EY’s audit and advisory division is a victory for investor protection

Earlier this month, Ernst & Young LLP announced a first spin-off of its audit and advisory functions, dubbed “Project Everest”, a sweeping move that could completely transform the business model of accountancy firms. The split still needs to be approved by EY Partners, with a vote expected later this year.

The announcement sparked heated debate within the global accounting and business community, with many praising EY for its bold spinoff and the potential windfall for EY’s advisory business. Others think Everest might be too ambitious a climb and hurt the EY brand.

If it becomes official, the division will separate EY accountants who audit companies such as Amazon.com Inc., Salesforce.com Inc., Alphabet, Inc. and more from its rapidly growing consulting business. and generally more profitable. The company’s split would also mark the biggest upheaval in the industry since the 2002 collapse of Arthur Andersen, the auditor mired in the Enron scandal and whose downfall reduced the Big Five to the Big Four.

The Big Four accounting firms – EY, Deloitte LLP, KPMG LLP and PricewaterhouseCoopers LLC – have been under regulatory scrutiny for years over concerns that their advisory services could compromise their ability to conduct independent reviews. As reported in The Wall Street Journal in March, the SEC sent letters to them and other accounting firms in late 2021 requesting information about its auditing clients and auditing practices. The UK auditing and accounting regulator, the Financial Reporting Council, went further and asked the Big Four in 2020 to separate auditing as a stand-alone business in Britain by June 2024.

While the details are still being worked out, accounting insiders speculate that the decision to separate the two operations will actually prevent EY’s new hires from continuing to advance cross-practice audit, tax and advice like their more experienced colleagues.

Nonetheless, from an investor protection perspective, this decision should be a big win. Over the years, serious conflicts of interest have arisen due to accounting firms performing both audit and advisory work for the same or related companies. Such disputes frequently lead to corporate misrepresentation, breach of fiduciary duty and, in some cases, fraud, which inevitably erodes investor confidence and leads to securities class actions and regulatory actions. .

By dividing the two companies, these conflicts of interest, and the inevitable problems they cause, could more easily be avoided. For example, EY recently agreed to pay the SEC $10 million for its work with Sealed Air – a packaging company known for its brands, Cryovac food packaging and bubble wrap packaging – linked to charges of auditor independence misconduct perpetrated by multiple partners to secure Sealed Air as a client.

Last April in the UK, EY was sued for $2.5 billion over the negligence of its auditor in NMC Health, which filed for bankruptcy in 2020 after billions of dollars were uncovered. undisclosed debts.

All eyes are watching. As if sending a warning shot to the EY bow, Acting Chief Accountant of the SEC Paul Munter issued a statement in August reminding accounting firms that “it is paramount that the accounting firm fully understands its responsibility to maintain auditor independence and that it discloses these requirements to the non-accounting investors involved” while exploring audit firm restructurings and other complex transactions.

While EY’s proposal continues to spark heated debate across the industry, the move will most likely limit conflicts of interest and better protect investors going forward, which means EY could also avoid future some costly securities litigation and SEC regulatory actions.

EY’s first-mover split is a bold one. Hopefully Deloitte, KPMG and PwC will take note of this as they consider the future of splitting off their own audit and advisory services and keeping their clients’ interests and investor protections in mind. audit.

This article does not necessarily reflect the views of the Bureau of National Affairs, Inc., publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Laura H. Posner is a partner of Cohen Milstein Sellers & Toll PLLC in the area of ​​securities litigation and investor protection practice, as well as ethics and fiduciary counsel practice. Prior to joining the firm in 2017, she was a bureau chief for the New Jersey Bureau of Securities.

We would love to hear your smart and original point of view: write for us

Comments are closed.