EY Split-Up Plan Exposes Rift Among Accounting Firms

According to people familiar with the matter, Ernst & Young’s plan to potentially split its auditing and consulting businesses around the world, codenamed Project Everest, has been rejected by major rivals on Friday, who said they would keep their companies one piece.

Big Four firms KPMG and PricewaterhouseCoopers have issued statements defending their existing tax and advisory service delivery models along with simple audit work. PwC said it “has no plans to change course,” whatever rival companies do. Deloitte said it remains committed to its current business model.

Under EY’s plan, the company will develop its rapidly growing consulting business, along with several other tax and advisory businesses, according to people familiar with the matter. The legacy audit firm will retain certain non-audit work, including some tax and valuation services, these people said.

One big advantage of potential diversion: a huge increase in new clients that both consultants and auditors can pursue without violating conflict of interest rules that limit the work that firms can do. The company can do audits for clients, who are familiar with the matter said. Likewise, it will give the consultant more choice of other companies to partner with in the accounting firm’s technology business, the people added.

Carmine Di Sibio, EY’s global president and chief executive officer, told the company’s partners on Thursday that the company’s “stakeholders… are increasingly demanding more independence and choice.” in several markets around the world,” according to a copy of an internal memo seen by The Wall Street Journal.

The memo emphasizes that the plan is still in its early stages. Any changes will require approval from partners across EY’s vast global network, which employs more than 300,000 people in about 140 countries. EY companies in each of those countries operate as separate legal entities, paying a fee to share brands, technology, and intellectual property. The partners of each of those 140 companies will have to approve the plan for it to continue, people familiar with the matter said. The split will also need regulatory approval.

If EY is ahead in its consulting business — and the internal memo emphasizes that no decisions have been made — “no one should be surprised that a [Big Four firm] will follow,” said Lynn Turner, former chief accountant of the US Securities and Exchange Commission. “Other companies will certainly explore it privately even if they say otherwise publicly.”

The SEC and other regulators will need to approve any breakup. One concern is that an audit-only company is vulnerable to litigation, in the same way that former Big Five firm Arthur Andersen exposed in the wake of the Enron Corp accounting scandal. in 2002.

EY has been at the center of some of the biggest accounting booms of the past few years. It was the audit arm of German payment processor Wirecard AG, which collapsed amid widespread fraud allegations; Chinese coffee chain Luckin Coffee Inc., which admitted to selling fabricated goods, and British hospital operator NMC Health PLC and sister company Finablr PLC, which discovered billions of dollars in unpaid debt disclosure.

EY says it stands firm in its work and has high quality audit standards. EY is confident that an independent audit business will be financially resilient, even in the face of the inevitable lawsuits that major auditors attract, said a person familiar with the matter. this problem said.

Regulators around the world are stepping up their scrutiny of potential conflicts of interest at major accounting firms, including an SEC investigation. Last year, the agency fined $10 million for breaking independent rules for pursuing a new customer, in a case the company settled without admitting liability.

Despite regulatory pressures, the Big Four companies are all thriving, with last year’s global revenue rising to record levels. The consulting and other consulting business is the biggest driver of that growth, more than auditing. Between 2011 and 2021, the four companies increased their total global revenue from consulting and tax work by 96%, outstripping a 17% increase in audit fees over the same period, according to data provider Monadnock Research LLC.

EY’s plan resonated strongly in the early 2000s, when four of the Big Five at the time sold out or split from their consulting organizations amid growing regulatory concerns over conflict. potential conflict of interest. EY in 2000 sold its consulting business to Cap Gemini Group SA of France.

The companies built their own internal advisory systems in the years that followed, arguing that the internal expertise enhanced the quality of audits they were able to provide. Accounting scholars say that argument will be retested if EY decides to move away from the multidisciplinary model.

Write to Jean Eaglesham at Jean.Eaglesham@wsj.com and Mark Maurer at mark.maurer@wsj.com

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https://www.wsj.com/articles/ey-split-up-plan-exposes-rift-among-accounting-firms-11653669979?mod=rss_markets_main EY Split-Up Plan Exposes Rift Among Accounting Firms

Edmund DeMarche

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