Those who follow accountancy will have noticed the news that emerged at the end of last week that EY (or Ernst & Young, as it used to be called) has announced that it is to spin off its auditing arm as a separate entity and the consulting division is to go it alone.
Those with long memories will recall that they did this before. Twenty or so years ago the EY consulting arm was sold to Cap Gemini. EY then rebuilt an entirely new consulting arm, which is now to be split from audit, yet again. For this reason I take anything said on this issue with a large pinch of salt: the chance that the existing partners want to simply do some profit taking on capitalising the consulting firm is very high.
That said, the move is welcome, if genuine. The conflicts within the Big 4 auditors are apparent. They have to be resolved. So far there is no sign they will be within existing structures. That is why separation is welcome.
But I am cautious. First, EY is not one firm, but may be hundreds. The chance all will agree to this proposal is low.
Second, the likelihood that a pure audit firm will emerge is very low. It will just have less consulting, I suspect. But some ancillary services will remain, I am sure. In that case purists wanting pure audit activity should not celebrate now.
Third, unless the other firms follow there will be no real reform in the audit market. That will include on price, where the new firm might struggle to be viable as a result given the believed levels of cross subsidy assumed to be going on in these firms right now.
Fourth, call my cynical, but if this is all about ring-fencing risk for the consulting partners the loss of their capital base makes the failure of an audit firm much more likely.
Fifth, unless legislation stops these firms returning to consulting then they will.
My summary is that this is an interesting, high risk move probably motivated for all the wrong reasons with significant inherent risk in it as a result meaning it may be undeliverable by EY, and with no guarantee of success if they alone do it. In other words, regulation has to drive this process fir all firms simultaneously if it is to work as I doubt markets can deliver what EY is seeking to do.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
its a complicated situation but if any one of the big 4 can do it, its probably EY. You are right to say there are numerous firms/partnership globally but uniquely EY is “governed” by the US firm in many respects. There will no doubt be a partner vote (and what audit partner is going to vote for this…..unless there is a big payout for them) but I believe the US firm can probably force the split through in some way.
PwC and Deloitte partners do not have this overriding governance mechanic and therefore such a split would be much harder. I believe it is probably almost impossible for PwC to follow suit as they have an extremely large historical partner pension deficit which would need splitting across audit/non audit making one of the two sides not financially viable (which is why Kevin Ellis is telling everyone internally that they dont believe this is the right way forward !).
the need for “non-auditors” on the audit side is an interesting one – even with some sort of statutory audit body presumably you would need the same people so i cant really see how this is an impediment – although how anyone in the audit side is going to get compensated at market rates on a solely audit client base is very unclear !
you wont be surprised to hear that partners in the non-audit side are extremely keen for this to happen in order to remove the considerable shackles of audit independence (which is a real thing despite what many think)
incidentally your website comments section dosent work on iphones
Thanks
And I will look at the iPhone issue – but it does work for me….I moderate on my phone sometimes
Couldn’t respond the the story of fines being paid to the accountant body. It’s like my being defrauded, police investigate, get the money back and pay into a police benevolent. Similar i read for FCA .Downward spiral of stupidity under Johnson and cronies.
Agreed