EY Split-Up Plan Exposes Rift Among Accounting Firms

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Ernst & Young’s two rivals say they’re not going through with their idea of ​​splitting up the auditing and consulting businesses

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According to people familiar with the matter, under EY’s plan, the firm will wind up some of its tax and other advisory business as well as its fast-growing consulting business. People said the legacy audit firm will retain certain non-audit functions, including some tax and assessment services.

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A major benefit of potential divestment: a large increase in new clients that both consulting and auditing parties can comply with without conflict of interest rules, limiting the work firms can perform for audit clients, case by case Familiar people said. Similarly, it will give the consulting side more options than other companies to participate in the accounting firm’s technology business, the people said.

EY’s global president and chief executive Carmine Di Sibio told his firm’s partners on Thursday that the firm’s “stakeholders … The Wall Street Journal.

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The memorandum emphasized that the scheme is still in its initial stages. Any changes would require approval from partners in EY’s vast global network, where more than 300,000 people operate in about 140 countries. EY firms in each of those countries operate as separate legal entities, paying fees for branding, technology and intellectual property sharing. People familiar with the matter said that the partners in each of those 140-firms would have to approve the plan to move forward. The division would also need to be approved by regulators.

If EY goes ahead with closing its consulting arm – and the internal memo emphasizes that no decision has been taken – “no one should be surprised that the other [Big Four firm] Will follow,” said Lynn Turner, a former US Securities and Exchange Commission chief accountant. “Other firms will certainly explore it privately, even if they publicly say otherwise.”

The SEC and other regulators would need to approve any breakups. One concern is that an audit-only firm would be vulnerable to being brought down by litigation, the way former Big Five firm Arthur Andersen turned in 2002 in the wake of the Enron Corp accounting scandal.

EY has been the front-and-center of some of the biggest accounting blowups of the past few years. It was the auditor of the German payment processor Wirecard AG, which collapsed amid allegations of widespread fraud; Chinese coffee chain Luckin Coffee Inc., which admitted to rigging the sale, and UK hospital operator NMC Health plc and affiliate Finablr plc, which were found to have billions of dollars in undisclosed debt.

EY has maintained that it stands by its work and has high quality audit standards. A person familiar with the matter said EY is confident that a stand-alone audit business will be financially resilient, even when hit by the inevitable litigations that attract larger auditors.

Regulators around the world are investigating potential conflicts of interest at large accounting firms, including an investigation by the SEC. The agency fined EY$10 million last year for breaking independence rules in its search for a new client, a case the firm settled without accepting liability.

Despite regulatory pressures, the big four are all thriving, with global revenue rising to record levels last year. The consulting and other advisory business, rather than audit, is the biggest driver of that growth. According to data provider Monadoc Research LLC, between 2011 and 2021, the four firms increased their combined global revenue from consulting and tax work by 96%, far more than their 17% audit-fee increase over the same period.

EY’s plan has strong echoes of the early 2000s, when four of the then Big Five sold or split from their consulting units amid rising regulatory concerns over potential conflicts of interest. EY sold its consulting business to Cap Gemini Group SA of France in 2000.

The firms built up their internal consulting arm in subsequent years, arguing that the in-house expertise increased the quality of audits they could offer. Accounting academics said that logic is bound to be tested anew if EY decides to exit the multidisciplinary model.

Write to Jean Eaglesham at [email protected] and Mark Maurer at [email protected]

Credit: www.wsj.com /

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