EY Keeps Tax Expertise In-House for Auditors By Scrapping Split

EY’s move not to split its audit and tax compliance practice from its consulting services will likely lead to higher-quality audits in the near term, relative to potential quality post-split, as their audit teams will have more tax experts available to them.

Considerable research supports that auditors benefit from knowledge spillover gains when they also provide tax services to their audit clients. As perceived or suspected audit failures have come under a microscope in the US and abroad, any action that could worsen quality also deserves scrutiny.

By keeping the tax experts in the combined firm, EY’s audit teams will continue to benefit from such arrangements by tapping those experts as needed.

The split seemingly failed over financials—partner payouts, pensions—and the allocation of tax experts between the legacy audit side and proposed new consulting company. Had the split been pushed through six or seven years ago, legacy EY might have covered the loss of tax talent by hiring more CPAs after the split.

Unfortunately for EY, the pipeline for CPAs has steadily declined since 2016, limiting their ability to quickly refill the talent gap that a split would have created. Their audit teams would have weakened as a result, even before we consider that the uncertainty surrounding the split was already creating poaching opportunities for the other Big Four firms. Presently, there isn’t a ready supply of ready-to-hire tax accountants even if EY planned to.

In business, success is quickly copied. It’s telling that shortly after EY announced the planned split, the remaining Big Four firms all publicly stated they wouldn’t follow EY’s approach. They recognized that their audit and tax compliance practices benefit from their consulting engagements and vice versa.

In an era of low unemployment, and declining CPA candidates and accounting students, combined firms also give employees opportunities to take their expertise and knowledge from one practice at the firm and move it into another, preventing brain drain. An EY split would have forced employees wanting a different career path at EY to leave the firm altogether.

The failed split is estimated to cost EY upwards of $100 million. But losing access to a large portion of their tax expertise could have ultimately cost their audit firm significantly more.

This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

Author Information

Jack Castonguay, PhD, CPA, is an assistant professor of accounting in the Zarb School of Business at Hofstra University and vice president of content development at KnowFully Learning Group.

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