Inside EY’s break-up plan: why it could radically reshape the Big Four
When EY’s global chief Carmine Di Sibio boarded the accounting firm’s private jet out of Davos in the early hours of Thursday morning, the Italian-American executive had already embarked on a more daring journey.
Sitting aboard EY One, as the Bombardier jet is known within the accounting firm, the auditor was steering a plan to break up the Big Four group that would reshape the oligopoly that has dominated professional services since their rival Arthur Andersen was brought down in 2002 by the collapse of US energy group Enron.
Di Sibio and his most senior colleagues are weighing 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 companies’ management to account and resisting pressure to sign off on numbers without proper evidence while their advisory colleagues prefer to keep clients sweet to generate fees in areas such as tax, deals and consulting.
“It surprises me that it’s taken this long,” says Fiona Czerniawska, chief executive of consulting sector analyst Source Global Research. “It’s becoming increasingly difficult for any accounting firm to offer a multidisciplinary service, which includes audit . . . I imagine that every other firm is looking into [restructuring] too. ”
Rationale for a break-up
For Big Four advisory practices, restrictions on working for audit clients are a drag on growth while investments in audit improvement have sapped capital investment from their consulting businesses.
“Most non-auditors would love to be free from the independence restrictions on what work we can do,” says one EY partner not involved in the restructuring planning.
Selling advice on digital consulting and M&A has helped drive the Big Four’s revenues to record levels but their advisory arms face competitors that are not constrained by audit conflicts. Accenture, which became independent from auditor Arthur Andersen in 2000, reported revenues of $51bn last year, almost double EY’s advisory sales.
Despite tightening the sale of advice to audit clients the Big Four still face questions over the quality of their audits.
“We feel we’ve been investing in audit quality but it still feels like we’re in the same place,” says a person with direct knowledge of EY’s plans.
A second factor, says the person, is that conflicts have become harder to manage as the Big Four push into multiyear managed service contracts for large corporate groups, which they deliver in tandem with tech companies through contractual alliances.
Auditing a tech provider, or even a private equity fund that invests in it, can throw up fresh conflicts and stifle the consulting arm’s growth in the rapidly expanding digital consulting market.
A partner at another Big Four firm says the problem is more pressing for EY because it dominates the Silicon Valley audit market, checking the accounts of Amazon, Google, Oracle, Salesforce and Workday.
Under the plans being drawn up by EY, its business would be split into an audit-focused partnership and a separately owned advisory operation encompassing most of its consulting and deals advice teams. The options under review include a public listing or the sale of a stake in the advisory business, with Goldman Sachs and JPMorgan advising the 312,000-person firm, according to people familiar with the matter.
The audit business, which would remain as a partnership, retained the EY brand when the firm sold its consulting practice to Cap Gemini for $11bn in 2000 before rebuilding it from scratch. It has not been decided which business would keep the EY brand this time, says the person with knowledge of the plans.
In recent years, the Big Four have opposed a repeat of the break-ups that took place two decades ago, but they have carried out contingency planning in case regulators were to force them to do so, according to senior accountants and consultants.
PwC considered options including an IPO of part of its business in 2019 but decided not to pursue a split partly because of the cost and complexity, says a person with knowledge of its planning.
PwC and Deloitte said on Friday they were committed to keeping their audit and advisory practices while KPMG stopped short of doing so, saying a multidisciplinary model “brings a range of benefits”.
Break-ups would give clients a wider choice of advisers and auditors, by reducing the risk of conflicts of interest but there is debate about whether big clients want this.
“I don’t believe the market wants a pure player,” says a senior auditor at a midsized firm. But a partner at a different mid-tier firm thinks the rest of the Big Four will follow EY’s…
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