In the spring of 2000, when the big accounting firm Ernst & Young successfully courted lobby shop Washington Counsel, one of the perks of the merger was that the newly joined businesses could share each other’s clients.

Executives of the combined outfit looked forward to having the lobbying unit, which would eventually take the name Washington Council Ernst & Young, refer its clients back to Ernst & Young’s auditors and accountants. And Ernst & Young would funnel clients who had policy and legislative needs to the lobbyists.

Then came the collapse of Enron, the downfall of its accounting firm Arthur Andersen and passage of the Sarbanes-Oxley reform legislation.With that, a part of the business model that Ernst & Young executives had constructed was in jeopardy.

Although Sarbanes-Oxley doesn’t bar accounting firms from doing lobbying work for clients they audit, the law does force publicly held companies to jump through extra hoops before they are allowed to retain their accounting firm to handle advocacy services.

The extra hassle, plus the specter of penalties for executives who run afoul of Sarbanes-Oxley, has convinced many corporations to interpret the law in the strictest of terms and decide against having their auditing firm provide additional services such as lobbying.

As a result, the lobbying practices of big accounting firms, such as Washington Council Ernst & Young, have found themselves “Sarboxed” — put at a disadvantage in attracting clients that get audited by their accounting parent. In some cases, they’ve even lost existing clients over Sarbanes-Oxley worries.

Computer giant Hewlett-Packard, for one, last year ended its relationship with Washington Council because of Sarbanes-Oxley, said spokesman Pete Jeffries.

Senate records show that the lobbyists at Washington Council had worked for HP since at least 1998, two years before Ernst & Young acquired the lobby shop. But Ernst & Young is Hewlett-Packard’s auditor, and while HP and Washington Council “had a great working relationship,” Jeffries said, “to be law abiding citizens and to comply with Sarbanes-Oxley, they were forced to drop Ernst & Young from the lobbying side of the ledger.”

In its place, HP put another big accounting firm, KPMG, and Quinn Gillespie & Associates on retainer for tax lobbying work.

Ken Kies, who heads the federal policy group of Clark Consulting, previously led the lobbying practice at the big accounting firm PricewaterhouseCoopers. Kies said that prior to Sarbanes-Oxley, the business model for the accounting firms and their lobbying units was all about cross-selling clients between the practices.

“Certainly, this has changed the business model,” he said. “There’s no doubt about it: A lot of boards don’t want their auditing firm doing any other business.” In a post-Enron and post-Arthur Andersen environment, “They don’t want to take the chance that [the] auditor is not completely independent,” he said.

However, the scale of the Sarbanes-Oxley problem for lobbying firms is hard to gauge, because some of the most affected firms are not willing to discuss the matter.

KPMG and Deloitte have relatively small lobbying practices, but both are registered to lobby on behalf of several clients. A KPMG spokesman said his company declined to comment. And Deloitte’s director of tax policy, Clint Stretch, said his company doesn’t like to talk about its business.

Washington Council is by far the biggest lobbying practice in the accounting-firm sector. It boasts about $12 million in annual revenue, but saw a minor dip of 6 percent between the first half of this year and the first six months of 2004, according to a recent Roll Call survey.

Nick Giordano, a partner at Washington Council Ernst & Young, acknowledged that a portion of the firm’s small revenue decline is attributable to Sarbanes-Oxley. “We are part of the accounting firm and are responsible for making sure all the rules are followed,” he said.

But the firm continues to expand its trade, health care and other lobbying portfolios — and the HP departure is not necessarily representative of what the firm has experienced. Many of E&Y’s audit clients have won approval from their audit committees to maintain the relationship with Washington Council.

This year alone, Washington Council has signed up more than a dozen new clients including Unilever, American Bankers Association, Delta Air Lines and the Biotechnology Industry Organization.

Sarbanes-Oxley’s effect is also somewhat limited. It applies only to public companies, and lobbyists inside the big accounting firms still have advantages, most notably global name recognition.

Lindy Paull, who joined PWC in 2003 to build the practice back up after Kies’ departure, said that since Sarbanes-Oxley, accounting firms and their audit clients have become more rigorous about the rules, but added that overall, business is still good.

PWC signed up a slew of new clients in 2005, including the Home Builders Construction Industry Coalition, Coca-Cola Co., Liberty Mutual and the American Forest and Paper Association.

“I think we are extremely cautious after Sarbanes-Oxley because, of course, accounting firms are now a regulated profession,” said Paull, a former chief of staff on the Joint Committee on Taxation. “There is a chilling effect on a range of tax services, but the one that comes to mind is the lobbying. … We won’t lobby for a single audit client.”

Paull said that most of PricewaterhouseCoopers’ lobbying work is for trade associations and coalitions, not publicly traded companies.

But, she said, if a group of companies that is putting together a coalition approaches PWC’s lobbying unit, the firm has to make sure that none of the companies in the coalition is an audit client.

Companies such as Hewlett-Packard who went shopping for new lobbyists after Sarbanes-Oxley haven’t only gone to other accounting firms but have also sent business to a number of independent tax lobbying firms including Angus & Nickerson, Venn Strategies and Capitol Tax Partners.

Stephanie Silverman, a founder of Venn Strategies, a boutique firm that focuses on tax policy, pension and health care work, said that within the past 12 months her shop has noticed an influx of referrals from the lobby shops of the big accounting firms.

“We saw a 10 percent increase in our lobbying revenue this year that we attribute solely to referrals prompted by Sarbanes-Oxley,” she said. “The tax lobbying world is a pretty small universe, a natural circle of friends who know each other and respect each other.”

Lindsay Hooper, managing partner of Capitol Tax Partners, said his shop, too, has received a windfall, albeit a tiny one, from the big accounting firms.

“We’ve certainly picked up a couple of clients that decided to change vendors, if you will, because of Sarbanes-Oxley. I would anticipate that we will pick up more,” said Hooper, who declined to name any specific clients.

Still, those Sarbanes-Oxley clients are a small portion of Capitol Tax’s overall business, and Hooper said you can’t count out the accounting firms. If Washington Council E&Y is doing one company’s audit work, it could pick up lobbying work from the roster of audit clients of the other accounting firms.

“So at the end of the day, it’s hard to see where the accounting firms would take a hit,” he said.