Ernst & Young (EY) are planning to split their audit and consultancy arms. They announced the split this year and plan to operationally separate in the UK by 2024. This announcement in the UK comes quickly after the same one by Carmine Di Sibio, EY’s Global Boss, who is based in the US. EY was founded in 1849 as a small accounting firm, but has since grown into an international network of professional services firms with more than 250,000 employees in over 150 countries. EY is one of 4 firms including Deloitte, KPMG and PwC, that are collectively known as the Big Four.
As such, a split will have ramifications for their clients, competitors, the accountancy industry and other industries such as management consultancy. Let’s take a look at what this means for everyone involved and analyse why EY have decided to make this move in the first place.
What is EY splitting into?
EY’s split will form 2 businesses, with one company focusing on audit, assurance and tax services, while the other focuses on advisory services in areas such as strategy, risk management and valuation/business consultancy.
While Di Simio is heading up these plans, he will still need the support of regulators around the world. In the US, for example, where 40% of EY’s global revenue comes from, they are grappling with who should be liable for $10bn of pension liabilities. EY still hasn’t received votes from every partner in all member firms in the 150 countries in which they operate, so roadblocks do exist.
However, the UK Accounting Watchdog has come out publicly in support of the split, stating:
“A split removes significant conflicts of interest with the rest of the business…which actually means that they might be in a position to grow further, whilst also producing quality audits.”
This support from Sir Jon Thompson, chief executive of the Financial Reporting Council, is welcomed by EY after years at odds with the regulator. Notwithstanding KPMG’s Carillon debacle, you’ll also remember that only recently, EY were ordered to pay huge fines after staff were caught cheating on professional exams.
Are other accountancy firms affected by this?
Although EY are the first to announce this, KPMG are also considering splitting. Meanwhile, PwC has said that they will not split but are looking at diversifying its revenue streams by taking on more consulting and advisory work. Deloitte has reiterated that they are staying put as they feel they offer a full range of services to clients and don’t want to fragment their offering.
EY will not give up on audit
EY bosses claim that this new structure will give them increased flexibility around their services offerings. They feel that they’ll be able to better serve their clients by delivering integrated advice or even providing specific work streams such as IT transformation). They’ll continue to provide traditional audit services just like before, as per regulators’ requirements, by leveraging both EY’s global resources and local expertise in relevant markets across the world.
The split will enable them to grow
The reasons behind this split are simple: it allows both parts of the business to operate under their own names when they work with clients or potential customers who may not know about them yet – but once they do know about them then they can focus on what makes them unique from other firms in their field rather than being lumped together as part of “big four” category.
It’s difficult to find reasons why regulators would oppose a split. The conflicts of interest between audit and consultancy have more than once brought shame to some of the biggest firms in the world. In the US, you had the Enron scandal in 2001 which led to their bankruptcy and Arthur Anderson’s who were fifth in terms of size after the Big Four at the time. Arthur Anderson was found guilty of destroying documents related to the US regulator’s investigation which brutally exposed these conflicts of interest. With a split, then, you reduce the risk of another Enron or Carillon.
Also, a split would, according to Di Simio, enable the new ‘pure’ consultancy business to:
“Raise funds to compete with the likes of Accenture for tech consulting and managed services contracts for companies that want to outsource part of their operations.”
What’s more, the new company would probably compete with McKinsey, BCG and Bain on strategy and management consulting. This is where exponential growth could be seen.
The Big Four are facing increasing pressure from regulators and clients to break up their audit divisions from their tax advisory divisions. At the same time, accountancy firms are increasingly competing with one another for clients – meaning that they need to find new ways of differentiating themselves from each other. This split could be just what EY needs to stay ahead of its competition.
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