Auditor Independence

Capitalizing on the chains that bind.

Marie Leone
CFO Magazine

May 1, 2002

Talk about turning lemons into lemonade. As regulators and shareholders probe Arthur Andersen LLP for suspect profits gained from violating Securities and Exchange Commission auditor independence rules, there's at least one accounting services firm that has profited because of SEC restrictions.

Three years ago, auditors at Deloitte & Touche Tohmatsu estimated that the Big Five accounting firm was turning away about $30 million annually in corporate bookkeeping business to stay within SEC auditor independence guidelines (Release No. 33-7919). The jobs it turned down included reconciliation statements, development of accounting policy and procedures, securing credit lines, and preparing SEC filings. Aware that big fees were just out of reach, a group of Deloitte partners led a management buyout of one of the firm's consulting divisions--Resources Connections Inc.--in April 1999 to fill the accounting service void.

The $190 million (in revenues) Costa Mesa, Calif.-based firm pulled in more than $70 million in revenues that first year, says ex-Deloitte partner and current Resources CFO Stephen J. Giusto. The company, which Giusto took public in December 2000, currently trades at around $28, more than double its initial public offering price. What's more, the start-up with the Big Five pedigree posted a 50 percent sales growth rate over the past year. In contrast, Deloitte's sales growth rate was only 11 percent, while temporary-employment services giant Robert Half International--which receives 40 percent of its sales revenue from Resources competitor Accountemps--posted no growth over the past 12 months.

Apparently, no other big public accounting firm has spun off a firm to capitalize on SEC restrictions. KPMG LLP, PricewaterhouseCoopers, and Ernst & Young International spokespersons say they haven't seen anything like Resources Connections born out of their firms. Nor has Arthur Andersen spun out a firm to handle business that falls into the violation of auditor independence category. Maybe it should have.