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Inside EY’s break-up plan: why it can radically reshape the big four

When EY’s global chief Carmine Di Sibio boarded the accounting firm’s private jet out of Davos early Thursday morning, the Italian-American director had already embarked on a more daring voyage.

Sitting on board the EY One, as the Bombardier jet is known in the accounting firm, the auditor led a plan to break up the Big Four group that would transform the oligopoly that has dominated professional services since their rival Arthur Andersen was overthrown in 2002 by the collapse of the US the energy group Enron.

Di Sibio and his most senior colleagues are considering a historic separation of EY̵[ads1]7;s auditing and consulting activities after years of criticism of alleged conflicts of interest between the two. Auditors are tasked with holding companies’ management accountable and resisting pressure to sign figures without proper proof, while their advisory colleagues prefer to keep clients sweet to generate fees in areas such as taxes, agreements and consulting.

“It surprises me that it has taken so long,” said Fiona Czerniawska, CEO of consulting sector analyst Source Global Research. “It is becoming increasingly difficult for any accounting firm to offer an interdisciplinary service, which includes auditing. . . I imagine that all other companies are looking more closely [restructuring] also. ”

Grounds for a breach

For Big Four consulting practices, restrictions on working for audit clients are an obstacle to growth, while investments in audit improvement have lost capital investment from their consulting firms.

“Most non-auditors would love to be free from the restrictions of independence of what we can do,” says an EY partner not involved in restructuring planning.

Sales advice on digital consulting and M&A have helped drive the four stores’ revenues to record levels, but their advisory arms face competitors that are not limited by audit conflicts. Accenture, which became independent from auditor Arthur Andersen in 2000, reported revenues of $ 51 billion last year, almost double EY’s consulting sales.

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Despite tightening sales advice to audit clients, the big four still face questions about the quality of their audits.

“We feel that we have invested in audit quality, but it still feels like we are in the same place,” says a person with direct knowledge of EY’s plans.

Another factor, the person says, is that conflicts have become more difficult to deal with as the big four push into multi-year managed service contracts for large corporate groups, which they deliver together with technology companies through contractual alliances.

Auditing a technology provider, or even a private equity fund investing in it, can create new conflicts and stifle the consulting arm’s growth in the fast-growing digital consulting market.

A partner in another Big Four company says the problem is more pressing for EY because it dominates the auditing market in Silicon Valley, and checks the accounts of Amazon, Google, Oracle, Salesforce and Workday.

In accordance with the plans prepared by EY, the business will be divided into an audit-focused partnership and a separately owned consulting business that includes most of the consulting and contract consulting teams. The options being considered include a public listing or sale of a stake in the consulting business, with Goldman Sachs and JPMorgan advising the firm with 312,000 people, according to people familiar with the matter.

The auditing business, which would remain a partnership, retained the EY brand when the company sold its consulting firm to Cap Gemini for $ 11 billion in 2000 before rebuilding it from scratch. It has not been decided which company will keep the EY mark this time, says the person who knows the plans.

In recent years, the big four have opposed a repeat of the breaches that took place two decades ago, but they have carried out contingency planning in case regulators should force them to do so, according to senior accountants and consultants.

PwC considered alternatives including a listing of parts of the business in 2019, but decided not to pursue a split in part due to the cost and complexity, says a person with knowledge of the planning.

PwC and Deloitte said on Friday that they were committed to maintaining the audit and consulting practice while KPMG stopped doing so, saying that an interdisciplinary model “brings a number of benefits”.

Cohabitation breaks will give customers a wider range of advisers and auditors, by reducing the risk of conflicts of interest, but there is debate as to whether large customers want this.

“I do not think the market wants a pure player,” says a senior accountant at a medium-sized firm. But a partner in another middle-class company thinks the rest of the big four will follow EY’s management. “This will trigger a series of incidents, where all professional service companies will quickly re-evaluate and evaluate their structures,” he says.

Selling split

For Di Sibio and EY’s global executives, the decision on whether to recommend a split to the firm’s nearly 13,000 partners in the coming weeks will not only depend on the attraction of a breakup, but on what forms of restructuring can be delivered.

“You can see the strategic gains, but they are not necessarily practical,” says the person with knowledge of EY’s planning. “That’s what we’re trying to figure out, because if it does not work, we will not do it.”

A break-up will require approval from hundreds of regulators globally and will take years, say partners in other companies.

The more immediate challenge would be to win support in a poll from EY partners in different business areas and countries, whose interests will be difficult to coordinate.

Partners at other accounting groups say important battlefields will include the relative valuations of the auditing and advisory services, whether the auditing partners believe their revenues will fall after splitting from the more profitable consulting practices and who will take responsibility for lawsuits arising from EYs alleged failure. to raise red flags about fraud at Wirecard in Germany and NMC Health in the UK.

Obligations as a result of the Wirecard audits and other legal requirements were not a driving force for the planning, says the person with knowledge of the conversations.

Auditors question whether an independent auditing firm would be viable and be able to compete for recruits without the promise of varied career opportunities.

The newly autonomous audit arm would retain experts in other disciplines to help with audit work, say people who informed about EY’s planning.

In the meantime, there is a danger of instability. In a note to employees on Friday, Di Sibio said that talking about an overhaul “can be distracting”, but asked them to stay focused.

“They have painted a big goal on their backs,” said a senior partner at a rival company, who predicted that any decision to split would encourage competitors to search for EY partners who fear a crude deal in the split.

“[We] will go and try to find every single decent partner they have who is necessarily dissatisfied with the process over the next 12 months and try to steal them, he says.

It will be “a little limbo” until the details are stepped out, but after that EY’s proposal for recruits will be ready, says the person with knowledge of the plans.

Waves deals?

An IPO will be more difficult to complete than selling a stake to a private equity investor, say partners in several companies. A public listing would be “probably the most complicated deal in history, but if the money is big enough, perhaps [they can do it]says a former Big Four partner.

“I do not see a listing. This is very attractive for private equity,” said a British partner in another firm.

Private equity firms funded acquisitions of KPMG and Deloitte’s UK insolvency and restructuring practices last year, while Clayton, Dubilier & Rice paid $ 2.2 billion for PwC’s global mobility services business in an agreement reached in October.

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A sale from EY could lead to further activity that mimics the large accounting firms’ sale of their consulting businesses more than two decades ago. The agreements included PwC’s divestment of its consulting department to IBM. KPMG’s consultants were split between Bearing Point and Atos while EY sold to Cap Gemini.

The only wait was Deloitte, which continued to expand its consulting business. The rest of the big four built up their advisory arms, but never managed to catch up.

But Czerniawska thinks it could be a first-mover advantage for EY this time around.

“Do you really want to be the last company to do this, or do you prefer to be at the forefront and take the initiative?” she says.

“If I ran [a firm] I want to be at the forefront and somehow shape the agenda where future changes take place, not wait to have to react. “

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