EY Plan to Split Audit, Consulting Shifts Into Next Phase

Now comes the hard part for Ernst & Young.

Three months after EY disclosed that it would break up its audit and consulting arms, the global accounting firm is expected to move ahead with its restructuring as soon as this week and begin seeking support from partners and regulators.

As it does, clients, investors, and competitors will be watching for details on how the firm will disentangle its businesses and what it means for reliable financial reporting. Up to now, EY has only given a broad brush description of its plans.

A split could allow both EY’s audit and consulting practices to reach new clients once free from strict limits on the types of advisory work that firms can provide to their audit clients. With conflicts removed, regulators will be watching whether the breakup would help or hurt the quality of EY’s auditing.

“Is there going to be a material difference between the performance of a separate EY audit business versus the other big three assuming they stay integrated?,” said Martin White, principal consultant with Source Global Research, which tracks the consulting industry. If audit quality improves, he said, “then you can imagine the pressure put on other firms to then split.”

As EY’s top global leaders finalize specifics of any deal, the next step would be to put it to a vote before thousands of global partners likely this fall and into the winter. The Wall Street Journal previously reported that a decision on whether the firm would move forward with its plans was likely coming in a few days.

An EY spokeswoman earlier this week said that discussions were ongoing but declined to comment further on deliberations.

The firm previously said that global leaders were looking at options to drive value for both staff and clients and to maintain effective auditing. Nearly two-thirds of the firm would be bundled into a new company through a $10 billion to $12 billion equity deal. Fifteen percent of the equity would be available for staff incentives and the remainder for other investors.

Unanswered Questions

Which services would join a new company and which would remain with a stand-alone audit firm remains an open question. It’s not clear if the audit practice, for example, would include other types of assurance services, such as testing greenhouse gas emission reporting—a potential new revenue-generator for firms.

Would auditors hire out their former consulting colleagues to help with the routine audit work like goodwill valuations, said Sandy Peters, a former audit partner who now oversees global advocacy for the CFA Institute.

“There are synergies from and benefits from the firm having specialists in some of these other areas,” Peters said. “I’m concerned about the expertise that’s needed that’s beyond just accounting and auditing and I’m worried about brain drain.”

That expertise comes at a cost and her organization has long supported more disclosure about how profitable firms’ audit practices are, not just how much they earn in fees. EY in 2021 earned $13.6 billion in fees globally from its audit practice compared to $15.9 billion from its consulting work, including strategy and transaction services.

The firm will likely have to answer those lingering questions about its profitability to convince investors to buy-in into a consulting-only company. Long term it could be a smart move, allowing the consulting business to grow once clear from conflict of interest rules, said Kevin McCarty, CEO of technology consulting firm West Monroe.

McCarty said he hopes that EY can successfully restructure the $40 billion revenue firm because it could level the playing field for the rest of the advisory industry.

The Big Four firms, through their audit and tax services, are trusted by corporate executives and are often the first to get the call when those businesses need help. Those lucrative connections will fade once the firm separates its audit practice from its fast-growing consulting arm, he said.

“Does the long-term value of that play, that strategy, does it outweigh the incumbency status and the occasional independence conflicts that you get mired in,” he said of the firm’s likely restructuring. “That’s the big gamble.”