EY’s radical break-up plan to split audit and advisory business to go ahead
EY’s plan to split their audit and advisory business has been confirmed by its leaders with voting due to begin at the end of this year on a country-by-country basis. EY’s chief executive, Carmine Di Sibio, suggests that due to the legal barriers of selling advisory services to audit clients, splitting the two has the potential of bringing in an additional $10bn a year in fees from big tech for their advisory arm. The FRC (Financial Reporting Council) has expressed its support for the split following the CEO, Sir John Thompson’s agreement with the largest accounting firms to autonomise their audit and advisory operations.
Chris Biggs, CEO and founder of accounting and consultancy company, Theta Global Advisors, highlights that other firms may also follow suit to reduce their financial liability following a string of legal claims regarding audit failure. The past year has seen record high fines in the UK and US for the big four firms following audit failures, conflicts of interest and cheated ethics exams. Published figures show that the FRC imposed a record £46.5m in fines upon auditors in 2021, with KPMG taking home the biggest fines totalling £21m, not including the £14.4m fine they received for the audits of their Carillion and Regenersis accounts earlier this year. In the US, securities regulator – S.E.C. – handed EY their largest penalty ever of $100m after it found hundreds of auditors had cheated on numerous obligatory ethics exams.
Big four firms are not only reducing their financial liability by separating the two arms, but it will also take away the negative spotlight for the advisory firms services – both in terms of human capital and for potential new clients. This will increase the firm’s attractiveness and help them in their continued efforts to attract the best talent.
The world of auditing has long been notorious for requiring staff to work long hours with few flexible or hybrid options being put on the table. Although most Big Four firms now offer a number of initiatives in relation to this, PwC recently reported that as a result of a negative spotlight being placed on the industry recently, their attrition levels for newly qualified auditors were 8% higher than in other areas of the business. Not only that, but just 15% of qualified auditors joining their firm were from the UK, demonstrating the difficulties Big Four firms are facing in terms of attracting and retaining talent.
Chris Biggs, CEO and founder of Theta Global Advisors, discusses what effect the proposed move will have on the industry: “It doesn’t come as a surprise to me to see that some firms are looking to split their audit and advisory arms. Auditing can be seen at times as being a riskier side of the business, especially in light of the fines and scandals in recent years. This not only affects the general image of a company, but also their ability to attract and retain talent that can be put off by negative headlines. Then, there is also the financial aspect too as currently Big Four firms have to turn down a lot of business due to conflicts of interest – being unable to advise and audit the same client. So, by splitting up these arms, EY has said it has the potential to bring in an extra $10bn in fees.
“However, one has to wonder whether the splitting up of auditing and advisory services will end up having a negative effect on the industry as a whole. If all of the top talent from these firms leave the auditing side of the business in search of better pay and less risk in the auditing arm, this could affect the quality of audits across the board. EY’s plan requires the approval of regulators around the world, including the UK’s Financial Reporting Council, but Sir Jon Thompson asserted back in July that overall, it would bring tangible benefits to the industry, so it appears it will go ahead as planned.”
