Ernst & Young is reportedly mulling the idea of spinning off the auditing side of the firm to deal with growing pressure on the Big Four to avoid conflicts of interest with their consulting practices.
EY global chairman and CEO Carmine Di Sibio reportedly sent a memo last Thursday to the firm’s partners saying that stakeholders “are increasingly asking for greater independence and choice in a number of markets around the world,” according to The Wall Street Journal. The split would require approval from partners at the various EY member firms around the world as well as regulators. The proposal was first reported by Michael West Media.
The plan is still in its early stages, according to EY. “As the most globally integrated professional services organization, we regularly conduct scenario planning and review EY businesses on a global basis to determine that we have the optimal strategy, structure and footprint to focus on delivering high-quality audits and exceptional service to all clients across EY service lines,” the global firm said in a statement emailed to Accounting Today. “We routinely evaluate strategic options that may further strengthen EY businesses over the long-term. Any significant changes would only happen in consultation with regulators and after votes by EY partners. We are in the early stages of this evaluation, and no decisions have been made.”
The rest of the Big Four firms do not appear to be interested in following EY’s lead in possibly splitting off their audit practice, with PricewaterhouseCoopers, Deloitte and KPMG all saying they remain committed to their current business models, according to the WSJ. Under EY’s proposed plan, the consulting and some of the advisory and tax business would largely be spun off from the auditing practice, but the audit practice would still perform some nonaudit services in the tax and valuation area.
In 2002, amid the wave of accounting scandals, EY sold off its consulting practice to Cap Gemini for approximately $11 billion in cash and stock, but later rebuilt the practice, which now makes up much of its $40 billion in global revenue. PwC similarly sold off its consulting practice to IBM for $3.5 billion in 2002. KPMG spun off most of its KPMG Consulting practice and renamed it BearingPoint in 2000, then sold the parts left in the U.K. and the Netherlands to Atos Origin in 2002. Like EY, both PwC and KPMG later rebuilt their consulting practices. Deloitte continued to hold onto its consulting practice.
However, the Big Four have been under pressure to bolster the independence of their auditing practices, and leaders of all four firms in the U.S. have reportedly received letters from the Securities and Exchange Commission in recent months asking about possible conflicts of interest. In the U.K., where auditing violations at an EY client, the travel agency Thomas Cook, which collapsed in 2019, have been investigated by the Financial Reporting Council, the U.K. government announced Tuesday that it is overhauling the auditing regulator and replacing it with a new agency called the Audit, Reporting and Governance Authority, which will have more enforcement authority (see story).
EY has also faced criticism recently over its audits of clients in various countries that faced accounting scandals, including Wirecard in Germany, Luckin Coffee in China and NMC Health in the U.K.