Ernst & Young as a stand-alone audit firm is set to bolster its market share to become an even bigger member of the Big Four if partners approve a global breakup of the firm.
The accounting firm’s plan to spin off most of its consulting and tax business into a new company would give its remaining $20 billion audit business access to a list of companies it could not sell to before: its soon-to-be former consulting clients.
“They’re still going to be a dominant player,” said Tom Rodenhauser, managing partner with Kennedy Research Reports, which analyzes the consulting industry, of EY’s audit business.
US securities laws prohibit the cross-selling of certain advisory work to audit clients. The restrictions are meant to prevent financial conflicts that could weaken auditors’ ability to serve as a check on corporate management, and protect the interests of investors. The split aims, in part, to end those limitations, freeing both businesses to pursue clients without onerous independence checks and the regulatory risks that come with them.
Even short billions in consulting revenue, EY will continue to compete among the Big Four if it simply retains its current book of audit clients, said Daniel Aobdia, who teaches auditing at Penn State University. Adding to that book of clients would make “EY a bigger Big Four firm tomorrow than it is today,” he said.
In the US, EY dominates the audit market, grabbing nearly 16% of all public companies as clients, according to Audit Analytics data released in June. Deloitte comes in second behind EY with 13% of the market.
EY leaders said last week that it would ask partners to sign off on the restructuring plan later this year and aimed to finalize the breakup by the end of 2023. They expect both its consulting and audit businesses to grow after the separation.
EY Ripple Effect
If completed, EY’s audit and consulting divorce would ripple across the Big Four, said Isaac Heller, CEO of accounting tech company Trullion in a statement.
A newly spun-off consulting arm would eat into competitors’ revenues—threatening potentially billions in fees. “It will also give them a strategic advantage by allowing them to work with all 4 of the Big 4 audit clients— something neither PwC, Deloitte or KPMG can say,” Heller said.
Deloitte, KPMG, and PwC have said they have no plans to follow EY’s lead and consider their own reorganizations.
In a statement, KPMG said the combination of audit, tax, and advisory services it offers supports quality audits, innovation, and staff retention and recruitment. “We have no plan to sell-off the future of our organization to monetize the past,” the firm said. “We are clear that our integrated approach best serves our people, our clients, the economy and wider society,” the firm added, echoing similar remarks from Deloitte’s global CEO.
Still, EY’s reorganization could pressure its three competitors to reconsider those positions. Meanwhile, regulators will be watching closely to see whether a stand-alone audit firm can deliver more effective audits and whether the resulting businesses truly are separate and independent, said Brandon Gipper, an associate accounting professor at the Stanford Graduate School of Business.
EY leaders argue that the split will make it an easier to recruit consultants with more flexible compensation like owning stock in the new business. A more profitable audit firm should mean better compensation for auditors and other professional staff, which could help retain and attract professionals amid a shortage of accountants and rising wages.
Consulting too has struggled to attract and retain younger workers. Even large firms have a hard time holding onto staff amid today’s tight labor market, Rodenhauser said.
Senior staff, those who were close to joining EY’s partner ranks, may be the most likely to leave, either lured away by competitors or by the preference to work for a partnership—a model that dominates both the consulting and accounting markets.
Retaining clients will be among the risks that EY faces as it looks to break up its business in scores of countries around the world. “When you change business cards the big thing is: Are the relationships going to remain. Are you still going to be the trusted advisor?” Rodenhauser said.