Reports last week that EY was considering separating its audit and advisory businesses took the professional services industry by surprise, not to mention the staff and clients of the firm.
Big Four firms – the others are Deloitte, KPMG and PwC – are under increased regulatory scrutiny over the quality of their audits following major recent corporate collapses, while the rules around independence are tightening.
EY’s plan is in the early stages of gestation. According to the Financial Times, EY would be split into an audit-focused partnership and a separately owned advisory operation.
The options include a public listing or the sale of a stake in the advisory business, with Goldman Sachs and JPMorgan advising the firm. EY has been down this road before, selling its consulting practice to Cap Gemini for $11 billion in 2000 before rebuilding it from scratch.
Who would keep the EY brand? How would the value of the firm be assigned? Who would take on liability for lawsuits arising from EY’s alleged audit failures, like with Wirecard in Germany?
These details need to be worked out. The deal will also need the green light from its 13,000 partners worldwide (including just more than 100 in Ireland) and many regulators.
In Ireland, EY reported revenue of €393 million for the year to the end of June 2021, of which 34 per cent was related to statutory audits and another 5 per cent to non-audit work for audit clients. But 61 per cent was income from entities with no audit relationship with the firm. Consultants might be tempted to vote for a split to keep a larger slice of profits free of concerns about conflicts of interest.
In an interview with The Irish Times published in January, EY Ireland managing partner Frank O’Keeffe, who previously headed the audit practice, detailed the growth opportunities from moves into new areas such as tech consulting, sustainability, Parthenon (its global strategy arm), and law, as he seeks to roughly double Irish revenues to €660 million by 2025.
That growth plan might now be overtaken by events at global level and force O’Keeffe and his fellow partners to make a difficult career decision.
