How will EY's split shake up the sector?

London-based EY, the third-largest of the Big Four accounting firms, has said it is moving ahead with plans to break the firm into two companies. This will create an $18-billion revenue audit firm and a separate but larger and faster- growing $24 billion consulting arm.

The audit business will retain the EY name, while the advisory firm will don a new brand identity. 

The firm’s 13,000 partners across 140 countries, including 550 in India, will vote on the proposal later this year.

EY Global said leaders at its 15 largest member firms accounting for 80% of total revenues have unanimously supported the strategy. EY’s Greater China members have refused to come on board.  

If successful, the move would mark the biggest shake-up in the sector since the collapse of auditor Arthur Anderson in 2002 because of the Enron accounting scandal. It reduced the ‘Big Five’ to ‘Big Four’. 

Accenture, which was split off from Arthur Andersen and listed in 2001, is now worth $183 billion, up from $6 billion at the time of its IPO. 

A split of EY would result in multi-million dollar cash payouts to audit partners by the newly created consulting unit and share awards to consultant partners who move out.

Reports said the consulting business will go for an IPO, with plans to raise about $10 billion dollars by selling a 15% stake. It will reportedly borrow another $17 billion, much of which would be used to pay off the partners at EY’s traditional auditing business.

The breakup will ease pressure from regulators to avoid conflicts of interest arising from EY providing non-audit services to audit clients. 

EY’s Big Four rivals have also been facing the pressure to break up their audit and consulting practices.

Dinesh Kanabar, CEO, Dhruva Advisors LLP says regulators may push others to follow EY’s example. The likes of BCG and McKinsey will face stiffer competition. Tax compliance and advisory may face challenges. 

EY Global CEO Carmine di Sibio said The separation can bring in an additional $10 billion a year for the advisory business in consultancy fees from big tech companies, as the business will be freed from conflicts that bar it from winning work with EY’s large audit clients.
 

Mukesh Butani, Managing Partner, BMR Legal says EY's move will address conflict of interest. The split will allow raising of growth capital for non-audit arm. EY’s decision clearly has advantages, he believes. 

EY CEO Di Sibio said conflicts become harder to manage as firms get bigger. He believes, other Big Four firms like Deloitte, KMPG and PwC will have to split their businesses eventually.

However, the other three have refused to follow EY’s lead in breaking up their businesses and indicated continuity with their current business models of providing a mix of audit, tax, advisory, legal and other professional services under one roof.  

Once brought into effect, EY’s decision may lead to sweeping changes in the audit and advisory sectors. While it may prove to be a value-unlocking exercise for some, others may face enhanced competition. It remains to be seen whether the other Big Four firms will change their stance anytime soon or not.