Saturday, July 13, 2024

Inside EY’s Dismantling Plan: Why It Could Radically Reshape The Big Four


When Carmen Di Sibiu, EY’s global president, boarded the accounting firm’s private jet outside Davos in the early hours of Thursday morning, the Italian-American CEO had already embarked on an even bolder journey.

Sitting on the ship EY The first, as Bombardier plane is known within the accounting firm, was the auditor taking over the direction A plan to dismantle the group of the Big Four It would re-form the oligopoly professional dominates Since the fall of their rival Arthur Andersen in 2002 due to the collapse of the American energy group Enron.

Di Sibiu and his senior colleagues are balancing the historic separation between EY’s audit and advisory work after years of criticism over the two’s perceived conflict of interest. Auditors are tasked with holding corporate management accountable and resisting pressure to sign numbers without proper evidence while fellow consultants prefer to keep clients nice to generate fees in areas such as taxes, deals, and consulting.

“It surprises me that it has taken so long,” says Fiona Cherniowska, CEO of consulting sector analyst Source Global Research. “It is becoming increasingly difficult for any accounting firm to provide a multidisciplinary service, which includes auditing . . . I imagine every other firm is looking at [restructuring] very. “

Rationale for separation

For the Big Four consulting practices, limitations in working with audit clients are a drag on growth while investments in audit improvement have drained capital investment from their advisory business.

“Most non-auditors want freedom from the constraints of independence on the work we can do,” says one EY partner who is not involved in restructuring planning.

Selling advice on digital advisory and mergers and acquisitions has helped drive revenue of the Big Four to record levels, but their advisory arms face competitors unconstrained by audit struggles. Accenture, which became independent of auditor Arthur Andersen in 2000, reported revenue of $51 billion last year, nearly double sales of EY Advisory.

Despite the tightening up of selling advice for client audits, the Big Four still face questions about the quality of their audits.

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“We feel we’ve invested in audit quality, but we still feel like we’re in the same place,” says someone with first-hand knowledge of EY’s plans.

The second factor, the person says, is that conflicts are becoming more difficult to manage as the Big Four push toward multi-year managed service contracts for large corporate groups, which they offer alongside tech companies through contractual alliances.

Auditing the technology provider, or even the private equity fund it’s investing in, could spark new conflicts and stifle the growth of the advisory arm in the rapidly expanding digital advisory market.

A partner at another Big Four says the problem is more pressing for EY as it dominates the Silicon Valley audit market, checking accounts for Amazon, Google, Oracle, Salesforce and Workday.

Under plans EY is developing, its business will be split into a partnership focused on auditing and a separately owned advisory operation involving most of the advisory and deal teams. Options under review include a Public listing or share sale In advisory, Goldman Sachs and JPMorgan have advised the 312,000-strong company, according to people familiar with the matter.

The audit business, which will remain as a partnership, retained the EY brand when the company sold its consulting practices to Cap Gemini for $11 billion in 2000 before rebuilding it from scratch. No business has been decided which will keep the EY brand this time around, says the person familiar with the plans.

In the last years , The Big Four Viewer Repeating the breakups of two decades ago, but implementing contingency planning in case regulators are forced to do so, according to senior accountants and consultants.

PwC considered options including an initial public offering of part of its business in 2019 but decided not to pursue a split in part due to cost and complexity, says a person familiar with the planning.

PwC and Deloitte said Friday that they are committed to maintaining their audit and advisory practices while KPMG has stopped doing so, saying the multidisciplinary model “brings a range of benefits.”

Separations will give clients a wider choice of advisors and auditors, by reducing the risk of conflicts of interest, but there is debate over whether large clients want this.

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“I don’t think the market wants a pure player,” says one senior reviewer at a mid-sized company. But a partner at another mid-tier company believes the rest of the Big Four will follow EY. “This will lead to a chain of events in which all professional services firms will urgently reconsider and evaluate their structures,” he adds.

split sale

For Di Sibio and EY’s global leaders, the decision to recommend a split into the company’s nearly 13,000 partners in the coming weeks will depend not only on the attractiveness of the split but on what forms of restructuring can be achieved.

“You can see the strategic gains but they are not necessarily achievable in practice,” says the person familiar with EY planning. “That’s what we’re trying to solve because if it doesn’t work, we won’t do it.”

The disintegration will require approval from hundreds of regulators globally and take years, say partners at other companies.

The most immediate challenge will be to win support in a vote by EY’s partners in different lines of business and countries, whose interests will be difficult to align.

Partners in other accounting groups say the main battlegrounds will include the relative ratings of the audit and advisory business, whether the audit partners believe their income will fall after splitting from the more profitable consulting practice and who will be held liable for lawsuits arising from EY’s alleged failure to raise red flags on Wirecard scams in Germany and NMC Health in the UK.

Liabilities arising from Wirecard audits and other legal claims were not a trigger for planning, says the person familiar with the conversations.

Auditors question whether an independent audit business is viable and can compete for employees without the promise of diverse career options.

The newly independent audit division will retain experts in other disciplines to assist with the audit work, say people briefed on EY’s planning.

In the meantime, there is a risk of instability. In a note to staff on Friday, Di Sibiu said talk of an overhaul “may be distracting” but asked them to stay focused.

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“They painted a big target on their back,” says one senior partner at a rival firm, predicting that any decision to split would encourage competitors to pounce on EY partners who fear a raw deal in the split.

“[We] They will go and try to find every decent partner they have who is necessarily unhappy with the process over the next 12 months and try to steal it,” he says.

There will be “a bit of forgetting” until the details are worked out but after that, EY’s offer to recruits will be clear, says the person familiar with its plans.

wave of deals?

An IPO will be more difficult than selling a stake to a private equity investor, say partners in many companies. A public listing might be “the most complicated deal in history, but if the money is big enough, it might [they can do it]’,” says a former partner at Big Four.

“I can’t see the IPO. That’s too Attractive private equity‘, says one of the UK’s partners in another company.

Private equity firms funded KPMG’s purchases, insolvency and restructuring practices in the UK for Deloitte last year while Clayton, Dobellier and Rice paid $2.2 billion for PricewaterhouseCoopers’ global mobility services business in a deal concluded in October.

The sale by EY could lead to more activity that mimics the major accounting firms’ sale of their consulting business more than two decades ago. The deals included the disposal of PricewaterhouseCoopers in its advisory division to IBM. KPMG Consultants were split between Bearing Point and Atos while EY sold to Cap Gemini.

The only dissenter was Deloitte, which continued to expand its consulting venture. The rest of the Big Four rebuilt their advisory arms but couldn’t catch up.

But Cherniawska believes there could be a first-mover advantage for EY this time around.

“Do you really want to be the last company to do this or would you rather be up front and take the lead?” she says.

“If I run [a firm] I would like to be at the front and in some way shape the agenda on which future changes take place, not waiting for a reaction.”

Rosario Tejeda
Rosario Tejeda
"Infuriatingly humble analyst. Bacon maven. Proud food specialist. Certified reader. Avid writer. Zombie advocate. Incurable problem solver."