This Wall Street Journal ($) article picks up on the theme of this post from late last year — i.e., that the government’s regulation of accounting firms through criminalization of their services is contributing to the shortage of accounting firms that have sufficient resources to provide the specialized services that big companies need:

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.
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.

Meanwhile, KPMG is learning that playing nice with the Justice Department may not be all that it’s cracked up to be. As noted here last week, the threat of an indictment has KPMG pursuing a settlement of the government’s criminal investigation into its promotion of tax shelters under a deferred-prosecution agreement. As a part of that effort, KPMG issued a well-publicized admission of wrongdoing and public apology last week regarding its involvement in the tax shelters.
However, as a result KPMG’s public admission, this NY Times article reports KPMG is now a sitting duck for damages in the myriad of civil lawsuits involving the tax shelters and even unrelated accounting issues, and that KPMG’s co-defendants in the tax shelter civil cases are furious over the financial implications to them of KPMG’s public admission of wrongdoing.
All of this is having a devastating effect on KPMG financially. KPMG reported earlier this year that it had revenue of $4.1 billion last fiscal year, but that “practice protection costs” — i.e., insurance, legal fees and litigation settlements — were running at the staggering amount of more than $400 million annually, or more than 10 percent of the firm’s revenue.
Thus, the cost of avoiding an indictment might just cause KPMG to meltdown anyway. At very least, the cost of cooperation will cause substantial financial damage to the firm, resulting in job loss and less competition for audit services for big companies. And let me get this right — this is a “business-friendly” Republican Administration pursuing these policies?