Accounting firm EY plans to split its auditing and consulting businesses
Big Four accountancy firm Ernst & Young is considering a global spin-off of its audit and advisory businesses amid a regulatory review of potential conflicts of interest in the profession, according to people familiar with the matter.
A split would be the biggest structural change to a Big Four company since Arthur Andersen collapsed some 20 years ago.
The potential move would create two giant professional businesses. Last year, EY had global revenue of $40 billion, of which $13.6 billion came from audit work.
How exactly the restructuring would work is unclear. The split could lock in some services, such as tax advice, to pure audit functions, said one of the people familiar with the talks. The breakaway firm could then offer consulting and other advisory services to unaudited clients.
Any change would have to be approved by a vote of partners around the world. EY’s global network is made up of separate companies in each country that share technology, branding and intellectual property.
EY conducts a strategic review of its business sectors every two years during which it assesses regulation, technological developments and competition with other companies, the sources said.
Regulators around the world have expressed concern about the potential impact on audit quality of accounting firms’ growing reliance on sales of advisory and tax services, which offer higher margins and greater growth potential than their core audit activities.
The Securities and Exchange Commission investigates potential conflicts of interest within the Big Four and certain mid-sized audit firms. In recent months, senior SEC officials have publicly warned accounting firms not to “creatively apply the [independence] rules.”
Under SEC rules, accounting firms are prohibited from providing services to audit clients that could impair their objectivity. Many companies pay fees to their audit firm for consulting or other non-audit services. This raises concerns that the additional revenue will affect the auditor’s duty of impartiality when reviewing the company’s financial statements. However, on average 90% of the total fees paid by an SEC-listed company to its auditor are for audit or audit-related services, according to industry group Center for Audit Quality.
Last year, the Big Four earned $115 billion globally from advisory and tax services, more than double the $53 billion from audits, according to data provider Monadnock Research LLC.
In the UK, the big four firms are separating their audit operations from the rest of their business, in response to demands from regulators. The measure follows a series of accounting scandals.
Regulatory pressures are just one consideration in talks about a possible breakup at EY, and the company is under no obligation to make such a move, said one of the people familiar with the matter.
The company has not set a timeline for the potential breakup, which is still under consideration and may not happen, people familiar with the matter said. The potential split was reported earlier by Michael West Media.
A break from EY would likely put pressure on the rest of the Big Four – Deloitte, KPMG and PricewaterhouseCoopers – to consider similar big changes, accounting industry watchers said. “It could have a destabilizing impact on the strength of the insurance profession,” said Jim Peterson, lawyer and former partner of Arthur Andersen.
The move could reduce conflicts of interest, depending on the structure of profit incentives, said Michael Shaub, an accounting professor at Texas A&M University. “There could be more than one firewall,” he said.
“Regulators may hope that such changes will increase the independence of audit partners, but on the other hand, they can only make audit partners desperate for revenue and hurt audit quality” , said Shyam Sunder, emeritus professor of accounting and economics at Yale University. .
KPMG declined to comment. Deloitte and PricewaterhouseCoopers did not respond to a request for comment.
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