EY split plan reveals rift between accounting firms

Ernst & Young’s plan for a possible global spin-off of its auditing and consulting business, dubbed Project Everest according to people familiar with the matter, was rejected on Friday by its main rivals who said they would keep their businesses in one piece.

Fellow Big Four firms KPMG and PricewaterhouseCoopers issued statements defending their existing models of offering advisory and tax services alongside bread-and-butter audit work. PwC said it had “no intention of changing course” no matter what rival firms do. Deloitte said it remains committed to its current business model.

Under EY’s plan, the company would spin off its rapidly growing advisory business, as well as some of its tax and other advisory businesses, according to people familiar with the matter. The former audit firm would retain some non-audit work, including some tax and valuation services, the people said.

A big upside of the potential split: a big increase in the number of new clients that advisory and audit teams could pursue without breaching conflict-of-interest rules limiting the work companies can do for clients. audit, people familiar with the subject. said. Likewise, it would give the advisory side more choice of other companies to partner with in the accounting firm’s technology business, the people added.

Carmine Di Sibio, EY’s global president and chief executive, told his company’s partners on Thursday that “business stakeholders … are increasingly demanding greater independence and choice over a number of markets around the world,” according to a copy of an internal memo seen by The Wall Street Journal.

The memo points out that the plan is still in its early stages. Any changes would require approval from partners in EY’s extensive global network, where more than 300,000 people work in around 140 countries. EY businesses in each of these countries operate as separate legal entities, paying fees to share branding, technology and intellectual property. Partners from each of those 140 companies would need to approve the plan for it to go ahead, people familiar with the matter said. The split is also expected to be approved by regulators.

If EY goes ahead with the spin-off of its advisory arm – and the internal memo stresses that no decision has been made – “no one should be surprised that another [Big Four firm] will follow,” said Lynn Turner, former chief accountant of the U.S. Securities and Exchange Commission. “Other companies will certainly explore it privately even if they say otherwise publicly.”

The SEC and other regulators would have to approve any breaks. One concern is that an audit-only firm would be susceptible to being brought down by litigation, in the same way that former Big Five firm Arthur Andersen folded following the accounting scandal at Enron Corp. in 2002.

EY has been at the center of some of the biggest accounting booms in recent years. It was the auditor of German payment processor Wirecard AG, which collapsed amid allegations of widespread fraud; Chinese coffeehouse chain Luckin Coffee Inc., which admitted fabricating sales, and UK hospital operator NMC Health PLC and sister company Finablr PLC, where billions of dollars in undisclosed debt were discovered.

EY said it respected its work and applied high quality auditing standards. EY is confident that a stand-alone audit firm would be financially resilient, even in the face of the inevitable lawsuits that big auditors face, said a person familiar with the matter.

Regulators around the world are stepping up their scrutiny of potential conflicts of interest at large accounting firms, including an investigation by the SEC. Last year, the agency fined EY $10 million for violating independence rules in pursuing a new client, in a case the company settled without admitting liability.

Despite regulatory pressures, the big four companies are all thriving, with global revenues hitting record highs last year. Consulting and other consulting businesses are the main driver of this growth, rather than audits. Between 2011 and 2021, the four firms increased their combined global revenue from advisory and tax work by 96%, far outpacing the 17% increase in their audit fees over the same period, according to the data provider. Monadnock Research LLC.

EY’s plan has strong echoes of the early 2000s, when four of the then Big Five sold or parted ways with their advisory arms amid growing regulatory concerns over potential conflicts of interest. In 2000, EY sold its consulting business to Cap Gemini Group SA of France.

The firms developed their in-house consultancy services over the following years, arguing that in-house expertise improved the quality of audits they can offer. This argument should be tested again if EY decides to move away from the multidisciplinary model, accounting academics said.

Write to Jean Eaglesham at [email protected] and Mark Maurer at [email protected]

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