one company is perceived
as counterproductive (e.g., EY)
– Internal growth
– High pricing
– « One culture » that makes buyouts difficult
– Equity partnerships
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Source: Xerfi
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AGENDA
• Entering and leaving consulting over time
• Structure of the accounting industry
• The human resources strategy
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AUDITING COMPANIES AS POST-GRADUATE SCHOOLS
• Beginning in the 1950s, hiring of graduates (rather than experienced
businessmen)
– In the USA, by mid-1990s, 1/3 of those who gained an MBA went into
consulting
– Today, 14,000 recruitment in France per year in the Big 4
➔ The business model of accounting firms (audit and consulting) is based on a
flat pyramid requiring human workforce
• Consulting firms constructed a brand that consultants should possess in
their CVs
– « The graduate graduate school of business »
– « The standard route to membership of a new global elite »
– Consulting seen as a « step towards the CEO path »
• Auditing companies mimicried the process of the university: cohorts, year
failure, preparationary class, exams…
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Source: Engwall, 2012, Xerfi
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IMPLICATIONS OF THE PARTNERSHIP FOR HUMAN RESOURCES
• Professional image of an elite identity: belonging to a highly selective elite
motivates consultants and influences their inputs (investments in time and
work)
• In most accounting firms, « up-or-out » policy due to their partnerships
structure leading to a 20-30% employee turnover
– Brand recognition leads to have more candidates than consulting positions (even with
the required level of quality [diploma…])
– Meritocratic way (?) to select candidates throughout the ladder
• Importance of human resources management practices on the identity of
consultants
– Usually the first norms that consultants follow after graduation; construct consultants as
individuals
– Lack of objectivity of HR practices, in reality
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Source: Alvesson & Karreman, 2007; Maister, 1993; Stenger, 2017, 2020, Xerfi; Kipping, 2011
HOWEVER, THINGS ARE CHANGING!
• Lower and lower brand image (scandals, accounting/audit image)
• Not much willingness to become partners; willingness to join the « start-
up nation »
• Necessity to rethink the HR system (what to offer to the Y/Z generation?)
• What to offer to women? While there are 40% of women at the entry
level, this figures decreases to less than 15% at the partner level
– Due to the ‘rat race’ to become partner where women can hardly compete, to women
stereotypes and modesty that do not help them success in the ‘up-or-out’ policy, and to
the preference of clients for men. Change remains very slow…
• Necessity to really offer a springboard for young graduates
• Necessity to respond to the aspiration of the post-Covid generation (work-
life balance, telework, etc.)
• While just after Covid-19 the bargaining power was in favor of the junior
consultants (i.e., costly HR practices), as the consulting market is now less
favorable to them, the pendulum slowly swings back
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Source: Kelan, 2012
REFERENCES
• Alvesson, M. & Karreman, D. (2007). Unraveling consulting in large accounting firms. In The Oxford
HRM: Identity, ceremony, and control in a handbook of management consulting.
management consulting firm, Organization • Stenger, S. (2017). Au cœur des cabinets d'audit et
Science, 18(4), 711-723 de conseil: De la distinction à la soumission.
• Engwall, L. (2012). Business schools and Presses universitaires de France.
consultancies: the blurring of boundaries. In The • Stenger, S. (2020). le rôle du mérite dans les
Oxford Handbook of Management Consulting. carrières de consultants: adhésion et effets du
Kipping & Clark (Eds.), pp. 365-385. OUP système up or out sur le travail dans les cabinets «
• Kelan, E. (2012). Gender in consulting: a review big four », working paper
and research agenda. In The Oxford Handbook of • Xerfi, Le conseil en Management, August 2018,
Management Consulting. Kipping & Clark (Eds.), Nov. 2019
pp. 499-508. OUP • Xerfi, Les défis et opportunités des cabinets de
• Kipping, M. (2011). Hollow from the start? Image conseil en stratégie et en management, July 2019
professionalism in management consulting. • Xerfi, Ripostes et nouveaux business models des
Current Sociology, 59(4), 530-550. acteurs du conseil face à la crise, Sept. 2020
• Maister, D. (1993). Managing the professional • Xerfi, L’intensification de la concurrence sur le
service firm. Free Press marché de l’audit, June 2021
• McDougald, M. S., & Greenwood, R. (2012).
Cuckoo in the nest? The rise of management
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AGENDA OF THE DAY
• Introductory lecture
• Group presentations
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