EY break-up plan could see firm lead industry shake-up

EY could gain a clear advantage over rivals by splitting its audit and advisory operations, according to Fiona Czerniawska, CEO of data and market researcher Source Global Research.

“It will be able to present itself as more forward-thinking and innovative than its peers and will have the opportunity to shape the post-separation rules of engagement,” she said.

Czerniawska insisted the risk of reputational damage from audit failures was increasing, evidenced by the Securities & Exchange Commission’s recent investigation into potential conflicts.

“A new and separate consulting/non-audit firm, however it’s branded, may be able to reinvent itself and be seen differently from the rest of the Big Four,” she added.

Czerniawska’s comments follow reports that EY is preparing to become the first of the Big Four to separate its audit and consulting businesses.

However, EY told Accountancy Age in a statement that no decision had been made as yet and any significant changes would happen in consultation with regulators and after a vote of approval by EY partners.

“We are in the process of evaluating strategic options that will drive value for all our stakeholders – EY people, clients, and partners – and serve the public interest,” EY said.

“We undertake this evaluation from a position of strength across all aspects of our business and all regions across the EY Global network.”

Intense pressure

Andrew Pavlovic, regulatory law partner at CM Murray LLP, explained how the Financial Reporting Council (FRC) has been applying pressure on the Big four for years to separate their audit and tax/advisory functions.

The main benefit of doing so, he noted, was to avoid accusations that their ability to carry out a robust audit was not compromised by their provision of advisory services to the company in question.

“The audit sector has been badly hit recently by a number of high-profile company collapses, with the FRC handing out a number of large fines to firms for failing to carry out audits in accordance with good practice,” Pavlovic said.

“Hiving off the audit function to a separate entity may enable the tax/advisory business to distance themselves from any further FRC fines that may be forthcoming.”

A sense of déjà vu

 Tom Rodenhauser, managing partner of Kennedy Research Reports, which analyses the industry, told Accountancy Age he had a sense of déjà vu.

“More than 20 years ago, the same debate raged about audit and consulting (advisory) coexisting under one roof due to conflict-of-interest issues,” he said.

Rodenhauser noted that audit scandals and ensuing regulation resulted in a few firms hiving off parts of their consulting operations, only to reconstitute them a few years later.

“The same scenario is at the forefront now for the same reasons,” according to Rodenhauser. “The conflict issue gets the most attention and regulators will continue to make life untenable for the audit firms that choose to do consulting.”

On different paths

Rodenhauser also believes the consulting and audit/tax services are in a “different galaxy” from one another, which suggests more firms may look at splitting these operations in the near future.

“Twenty years ago, one could argue there was some overlap that offered logic to keeping the two sides together as one entity,” he said. “Today, keeping them together is only logical for the partners who would profit from maintaining the status quo.”

Rodenhauser sees consulting as a “dynamic growth industry” that’s driven by technology, meaning the Big Four are now competing more against Accenture and other big tech firms.

“There are also cross-cutting issues, such as ESG and digital/analytics, that are driving service needs,” he added. “Audit, meanwhile, is still very people-oriented, with well-worn rules of engagement and staid by comparison.”

Technology partners

Of course, the spun-out audit businesses are also likely to be looking for technology partners that can integrate audit rules into existing systems, according to Czerniawska.

“This would give technology firms an entry point into a large, captive, annuity market,” she said.

However, it remains to be seen how long the two sides can remain independent, with Czerniawska arguing that history suggests they naturally gravitate back towards each other.

“Audit firms have spun off consulting arms in the past but just can’t seem to resist adding consulting back to their portfolio of offerings after a time,” she added.

Industry reaction

Firms approached by Accountancy Age were guarded as to their opinion on EY’s proposed break-up plan and its impact on the industry at large.

KPMG told us it didn’t speculate on reports about what other companies, including its competitors, may or may not have planned.

“KPMG believes that a multi-disciplinary model brings a range of benefits, such as diverse talent, technology, and global capability, that drives innovation and the highest quality standards across our audit, tax and advisory businesses,” it added.

Meanwhile, a spokesperson for Deloitte said: “As stated previously, we remain committed to our current business model.”

PwC did not provide comment at the time of publication.