Deloitte Sells Santa Ana Unit to Resolve Conflict of Interest

Accounting giant Deloitte & Touche LLP said Thursday it sold its Santa Ana-based executive staffing unit in order to resolve a conflict of interest that cost the subsidiary $9 million in business last year.

Managers of Deloitte’s Resources Connection subsidiary, backed by a New York investment fund, purchased the business in a leveraged buyout. Financial terms weren’t disclosed.

Resources Connection LLC provides temporary staffing to clients who need executive-level financial managers, human resources managers and information technology professionals.

The so-called professional temp business is the fastest-growing part of the temporary staffing industry, analysts say.

“In specific disciplines like information technology and accounting and finance, you see growth rates like 15% a year,” said Kevin J. Dyches, who follows the staffing industry for New York-based Prudential Securities. That’s double the growth rate for the staffing industry overall.

A number of conventional industrial and clerical staffing firms, such as Remedy Temp Inc. in Aliso Viejo, have added professional services units to take advantage of that market, said Mark Allen, an analyst with Robinson-Humphrey LLC in Atlanta.

By establishing its independence, Resources Connection is setting itself up for an expansion drive that it could not have managed had it remained part of Deloitte, tied to its parent’s purse strings.

Now, the temporary staffing firm has its own financial backers, bank lines of credit and the potential of one day raising cash through a public stock offering.

The immediate problem solved by the split stemmed from accounting rules that raised questions about the ethics of Deloitte auditing businesses that had retained Deloitte-provided professionals to help achieve their financial results.

Don Murray, Resources Connection’s managing partner, said the company last year had to turn down $9 million worth of business so it would not step on its parent’s toes.

Few of the firm’s temporary placements have been in executive positions because internal rules kept it from placing high-level executives at firms Deloitte audited.

The potential for conflict has been growing, Murray said, as Resources Connection has added specialties such as information technology and human resources.

Although all of the major accounting firms have consulting operations, Deloitte is the first to shed one. Industry watchers say others are expected to follow suit.

The audit firms’ consulting activities have attracted scrutiny from the Securities and Exchange Commission, which in September began a campaign to stamp out earnings manipulation. The SEC is concerned that auditors could overlook faulty statements prepared by another part of the same firm.

Last month, the SEC said it was investigating several unidentified accounting firms that may have compromised their independence as auditors. It isn’t known whether Resources Connection was involved in this inquiry.

“Even if everybody is above-board in their actions, there certainly is the appearance of a lack of independence” if the firm places an executive at a company whose books it audits, said Robert Willens, a managing partner at Lehman Brothers Holdings Inc.

Resources Connection was founded in 1996 and has about 100 managers and 27 offices in the United States.

The company expects to report total revenue of $70 million for its 1999 fiscal year, which ends May 31, and Murray said Resources “is on track to do $100 million next year.”

The firm’s clients have included AlliedSignal Inc., Philip Morris Cos., Cigna Corp. and Safeway Inc.

He said the company also plans to add five U.S. offices this year and is “looking at two international offices, one in Canada and one in Asia.”

Resources Connection now has almost 1,000 employees--750 working on assignment to client companies and about 200 in administrative and marketing positions at its various offices.

Murray is one of 100 Resources Connection managers who together control a 38% stake in the newly independent company. With stock options that aren’t vested for several more years, the management group’s stake could swell to 44%, he said.

The rest of the stock is controlled by the firm’s investment backer, Evercore Partners, whose owners include Roger Altman, a former Wall Street investment banker and deputy treasury secretary.