PWC Plans to Separate Its Businesses

NEW YORK -- The world's largest accounting firm, PricewaterhouseCoopers, which audits and advises many of the world's biggest corporations, has announced plans to separate its auditing and consulting businesses into at least two, and possibly more, free-standing organizations.

The move is aimed at addressing market regulators' increasing concern about the integrity of corporate audits and enabling both the audit business and the consulting arm to compete more effectively in the Internet economy, said James Schiro, the firm's chief executive.

The restructuring plan, which has been expected since last fall, calls for the organization's audit, tax and business advisory services - known collectively as assurance services - to remain within the PricewaterhouseCoopers partnership. Its management consulting business, business process services, human resource consulting work and certain corporate finance support activities will be reshaped into separate businesses, Schiro said.

He said it was unlikely that all of those various consulting businesses would fit comfortably into a single new entity. Some might ultimately become publicly traded companies, while some might form new partnerships with other businesses, he said. "We have to do what is best for those individual businesses," he added.

As consulting work has become an increasingly important source of profits for the largest accounting firms, regulators have grown ever more concerned that a supposedly independent auditor may be tempted to pull some punches rather than risk losing lucrative consulting contracts with the same corporation.

Those concerns came into sharp focus for PricewaterhouseCoopers in early January, when a report by the Securities and Exchange Commission identified nearly 1,900 partners at the firm who had made investments in companies that also relied on the firm to conduct their annual independent audits.

The giant accounting firm is not alone in trying to find a business structure to ensure that the independent audits on which investors rely are truly independent, as required by federal securities laws. Its largest rivals - KPMG, Arthur Andersen and its sibling, Andersen Consulting, Deloitte & Touche and Ernst & Young - are all trying to address the problem, said Arthur Bowman, editor of Bowman's Accounting Report, an industry newsletter based in Atlanta.

Schiro said the new structure at PricewaterhouseCoopers would allow both businesses to serve the Internet economy better. The firm's core audit business is facing a world in which Internet companies, and their investors, are demanding more information faster, Schiro said. That requires accounting firms capable of providing "continuous auditing services," he added.

On the consulting side, many cash-short Internet companies may want to pay for consulting services with stock or stock options - arrangements that, given the firm's current structure, would raise the kind of conflicts so troublesome to regulators.

Schiro said the need to avoid consulting arrangements that would conflict with its independence as an auditor was hampering the growth of both businesses.

The firm's partners were recently asked to contribute an additional $160 million to the partnership, generating speculation the merger between Price Waterhouse and Coopers & Lybrand, which occurred in 1998, was not producing either the profits or the cost savings that had been anticipated.

Schiro disputed that conclusion, saying the call for additional capital had been anticipated since the merger, given the different capital structure of the two firms.

He insisted the changes announced Thursday would have been necessary, given the changing regulatory and business environment, whether or not there had been a merger.