EY plans global spin-off of auditing
Drastic reorganization of the Big Four: The wide-ranging overhaul would allow the company to avoid conflicts of interest with the consulting business, which weighs on the industry
EY is working on a spin-off of its global assurance and advisory business, the biggest reorganization of one of the top four accounting firms in two decades, according to three people familiar with the plans.
The proposal, which is still being finalized by EY's senior partners, is a bold attempt to avoid the conflicts of interest that have gripped the industry and prompted regulatory action from the UK to the US.
EY and the other Big Four accounting groups that dominate the industry globally - Deloitte, KPMG and PwC - have been heavily criticized for their perceived lack of independence in auditing company accounts, as they also receive fees for consulting, tax and business advisory services.
A voluntary split would be a significant shift in position from EY, whose former global boss Mark Weinberger slammed calls in 2018 for the Big Four to split up over concerns about a lack of competition.
The firms have rebuilt their consulting divisions after initially selling them after the collapse of US energy company Enron in 2001, which led to the demise of auditor Arthur Andersen and reduced the Big Five to the Big Four.
According to three people with knowledge of the matter, EY's senior partners have discussed their options for restructuring its global operations.
The plans call for an auditing-focused firm to be separated from the rest of the business, the people said. That firm would retain experts in areas like tax to help with company audits, one of the people said.
EY's surprise move will likely come under scrutiny from regulators, forcing its competitors to consider a similar move.
"We're all going to have to review our positions, but it's not going to be quick or rash," said a senior partner at another Big Four firm, adding that regulators' reactions would influence reactions from other groups.
A demerger of EY would result in two separate companies and would be a far bigger change than the more limited operational separation of the Big Four's UK audit and advisory functions agreed following the corporate scandals at retailer BHS and outsourcer Carillion.
The exact structure of the restructuring is under discussion, one of those involved said, and any restructuring would require partner coordination and broad approval from each national member firm that make up EY's global business. The potential split was first reported by Michael West Media.
Mergers and acquisitions within professional services companies are notoriously difficult to implement, due to the need to reach consensus between the various partners who own and manage the companies in each country.
EY, which employs 312,000 people in more than 150 countries, is structured as a network of legally separate national member firms that pay a fee each year for common branding, systems and technologies.
The company's executives are trying to come up with an exact structure that "works for everyone," said one of the employees.
The process could take "many months" and it's not yet certain that there will be a drastic restructuring, the person added, but conceded that the changes would be of great importance if decided.
"We want to lead the profession in a new direction," said the person. "We are aware that this will change the profession".
EY said: "Any significant changes would only be made in consultation with regulators and after approval by the EY partners. We are still in the early stages of this assessment and no decisions have yet been made."