|By Tessoni, Daniel|
Nearly one decade ago, most of the large accounting firms divested their advisory services business. The divestitures were motivated not only by business and management reasons, but by regulatory pressures as well. In particular, regulators were concerned that audit quality could suffer if advisory services threatened auditor independence. As a result of the divestitures and the adoption of the Sarbanes-Oxley Act of 2002 (SOX), advisory services revenue represented only a small share of accounting firms' revenues circa 2007. In recent years, however, advisory services revenue has risen again, renewing concerns of its potential effects on audit quality. But auditor independence is no longer viewed as the primary threat to audit quality; instead, concerns revolve around the audit firm's culture and the quality of the resources allocated to advisory versus assurance services. The following is an examination of the rise and fall - and rise again - of advisory services within public accounting firms.
Advisory services revenue grew rapidly at public accounting firms during the late 1990s; yet, by the early 2000s, all but one of the then-Big Five had spun off or sold these business lines. Three factors drove these divestitures: 1) internal management tensions because ci the fester revenue growth and perceived higher margins of advisory services as compared to assurance services; 2) the opportunity to unlock higher values and raise capital through sales to publicly traded corporations or via an initial public offering (IPO); and 3) the pressure applied, and regulations adopted, by policymakers aimed at ensuring auditor independence.
Beginning in the early 2000s, advisory services revenue shrank due to divestitures and the adoption of SOX. At the same time, assurance services revenue soared as SOX fueled rapid increases in the demand for assurance services from clients. As a result, advisory services played a diminished role in accounting firms beginning in the early 2000s to about 2007. Since 2007, however, advisory services have represented a rising share of revenue for accounting firms, triggering renewed concerns.
Over the years, observers have raised management and policy concerns about the role that advisory services play in the accounting industry.
Recently, however, advisory sendees have again become important to accounting firms. These firms have found ways to sell advisory services to clients for which they are not the primary auditor. This rebirth of advisory services has generated renewed policy and management concerns. A Treasury report (Final Report of the