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Conflict, what conflict?

On 1 July Price Waterhouse and Coopers & Lybrand officially tied the have been advising competing clients. Sometimes not even the left hand knows what the left hand is doing. knot. The two global professional services firms – with 135,000 staff, 8,500 partners and $15bn in turnover – now start the serious business of trying to work together.

Later in the month, the newly merged firm may lose a client. At the time of writing it is unclear whether Coopers & Lybrand will be asked to step down as auditors to the British Horseracing Board (BHB). In the overall scheme of the new global partnership the loss of BHB’s fees of a few tens of thousands of pounds is probably less than the cost of the airfares that senior partner Jim Schiro is clocking up explaining the rational and the vision behind the new partnership.

But although the loss of BHB would be infinitesimal, the manner in which the client has been jeopardised should stand as a warning to partners of the newly merged firm and indeed to every professional services firm with global ambitions.

The story is this: Coopers & Lybrand’s economics unit produced a report commissioned by the Betting Office Licensees Association (BOLA), an organisation which represents bookmakers. BOLA’s director-general Tom Kelly said: “The BHB issued a financial plan which fundamentally affected our industry.

We thought it was flawed. We contacted Coopers & Lybrand and asked them whether they would look at the plan.” Pretty straightforward stuff, apart from one minor detail. As Kelly said: “At the time we didn’t know Coopers were auditors to BHB and neither did they.” The BHB, which has been in existence since 1993, is racing’s governing authority. It’s funded to the tune of around #14m a year, largely from racecourses. Coopers has been its auditors since 1994. That fact emerged only after the report was published.

Kelly said: “I fail to see the conflict of interest. None of this has anything to do with the financial plan. I think the only thing that Coopers has to apologise for is apologising in the first place.”

As Coopers pointed out when the embarrassment first became public, this was not a regulatory or professional conflict of interest. It was a commercial conflict. And in one sense Kelly is right. One arm of the sprawling global professional services firm analysed the future plans of one of the same firm’s audit clients. There is no suggestion that Coopers prepared the financial plan which it then criticised.

Talk to directors in industry and commerce about the unfortunate incident and you get a mixed reaction. One said: “You could argue the BHB should have been a bit more grown up about the whole thing.” But another admitted that he too would have “hit the roof”. If the auditor is representing himself as business adviser to the organisation, he cannot under any circumstances publicly turn round and criticise.

Among fellow auditors there was also sneaking sympathy, even among the smaller firms who could be forgiven for enjoying a touch of schadenfreude.

In some ways it’s all good knock-about stuff. The BHB may find another auditor and life and horseracing will carry on. But among fellow professionals in the Big Five, the incidence raises the simple question: how do you put in place effective internal procedures to prevent similar embarrassing commercial mishaps.

For the newly merged PricewaterhouseCoopers the question must loom even larger. The merged firm has an astonishing 30,000 clients in the UK. It also has growth plans of 20% a year. Even allowing for existing clients providing half of that extra income, it means new clients and new jobs coming on board on a daily basis. Coopers maintains its procedures are adequate and that the BHB affair was simply human error.

The Coopers procedures says partners should check on an electronic database of existing clients prior to accepting any assignment. But digging out connections between clients appears to cause the firms difficulty and they have been caught out before. KPMG went ahead with some work on Maxwell overlooking the fact it had done some work for the Pergamon part of the empire some years previously. The firm’s system didn’t cross refer from Maxwell to Pergamon.

A Big Five former partner who left practice recently told Financial Director that the main burden of ensuring the firm was doing nothing to upset client relations fell to the partner in charge of the client. You can see the weakness in that situation. How can BHB’s audit partner possibly know the assignment that other divisions of the firm are up to?

It is unclear from Coopers whether it would have accepted the assignment if it had discovered the link. If the partners had identified the potential commercial conflict of interest it could have taken a business decision, decline the consultancy role or jeopardise the audit. Bear in mind, of course, that all partners have individual financial performance targets and are extremely reluctant to give up work. There may have been heated discussions.

One technical partner for a medium sized firm said when his firm is in the running for a new job, partners and senior managers were now e-mailed asking if there was any reason that they knew of why the assignment should be declined. But for organisations the size of PricewaterhouseCoopers that looks impractical the Big Five will continue to rely on databases and partner contacts.

But clients of mega firms deserve something better. The firms should consider establishing ‘a clearing house’, attached to the professional standards review, run by senior staff who would do their best to find potential conflicts of interest. It wouldn’t be foolproof but it may stop them looking quite so incompetent in front of clients and everyone else.

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