Ernst & Young LLP is a tax-and-auditing giant coming off its most lucrative year in recent memory. Yet the firm is deep into the process of splitting its business—a decision that, if it comes to pass, could create initial upheaval for both remaining companies.
On the surface, the timing of the move seems odd. But last month’s announcement from EY’s top brass that it had made the decision to “separate into two distinct, multidisciplinary organizations” was only the latest signal that the financial sector, and perhaps business in general, is in the midst of a shift.
Twenty years after Arthur Andersen’s fall turned the Big Five into the Big Four, EY is voluntarily shedding its status as one of the world’s largest and most recognizable professional networks. Multibillion-dollar global conglomerates don’t make these decisions lightly. What was EY’s motivation, and how might it reflect the future of financial services?
Conflicts of Interest
EY’s most recent fiscal year, ending in June 2022, marked its highest growth in almost two decades, including a reported $11.3 billion tax service line that would make it the largest among the Big Four. Yet recent criticism and action against the firm’s auditing arm—including an unprecedented $100 million fine issued by the SEC stemming from a scandal involving employees cheating on ethics exams—has put EY on the defensive and prompted a closer internal examination of its compliance.
At least one characterization of EY’s split is described as a “protective measure” against potential conflicts of interest. That checks out given the current climate, but the reality is that every major accounting firm—including each of the Big Four—has built potential conflicts directly into their business models. And even the critic who likens a tax-and-auditing business to the fox watching over the henhouse must admit that the regulatory powers that be are, at the very least, tolerant of the arrangement. Clearly, there are other motivations.
Consulting is the Goal
The EY split is expected to lead to a windfall for some of the firm’s partners, which was reason enough for certain stakeholders to endorse the split. But for an organization encompassing 140 countries and requiring the sign-off of more than 10,000 partners, a one-time payout for a handful of leaders wouldn’t have created enough of a push to even nudge the firm toward a breakup.
Instead, EY sees an opportunity for long-term growth. In theory, an auditing firm can’t reliably maintain its independence (and therefore deliver on its prescribed duties) when also tied to consulting services. Because EY has seen its tax business flourish even as it has taken some heat for its behaviors on the auditing side, a move to separate the two makes sense logistically, especially amid growing scrutiny from regulators.
But it also appears to be a winner from a financial standpoint. The process of confirming a firm’s auditing independence from its tax services typically takes a month or more—a time period that, in today’s world, runs too great a risk of a prospect moving on to a competitor. A separation of services removes that step and, in the case of EY, should empower its auditing firm to land more business.
At the same time, it unshackles EY’s tax services business. Although the splitting process is expected to be complicated, the firm’s tax arm will be free to focus on a single vertical, sell prospects on that area of expertise and operate without concerns of conflicts of interest moving forward. And with the arrival of new bookkeeping technologies that allow accountants to spend less time poring over ledgers and more time strategizing and advising clients, the split allows EY to double down on lucrative consulting opportunities.
“We firmly believe,” as EY’s statement announcing the split read, “that we can embrace the changing landscape, build businesses that redefine the future of our professions, create exciting new opportunities and deliver greater long-term value for EY people, clients and communities.”
Opportunity for Financial Tech Companies
For now, the other members of the Big Four have shown no public interest in a separation of powers and, in some cases, have even panned EY for its split. But don’t be surprised if others soon join EY in establishing the independence of their tax and audit services. As governing bodies struggling to sort out the potential conflicts of the accounting giants continue to exert pressure, Deloitte LLP, KPMG LLP, and PricewaterhouseCoopers LLP may follow suit. Smaller firms that have yet to cement their brands in the public consciousness may be more reluctant to split but may decide that the associated growth opportunities are too great to ignore.
Ultimately, the biggest winner may be the financial technology organizations arming these professional services with the software to optimize their operations. Full-service tax-and-audit accounting firms are subject to certain tech restrictions based on the usual conflict-of-interest concerns. But separate tax consulting services, such as EY’s NewCo tax business, can bypass that checkpoint and onboard more quickly with new clients using emergent fintech software, which amplifies the powers of that organization across the board and supercharges growth.
The appeal of faster, more efficient business may be too much to pass up for the biggest accounting firms. If and when the remaining members of the Big Four acknowledge the opportunity, others are likely to follow. At that point, automated accounting, spend management, and other fintech software will no longer be a hot trend in the accounting space, but an indispensable tool of the trade.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Sid Saxena is the CEO and co-founder of Docyt, an accounting automation software platform. It’s a single system, which uses machine learning, to automate all financial workflows—both income and expense side—and provides real-time ledger reconciliation and financial statements.
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