Inside EY’s breakup plan: Why it could radically reshape the Big Four

When EY global chief Carmine Di Sibio boarded the accounting firm’s private jet in Davos in the early hours of Thursday morning, the Italian-American executive had already embarked on a bolder journey.

Sitting aboard EY One, as the Bombardier plane is called within the accounting firm, the auditor piloted a plan to dismantle the Big Four group that would reshape the oligopoly that has dominated professional services since the fall of their rival Arthur Andersen in 2002 by the collapse of the American energy group Enron.

Di Sibio and his more senior colleagues are assessing a historic separation of EY’s audit and advisory businesses after years of criticism over perceived conflicts of interest between the two. Auditors are tasked with holding company management to account and resisting pressure to sign off on numbers without proper evidence, while fellow advisers prefer to keep clients soft to generate fees in areas such as tax, transactions and advice.

“It surprises me that it’s taken this long,” says Fiona Czerniawska, managing director at consulting industry analyst Source Global Research. “It is becoming more and more difficult for any accounting firm to offer a multidisciplinary service, which includes auditing. . . I imagine that all the other companies are studying [restructuring] too. ”

Reason for a breakup

For Big Four consultancies, work restrictions for audit clients are holding back growth, while investments in improving auditing have undermined capital investment from their consultancy businesses.

“Most non-auditors would like to be freed from the independence restrictions on the work we can do,” says an EY partner not involved in restructuring planning.

Selling advice on digital consulting and mergers and acquisitions has helped push Big Four revenues to record highs, but their consulting arms face competitors that aren’t constrained by audit disputes. Accenture, which became independent from auditor Arthur Andersen in 2000, reported revenue of $51 billion last year, nearly double EY’s consulting sales.

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Despite the tightening of the sale of advice to audit clients, the Big Four still face questions about the quality of their audits.

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

A second factor, the person says, is that conflicts have become more difficult to manage as the Big Four push for multi-year managed services contracts for large enterprise groups, which they provide in tandem with technology companies by through contractual alliances.

Auditing a technology provider, or even a private equity fund that invests in it, can create new conflicts and stifle the growth of the consulting business in the booming digital consulting market.

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

Under plans drawn up by EY, its business would be split into an audit-focused partnership and a separately owned advisory operation encompassing most of its advisory and transaction advisory teams. Options under consideration include a public listing or selling a stake in the advisory business, with Goldman Sachs and JPMorgan advising the 312,000-person company, according to people familiar with the matter.

The audit business, which would remain in partnership, retained the EY brand when the firm sold its consultancy to Cap Gemini for $11 billion in 2000 before rebuilding it from the ground up. It has not been decided which company will keep the EY brand this time around, says the person familiar with the plans.

In recent years, the Big Four have opposed a repeat of the breakups that took place two decades ago, but have contingency planning in place in case regulators force them to do so, accountants say. and senior consultants.

PwC considered options including an IPO of part of its business in 2019, but decided against pursuing a spin-off partly because of cost and complexity, says a person with knowledge of its planning.

PwC and Deloitte said on Friday they were committed to retaining their audit and advisory practices while KPMG refrained from doing so, saying a multidisciplinary model “brings a range of benefits”.

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

“I don’t believe the market wants a pure player,” says a senior auditor at a midsize company. But a partner at another midsize company thinks the rest of the Big Four will follow EY’s lead. “This will trigger a series of events, during which all professional services firms will urgently reconsider and assess their structures,” he said.

Sell ​​the split

For Di Sibio and EY’s global leaders, the decision whether or not to recommend a spin-off to the firm’s nearly 13,000 associates in the coming weeks will rest not just on the lure of a breakup, but on the feasible forms of restructuring.

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

A breakup would require approval from hundreds of regulators around the world and would take years, according to partners at other companies.

The most immediate challenge would be to win the support of a vote from EY partners in different businesses and countries, whose interests will be difficult to align.

Partners from other accounting groups say the main battlegrounds would include the relative valuations of audit and advisory business, if audit partners believe their revenues would drop after divesting from the largest advisory practice. profitable and which would take responsibility for lawsuits stemming from EY’s alleged failure to raise red flags about fraud at Wirecard in Germany and NMC Health in the UK.

Liabilities arising from Wirecard audits and other legal claims have not been a driver for the planning, the person familiar with the talks said.

Auditors wonder if a stand-alone auditing business would be viable and could compete for recruits without the promise of varied career options.

The newly autonomous audit arm would retain experts in other disciplines to help with audit work, say people briefed on EY’s planning.

In the meantime, there is a risk of instability. In a memo to staff on Friday, Di Sibio said talking about an overhaul “could be distracting,” but asked them to stay focused.

‘They’ve painted a big target on their back,’ says a senior partner at a rival firm, who predicted any split decision would encourage rivals to rush for EY partners who fear a raw deal in the slicing .

“[We] are going to try to find all the decent partners they have that are necessarily unhappy with the process over the next 12 months and try to rob them,” he says.

There will be “a bit of a blur” until the details are worked out, but after that EY’s pitch to rookies will be clear, says the person with knowledge of his plans.

Vague deals?

An IPO would be harder to pull off than selling a stake to a private equity investor, say partners at several companies. A public listing would be “probably the most complicated transaction in history, but if the money is big enough, maybe [they can do it]“says a former partner of the Big Four.

“I don’t see an IPO. It’s very attractive for private equity,” says a UK partner at another firm.

Private equity firms funded the takeover of KPMG and Deloitte’s UK insolvency and restructuring practices last year, while Clayton, Dubilier & Rice paid $2.2 billion for the business of PwC’s global mobility services as part of an agreement reached in October.

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A sale by EY could lead to new business mimicking the sale by major accounting firms of their consulting business more than two decades ago. The deals included PwC’s divestiture of its consulting division to IBM. KPMG’s consultants were split between Bearing Point and Atos while EY sold to Cap Gemini.

The only holdout was Deloitte, which continued to expand its consulting business. The rest of the Big Four rebuilt their advisory arms but never managed to catch up.

But Czerniawska thinks EY can have the first-mover advantage this time around.

“Do you really want to be the last company to do it or do you prefer to be at the forefront to seize the initiative?” she says.

“If I ran [a firm] I would like to be at the forefront and somehow shape the agenda in which future changes will take place, without waiting to have to react.

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