The SEC issued draft new rules in June which identify the consulting services it considers inappropriate for an auditor to perform. Partners from three of the Big Five said that clients in emerging markets have different requirements to clients in the U.S. and Europe. They claim companies would be severely disadvantaged if they were not allowed to call on their auditor for consulting services.

"In a transitional market, companies have undergone rapid growth and development in the space of five to ten years," explained George Pataraya, an audit partner at Deloitte & Touche's Moscow office.

"An auditor that has serviced a client for many years has a unique understanding of a client’s history and the way it relates to its sector. If the client suddenly has to
look elsewhere for consulting, the new consultant will have to start from scratch. This will ultimately damage the economies of emerging countries."

According to Reyaz Mihular, a partner with KPMG Sri Lanka, proposed independence rules will also affect audit quality. "In these countries a central purpose of the audit is to assess risk for foreign investors." He explained that on the Indian subcontinent and in other parts of Asia, KPMG could not produce audits that satisfy the needs of regulators and users without using consulting personnel.

Tony Seah, technical director of the Malaysian Institute of Professional Accountants, agreed that the SEC’s proposed rules will have negative repercussions in Asia - for audit clients, regulators and users. He added that the situation could be made worse if Asian regulators attempt to maintain credibility by emulating the SEC’s tough stance on audit independence.

Opinion among the Big Five is split, depending on whether a firm is in the "coalition" set up by Deloitte, AA and KPMG to resist new rules. Ernst & Young and PricewaterhouseCoopers do not share the coalition’s view on emerging markets. Arthur Haigh, managing partner of PwC Russia, said that auditors can simply recommend a suitable consultant, and if necessary team up with a consultant in the first few months of a project.

Mihular said this would be a poor substitute for services clients currently receive from their auditor, especially in Asia where relationships of "personal trust" between individual audit partners and their clients take years to build. He adds that KPMG would be forced to rely on outside consultants for assistance with audits and this would "create new independence conflicts according to SEC definitions."

However, Nelson Carvalho, technical director of the Brazilian Institute of Finance Directors, said that the situation in Latin American countries, at least, is more complex than Big Five firms suggest. In 1998, the Brazilian SEC forced auditors to limit their consulting services in an attempt to prevent domestic problems with tax accounting. Some Big Five firms, which cannot be named, are taking legal action against the Brazilian regulator.

Following Latin America’s financial crisis in 1998, multinational corporations bought up some of the continent’s biggest domestic companies, particularly in poorer countries such as Bolivia and Venezuela. Carvalho said, "This means that decisions on audit and
consulting are no longer taken by Latin American companies, but by head offices in Madrid and New York."

He said that Big Five firms and their international clients are fighting their battle with the U.S. SEC through Latin America.

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