EY’s radical plan to break itself up risks stripping its audit business of the expertise needed to vet the complex accounts of the world’s largest multinationals, industry executives have warned.
Partners at the Big Four firm, including the 120 in the Republic, will start voting in November on EY’s proposal to spin off and publicly list its advisory business, a move its leaders say will drive growth by eliminating conflicts of interest.
But EY and its Big Four rivals — Deloitte, KPMG and PwC — rely on their advisory arms to provide the expertise in tax and asset valuation often needed to sign off on companies’ accounts.
“The [audit and consulting] skills are complementary,” said Sandy Peters, senior head of global advocacy at the CFA Institute, the professional body for the investment industry and an opponent of splitting up the Big Four during deliberations by the UK competition regulator in 2019.
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Regulators, who will have to rubber stamp the demerger, and companies should be asking how EY would replace the experts needed to carry out quality audits, said Ms Peters, a former partner at KPMG. “There’s $5 trillion (€5 trillion) of goodwill on the books of US public companies that needs to be impairment tested. Are those skills all staying on the audit side?”
A break-up by EY will mark the biggest change to the accounting industry in two decades, but Deloitte, KPMG and PwC have so far stood by their model of combining audit and consulting operations. KPMG has said that model “drives innovation and the highest quality standards” across its entire business, including audit.
Some of EY’s competitors questioned whether a newly-separated audit firm could attract the tax and valuation experts needed to check the books of large companies because the top earners would want to remain in the advisory business where the financial rewards are higher.
“Anyone who sits there saying ‘you can have an audit-only firm with a few tax experts in it and that’s brilliant for audit quality’ [has] completely missed the point,” said a senior partner at another Big Four firm.
There are very few tax experts capable of working on the most complex corporate accounts and an audit-dominated firm would struggle to pay enough to retain them, he added.
EY’s new audit-dominated business would include teams that generated revenues of $20bn last year, a figure the firm predicts will grow by 7 per cent to 8 per cent annually following the split.
[ EY’s Irish partners to vote on global split of audit and consultingOpens in new window ]
But like competitors, EY is struggling to hire enough auditors to meet demand in several countries, with some blaming increased regulatory scrutiny and lower pay than at law firms or investment banks. As a result, EY’s newly independent audit business would have to rely on selling more advisory services to meet its growth targets, said a person familiar with the matter.
Under the planned split, the separate advisory business would begin with revenues of $25 billion and ebitda of $4.4 billion, according to figures shared with partners last week.
EY has said the new audit business will have the skills needed to carry out work on the complex accounts of large companies. The firm’s current audit business will account for almost two-thirds of the standalone group, with the rest being advisers, some of whom would help on audits, EY told partners last week.
Just 14 per cent of the new audit business would be tax services, 7 per cent accounting advisory and 6 per cent tech risk consulting, EY told partners. Valuation, actuarial, forensic accounting and financial risk experts would be retained at the company to support audit work and would each make up 1-2 per cent of the business.
Despite doubts within the industry, a new survey by consulting sector analyst Source Global Research suggests that a majority of executives at large companies will be more likely to hire both EY’s audit and advisory divisions if the split happens.
As many as 62 per cent of executives at US and UK companies would be “more likely” to hire EY as auditor following a separation, with only 6 per cent saying they would be less inclined to. ― Copyright The Financial Times Limited 2022
