"Our consulting is focussed around our competencies-accounting, risk transactions, tax, and controls.These are all businesses that add to a quality audit"

Global CEOs visit India for various reasons. Some come to lobby the government, others to meet customers, still others to review operations. Very few CEOs, however, come to India to rebuild the trust of the local market and their local employees. If Samuel A. DiPiazza Jr was in town to do just that, attribute it to the profession he belongs to-accounting. The 52-year-old global CEO and Managing Partner of audit firm PricewaterhouseCoopers (PwC) was in India recently. He spoke to Business Today on the aftermath of Enron and the new audit order. Excerpts:

So, is it a better and safer audit world out there today?

In the past five-to-ten years we found ourselves in an environment that was conditioned for a series of problems. Especially in the US, where we had a stockmarket that was overpriced...and everybody knew it. We had an environment of proliferation of stock options. And when, all of a sudden, the economy became much tougher these issues came to the fore.

Today, I think it is a better capital market because of some of the changes. But I do not think we are going to change this environment unless we deal with issues of disclosure and accountability. We still have the same accounting standards as we did before and I believe some of those are at the root of the problems we have seen. So, no I don't believe it is perfect (out there).

Thanks to all of 2002's scams people believe auditors are easy dupes or hand-in-glove with the management...

There are two issues here. First, you have very complex accounting standards, especially in the US where they are heavily rule based. This creates a situation where financial engineers, investment bankers, people inside companies, even accountants would operate in a way to present the best picture. This is often not consistent with the economic transaction. So, in all these cases it is not that the accountant was being fooled but that the standards were so complex that they allowed reporting that was not so consistent with the economics of the transaction. Second, it is fair to say that if management decides to mislead the accountant, it will take time for the accountant to find out. Audits are not designed to uncover fraud; they assume some level of honesty and integrity. Skeptical audits can find fraud, but not in every case.

The scams seem to have been restricted to the US. Europe, with its principle-based accounting, has come out unscathed.

(Piazza looks to Willem Brocker, the Global Managing Partner in charge of markets, who is present in the room and he responds.) I would not say all is perfect in Europe. They still have a fragmented approach to governance. But some of the things Sam referred to-the obsession with quarterly results and proliferation of proforma statements and stock options have been largely US-phenomena. There is no doubt that we have not seen major scandals in Europe. There have been business failures and audit failures but nothing of the scale in the US.

Will all this be forgotten with the next boom and will companies get back to their not-so-good ways?

You are right. Another market rise, and we run the risk of the same problems. We have Sarbanes-Oxley and other good pieces of regulation that will improve the landscape but we need to move away from our obsession with quarterly results.

There is a school of thought that all these new regulations are overly stifling and that growth suffers as a result.

We see a clear trend among boards and managements to take fewer risks today-to be more concerned about processes because of the liability and regulation, and less focussed on opportunities to grow and do good business. And maybe that's because of the economy but if it is because of over regulation then the recovery will be much slower coming. You can already see this. I go to more board meetings than anyone else-boards are struggling to provide good business advice.

What about the issue of the auditor being consultant too? Wasn't that one problem with the Andersen-Enron relationship?

It was a tragedy to have Andersen destroyed. I am not trying to support what Andersen did or did not do. It was a proud and solid firm. Some people made some mistakes and they should have been held accountable, but to have destroyed Andersen through the indictment, I think, was an overreaction. Auditors should be held responsible but it was not right to destroy the company.

Hasn't that made consulting a four-letter word in the audit business? For instance, PwC recently hived off its consulting arm to IBM in what is being described by several analysts as a knee-jerk reaction. Won't growth suffer as a result.

It (Consulting) has been a good business for years. But over the last five years our fastest growth business was not management consulting. It was tax I don't accept the argument, "you audit so you can consult". Auditing is a very good business for us. We separated it because we felt the public perceived a conflict and we wanted to remove that.

But you still do other stuff. Won't that be seen as a conflict?

I believe we have to be careful with that. Audits are complex and require people with multiple skills. If you turn an audit firm into one that just uses accountants to audit you are not going to get the skills that are required for high quality auditing. Our audits are of a higher quality because of the other multi-competency skills we bring to the table.

But do understand we have dramatically reacted to this environment. We have disposed off almost 40 per cent of our firm (in terms of employees) in the past months. This hasn't just been in management consulting. It has been in a number of businesses. However, tax has always been a part of the auditing competency. We think we have the right balance now. Our consulting is focused around our competencies-accounting, tax, controls, risk transactions. These are all businesses that add to a quality audit.

Did it have to take a scam for audit firms to realise that it wasn't right to mix audit and consulting? Surely, the debate on self-governance should have helped them come to this conclusion long ago?

If Andersen hadn't done consulting for Enron, would they have got themselves into this mess? Actually, you do not need a consulting project to corrupt you. The audit fee is large enough to corrupt you if you aren't a person of integrity.

But who should do audits? You could get governments to do them, but then I think you would get poorer results. In fact, I think the capital markets would pay a huge price. If you turn us into a business that does not have the competencies to do what it is supposed to, it will affect the quality of our work. Many of our people, when not working on audits, do risk consulting and tax consulting. This gives them (the kind of) experience that makes our audits better.

Why did PwC develop cold feet over going it alone with a consulting arm, Monday? That, after spending a small fortune on launching the brand. And why was the division with estimated revenues of $4.9 billion in 2002 sold to IBM for a mere $3.5 billion?

(Laughs). Yes, Monday was sold on Tuesday. But, I've heard these comments. We are still very pleased with the transaction.

Despite the price?

Last year, it was very important to separate this business. Yes, if we had sold out a few years earlier, to Cap Gemini or HP for stock, and you look at the value of the stock today, we would have got a great deal. But we sold for cash. And our consultants are happy. They now work with world-class people.