EY intends to separate its advising and audit divisions. It claimed that it was taking these steps to ease regulatory worries about possible conflicts of interest. Will this inspire others to do the same?
The third-largest of the Big Four accounting firms, EY, with headquarters in London, has declared that plans to divide the company into two entities are moving forward. This will create a $24 billion consulting division and an audit firm with $18 billion in revenue each.
While the advice firm will sport a new brand identification, the audit division will continue to operate under the EY moniker.
Details about EY’s Global Split leave it out of the “Big 4:
Later this year, the idea will be put to a vote among the firm’s 13,000 partners, who are spread across 140 nations, including 550 in India.
Leaders at the 15 largest member companies, which account for 80% of overall revenues, have reportedly unanimously endorsed the plan, according to EY Global. Members of EY from Greater China have declined to join.
If successful, the initiative would represent the industry’s most significant shake-up since Arthur Anderson’s demise in 2002 due to the Enron accounting disaster. The “Big Five” were downgraded to the “Big Four.”
Accenture, which was separated from Arthur Andersen and listed in 2001, has grown in value from $6 billion to $183 billion since its initial public offering.
If EY were to split, the newly formed consulting unit would pay out millions of dollars in cash to audit partners and grant share awards to consultant partners who leave.
According to reports, the consultancy industry will file for an IPO with a goal of raising $10 billion by selling a 15% interest. According to reports, it will take out a further $17 billion in debt, most of which would go toward paying off the partners at EY’s core auditing business.
Regulators’ pressure to prevent conflicts of interest resulting from EY providing non-audit services to audit clients will be lessened by the separation.
The Big Four competitors of EY have also been under pressure to separate their audit and consultancy businesses.
According to Dinesh Kanabar, CEO of Dhruva Advisors LLP, regulators might pressure other companies to follow EY’s lead. There will be more competition for firms like BCG and McKinsey. Tax compliance and advice may encounter difficulties.
Separation, according to EY Global CEO Carmine di Sibio, can generate $10 billion more in consulting fees for the advising business each year from major tech firms since it will be freed from conflicts that prevent it from working with EY’s major audit clients.
EY’s approach, according to Mukesh Butani, Managing Partner at BMR Legal, will address the conflict of interest. The split will enable the non-audit arm to raise growth funding. He thinks there are advantages to EY’s choice.
According to EY CEO Di Sibio, managing conflicts gets more difficult as businesses grow. Other Big Four companies like Deloitte, KMPG, and PwC, in his opinion, will eventually need to divide their businesses.
The other three, on the other hand, have resisted EY’s example and kept up with their current business models, which include audit, tax, consulting, legal, and other professional services under one roof.
Once it is put into operation, EY’s choice might cause significant changes in the audit and advising industries. For some, it might be a value-unlocking activity, but it might also mean more competition for others. It is unclear whether the other Big Four companies will modify their position any time soon or not.