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Large firms have few auditing choices

Diya Gullapalli The Wall Street Journal

The reduction in the number of top-tier accounting firms, to the Big Four from five earlier this decade, is making it difficult for many large companies to change auditors, and the problem would expand if the Justice Department indicts KPMG LLP for selling allegedly abusive tax shelters, interviews with company executives and surveys show.

Intel Corp. is one of the many big companies now bumping up against the limitations. After using Ernst & Young LLP as its auditor for more than three decades, the semiconductor maker considered switching recently for a fresh look at its financials. But it stuck with Ernst after receiving proposals from the other Big Four firms: Deloitte & Touche LLP, KPMG and PricewaterhouseCoopers LLP. That is because federal regulations bar the three other firms from serving as Intel’s independent auditor unless they give up valuation, computer-software and other work they do for Intel.

“Because there are only a limited number of large multinational audit firms that do the kind of work that we need, if we were to switch audit firms, all sorts of dominos would fall,” said Cary Klafter, corporate secretary at Intel.

Worries about the shrinking number of top-tier auditing firms began mounting with the collapse of Arthur Andersen LLP in 2002, after its conviction for obstruction of justice tied to its audits of Enron Corp. (The conviction was reversed last month by the Supreme Court.) The Sarbanes-Oxley corporate-governance act, passed by Congress in response to the accounting scandals at Enron and elsewhere, has complicated the situation, as well, by forbidding auditors from providing certain nonaudit-related services to audit clients. The restrictions, aimed at enhancing the independence of auditors, have led some companies to distribute nonaudit work to the other Big Four firms. But that puts these companies in a bind if they want to switch auditors.

News recently that the Justice Department is debating whether to indict KPMG has made the issue more acute. Any indictment could send the firm’s clients fleeing, and KPMG is cooperating with authorities to try to stave off such an outcome. KPMG stresses that it has pushed out several dozen executives associated with the tax-shelter sales and made changes to root out unethical business practices.

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