Although sources claim that EY's plan to separate its auditing and consulting businesses may result in less scrutiny from international regulators, the brand identity may suffer.
Tax experts who are familiar with EY's plans to separate its auditing and consulting businesses say that as regulatory pressures subside following its restructure, the "big four" accounting firm may be permitted to approach clients who were previously off-limits.
Separating the operations is advised by consultants from both inside and outside of EY to help each one expand more quickly.
One senior tax leader at EY in Boston claims that "some data modeling shows that the full potential of the two businesses has been hindered by regulatory restrictions."
When EY's auditors are unable to question the management team of their corporate client because doing so might prevent consultants at the same company from obtaining more lucrative advisory work, a conflict of interest arises.
The tax leader continues, "the break-up avoids conflicts and reputational damage associated with failed audits."
Six of the top 10 Fortune 500 companies and 1,009 public companies are already audited by EY. Its consulting business would be able to approach audit clients like Amazon, Salesforce, and Google, which are currently off-limits due to a conflict of interest, thanks to the reorganization plan.
Regarding whether they would use paid advisory services from EY, Amazon and Google declined to comment.
The 'Project Everest' plan by EY, which began in November 2021 and is anticipated to be finished by 2023, would divide the company's larger auditing business and its faster-growing consulting business into two distinct entities.
Since Arthur Andersen's demise in 2002, Project Everest is the accounting industry's largest anticipated change in 20 years. While the consulting division of the company would become a publicly traded company, the audit division would continue to be a network of partnerships.
Following its distribution to EY executives in May, the plan was leaked due to dissatisfaction over partner pay, according to news reports from Bloomberg and Reuters. Below partner level directors and managers would only receive a pittance under the plan.
After the company's IPO, consulting partners at EY who currently make an average of $850,000 could increase their salaries by $2 million. According to news reports, senior partners could receive shares worth up to $8 million.
Following a leak of the information in May, EY's global chairman and CEO Carmine Di Sibio stated in a firm-wide statement that future partner compensation in some countries may be reduced depending on the success of those businesses.
“Profitability is very good in some countries but not in others, so partners might make less money going forward,” according to Di Sibio.
For more than $10 billion, the company intends to sell about 15% of its consulting business, reserve another 15% for employee equity incentives, and keep the remaining 70% for its partners.
The consulting division, NewCo, would generate 60% of EY's anticipated $42 billion in revenue in 2023. The final 40% would belong to the AssureCo audit division.
Investment banks JPMorgan and Goldman Sachs are advising EY on the sale of its consulting division.
As a result of UK regulatory pressure on the big four firms in 2019 to end conflicts of interest—which begin when auditors cannot question their client's management during an audit because doing so could result in the firm losing the same account for more lucrative consulting work—Project Everest was founded.
Conflicts of interest in 2022 have also been the subject of investigations by the US Securities and Exchange Commission (SEC) and other authorities. Despite tightening the sale of advice to clients, firms are still faced with concerns about audit quality.
It is unclear if the split business would ease the regulatory pressures that EY is already experiencing as a result of its subpar audit of the German payments company Wirecard. After acknowledging to German regulators that €1.9 billion ($2 billion) in cash likely never existed, Wirecard filed for insolvency in 2019.
Following a string of scandals, including Wirecard, the Big Four consultants are cautious about the reputational effects of the audits and advice they give to clients.
Project Everest would probably have an impact on how other businesses manage their audit practices' clients, talent, and regulatory pressures. The split may force the remaining Big Four to reorganize their business practices in order to reduce regulatory scrutiny when approaching current audit clients with consulting services that were previously forbidden.
The other big four firms will probably make or revisit their own plans to separate the audit and consulting divisions, according to Fiona Czerniawska, CEO of consulting sector analyst Source Global Research in London.
The length of time required surprises Czerniawska. "It’s becoming increasingly difficult for any accounting firm to offer a multidisciplinary service … I imagine that every firm is looking into restructuring too."
After a restructure, corporate clients would have access to more consultants because EY would be able to hire more specialists with cross-service training.
However, opinions on whether clients want an excess of big four advisers are divided. One head of tax at a Norwegian energy company that employs EY claims that the advice from the big four is occasionally ambiguous.
“They usually all offer the same advice and the number of caveats to their professional input is a turn off,” he says.
Due to Project Everest's potential for EY's entities to acquire other law firms with less scrutiny on rival firms, M&A activity in the legal sector may increase for compliance tools, talent, and clients. Building digital, data-analytics expertise is where the majority of deal-making in the tax market is concentrated.
The competition for senior talent in the consulting market could become even more fierce, according to Ed Moore, principal direct tax consultant at boutique recruitment firm Harvey John in the UK.
According to Moore, "the digitalisation of tax is becoming the new normal and the potential of technology is dependent on the ability of the humans behind it."
"This will drive competition for talent with well-established names in the market."
"However, it is not clear whether EY will be able to compete to attract talent when starting from scratch in building a brand name," he continues.
KPMG, PwC, and Deloitte, competitors of EY, thought about spinning off their consulting businesses as well but decided against it due to the high entry costs and difficulties for new market entrants. If they did not continue to operate under the umbrella brand, both of EY's split businesses would probably face fierce competition.
The Norwegian head of tax says, "It would be difficult for them to stand out without keeping the name."
EY is requesting permission from regulators, including the US SEC, to use the EY brand for the first few years; during that time, proposed new company names will be put on hold.
Its limited services may make it difficult for the standalone auditor to draw in new clients. According to consulting analysts, the firm may suffer if customers perceive it as primarily an auditor.
In light of the recent market downturn, which makes it challenging for EY professionals to meet challenging targets for revenue growth and profit margins, advisers say maintaining the brand is crucial. In a highly competitive market, hitting targets would require cost reductions and client share growth.
Consulting firms can sell their services, such as strategy or restructuring advice, to businesses by building a strong, well-known brand. This is crucial for EY's tax advisory services, which, according to public statements, are expected to generate close to a quarter of the company's $22.7 billion in annual revenue.
There will be more to finalize before the member firms of EY cast their votes on the proposals in July.
For instance, since tax would be regarded as a component of both the auditing and consulting divisions, it is still unclear how some departments, like tax, would be divided among the business.
The company will reveal in July whether it will move forward with the restructuring plan, but EY's global leadership would need the support of its partner network in 140 countries. The big four provider appears to have a busy summer ahead of them.
By fLEXI tEAM