Ernst & Young’s unraveling plan: Why it could fundamentally reshape the Big Four

When Ernst & Young global president Carmine Di Sibio boarded the accounting firm’s private jet to leave Davos in the early hours of Thursday, the Italian-American executive had already embarked on a bolder footstep. journey of.

sitting on a boat Ernst & Young One, Bombardier jets are well known within accounting firms and auditors are coaching The plan to break the Big Four This will reshape oligopoly dominant profession Ever since their rival Arthur Andersen collapsed in 2002 with the collapse of US energy group Enron.

Di Sibio and his most senior colleagues are weighing the historic separation of Ernst & Young’s auditing and consulting businesses after years of criticism over the conflict of interest between the two. Auditors are tasked with holding company management accountable and resisting pressure to sign off on numbers without proper evidence, while their advisory colleagues prefer to keep clients sweet to incur fees in areas like taxation, transactions and consulting.

“I’m surprised it took so long,” said Fiona Czerniawska, chief executive of consulting industry analyst Source Global Research. “It’s getting harder and harder for any accounting firm to provide a multidisciplinary service, including audit. . . . I think every other company is looking into it [restructuring] also. “

Reason for breaking up

For the Big Four consulting businesses, restrictions on working for audit clients have weighed on growth, while investments in audit improvements have dented capital investments in their consulting businesses.

“Most non-auditors want to not be limited by the independence of what we can do,” said an Ernst & Young partner who was not involved in the restructuring plan.

Sales of digital consulting and M&A advice helped propel the Big Four’s revenue to record levels, but their consulting arm faces rivals unencumbered by audit conflicts. Accenture, which became independent of auditor Arthur Andersen in 2000, reported $51 billion in revenue last year, nearly double Ernst & Young’s sales.

The Big Four are still facing questions about the quality of their audits despite tightened sales of advice to audit clients.

“We feel like we’ve been investing in audit quality, but it still feels like we’re in the same place,” said a person with direct knowledge of EY’s plans.

The second factor, the person said, is that these conflicts have become more difficult to manage as the Big Four sign multi-year managed services contracts for large conglomerates, which are delivered in tandem with tech companies through contract alliances.

The audit technology provider, or even the private equity funds that invest in it, could spark new conflicts and stifle the growth of the consulting sector in the rapidly expanding digital consulting market.

A partner at another Big Four firm said EY’s problems were more pressing because it dominates the Silicon Valley audit market, examining accounts at Amazon, Google, Oracle, Salesforce and Workday.

According to plans set out by Ernst & Young, its business will be divided into an audit-focused partnership and an independently owned advisory business, comprising most of its advisory and transaction advisory teams.Options under review include Public listing or sale of shares On the advisory side, Goldman Sachs and JPMorgan Chase & Co. advise the 312,000-employee firm, according to people familiar with the matter.

In 2000, the firm sold its consulting business to Cap Gemini for $11 billion and then rebuilt from the ground up, with the auditing business continuing as a partnership retaining the EY brand. No decision has been made on which company will retain the Ernst & Young brand, the people said.

In recent years, Big Four against It’s a repeat of the breakup that happened 20 years ago, but they have contingency plans in place in case regulators force them to do so, according to senior accountants and advisers.

PwC considered various options, including an initial public offering of parts of its business in 2019, but decided against a split partly because of cost and complexity, a person familiar with its plans said. .

PwC and Deloitte said on Friday they were committed to keeping the audit and consulting business in place, while KPMG did not, saying the multidisciplinary model “brings a range of benefits”.

By reducing the risk of conflicts of interest, the spin-off will provide clients with a wider choice of advisers and auditors, but there is debate over whether large clients want to do so.

“I don’t believe the market needs a pure player,” said a senior auditor for a mid-sized company. But a partner at another midsize firm believes the rest of the Big Four will follow EY. “This will set off a chain of events where all professional services firms will urgently reconsider and assess their structures,” he said.

sell split

For Di Sibio and Ernst & Young’s global leaders, the decision on whether to recommend a split to the firm’s nearly 13,000 partners in the coming weeks will depend not only on the attractiveness of the split, but also on the form of restructuring that can be delivered.

“You can see a strategic victory, but it doesn’t necessarily come true,” said a person familiar with Ernst & Young’s plans. “That’s what we’re working on, because if it doesn’t work, we’re not going to do it.”

Partners at other companies said the split would require approvals from hundreds of regulators around the world and would take years.

A more pressing challenge will be to win the votes of EY partners across business lines and countries, whose interests will struggle to align.

Partners in other accounting groups say key battlegrounds will include the relative valuation of audit and consulting businesses, whether audit partners believe their revenue will decline after they are separated from the more lucrative consulting business, and by Ernst & Young. Who is liable in lawsuits arising from the alleged failures warns of fraud by Germany’s Wirecard and UK’s NMC Health.

Liability arising from the Wirecard audit and other legal claims was not the driver of the plan, the people said.

Auditors have questioned whether an independent auditing practice is viable and can compete for new hires without a commitment to offering multiple career options.

People familiar with Ernst & Young’s plans say the new independent audit unit will hire experts from other disciplines to help with the audit.

At the same time, there is a risk of instability. In a note to employees on Friday, DiScibio said talking about the overhaul “could be distracting,” but asked them to stay focused.

“They paint a great goal behind the scenes,” said a senior partner at a rival firm, predicting that any breakup decision would encourage rivals to snap up EY partners for fear of getting the original deal in the carve.

“[We] They’re going to go and try to find every decent partner they have, and they must be unhappy with the process for the next 12 months and try to steal them,” he said.

People familiar with EY’s plans said there would be “some uncertainty” until the details were hammered out, but after that, EY’s pitch to new hires would be clear.

A wave of discounts?

Partners at several firms said an IPO would be harder than selling shares to private equity investors.A public listing would “probably be the most complex deal in history, but if the money is big enough, maybe [they can do it],” said a former Big Four partner.

“I don’t see an IPO. It’s very Attractive to private equity,” said the UK partner of another firm.

Private equity firms last year funded the takeover of KPMG and Deloitte’s insolvency and restructuring businesses in the UK, while Clayton, Dubilier & Rice paid $2.2 billion In a deal closed in October, PwC’s global mobility services business.

An Ernst & Young sale could spark more activity, mirroring the sell-off of its consulting business by the big accounting firms more than two decades ago. The deals include PricewaterhouseCoopers selling its consulting arm to IBM. KPMG advisors were split between BearingPoint and Atos, while Ernst & Young sold to Cap Gemini.

The only holdout is Deloitte, which continues to expand its consulting business. The rest of the Big Four rebuilt their consulting divisions but never caught up.

But Czerniawska thinks EY may have a first-mover advantage this time around.

“Do you really want to be the last company to do this, or would you rather be on the front lines and get ahead?” she said.

“If I’m running [a firm] Rather than waiting to have to react, I want to be up front and somehow shape the agenda for future changes. “

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