20.3 C
New York
Tuesday, May 30, 2023

Buy now


After all, why EY and its rivals may end up breaking up

“Whowever said Don’t question things? We say question everything. ” The TV commercial started Ernst & Young Airing during the 2021 Super Bowl, a sports extravaganza known for its expensive commercials and their hiatus of American football. On April 11, the professional services giant decided to indefinitely postpone plans to separate its audit and consulting businesses after too much skepticism from its US arm. A big sticking point is the tax practice sector, which auditors and consultants alike covet. With low interest rates and frothy stock prices, the plan to take the consulting business public and take on debt to repay audit partners also looked smarter when the deal was conceived in 2021.

Hear this story.
Enjoy more audio and podcasts iOS or android.

Your browser does not support

This suspension is a huge blow Ernst & YoungGlobal bosses underestimated the significance of the difficult climb “Project Everest” (unfortunately codenamed Breakup Project) proved.arrive Ernst & YoungFighting against splintered professional services rivals in the so-called “Big Four,” Deloitte, KPMG and PwC, which looks like rehabilitating. Deloitte Global CEO Joe Ucuzoglu insists that a “multidisciplinary approach” is “foundational” to his company’s success.bill thomas, his opponent number KPMG, said his firm’s decision in the early 2000s to list its consulting arm (since redeveloped) was “the wrong thing to do”.Bob Moritz, who leads PwCinsisting on keeping the business together is at the heart of his company’s ability to recruit and retain talent.

However, the arguments against turning the Big Four into a Big Eight are far from open and closed. This is because the business logic of splitting is becoming more and more compelling. At stake is the future of one of the business world’s most pivotal oligopolies.

The Big Four are the heavyweight champions of professional services.They dominate the audit market – check the books of 493 companies in the US small&P 500 index and a large percentage of European blue chips. They also provide clients with a one-stop shop, advising on issues ranging from dealmaking to digitization. Together, they employed 1.4 million people and generated $190 billion in expenses as of last year, up from $134 billion in 2017 (see Figure 1). KPMGThe smallest of the four giants, its revenue is three times that of strategic consulting giant McKinsey.

The driving force behind the Big Four’s growth in recent years has been the rapid expansion of their consulting business, which now accounts for half of their total revenue (see Figure 2). early 2000s Ernst & Young, KPMG and PwC All firms divested or sold their consulting arms in response to new conflict-of-interest regulations that prohibited them from selling advice to audit clients. (Deloitte planned but later abandoned a spinoff.) However, with little room to expand in the audit business, the giants were quickly drawn back to the fast-growing consulting business.

The restructuring has paid off in many ways. The opportunity to venture into different service areas has helped the Big Four attract the bright and talented young people their businesses depend on.Laura Empson, a former board member at the Bayesian Business School in London, has observed that a career in computing beans looks more attractive if there is an opportunity to work on large acquisitions or advise governments on important matters KPMGUK branch.

The breadth of the Big Four also helps them win customers.Expertise in areas such as taxation and valuation helps KPMG Others have cemented their status as auditors of choice for large companies, Mr Thomas said. At the same time, a well-known audit brand has boosted the reputation of the firm’s consulting arm.

According to Mr Moritz, the multidisciplinary model can also help PwC and other professional services giants adapt to the digital age. Software and data now underpin nearly every service a company provides. Auditors benefit from the know-how of consultants, and consultants benefit from a steady demand for audit work, funding investments even in downturns.

All of this explains why some people balk at the idea of ​​separation.The company operates a franchise-like structure with separate partnerships in each country, which also makes major transitions like breaking up difficult – because Ernst & Young Found in the US.

However, the case for staying united is weakening as the Big Four’s business shifts to consulting.Auditor independence rules have gone from inconvenience to drag; a nuisance Ernst & YoungIt can’t work with the software companies it audits, such as Salesforce, to help them market their technology to customers. New requirements in Europe and elsewhere for companies to rotate auditors, typically every ten years, have increased conflict among audit and consulting partners over who will serve large clients.

At the same time, the influence of audits internally has been steadily declining, Ms Empson said.Sarah Rapson, Associate Director RC, Britain’s audit watchdog is concerned that companies are no longer fostering the “culture of doubt and challenge” on which audits rely. These problems manifested in a series of well-publicized audit messes. March 31 APASGermany’s accounting regulator, prohibits Ernst & YoungThe German arm of the company was banned from accepting new publicly traded audit clients for two years after it failed to spot a hoax by Wirecard, the fintech darling-turned-fraud.last year KPMG Fined £14 million ($18 million) RC Provided misleading information in the review of two audits of the company. Deloitte fined £15m ($19m) by UK government in 2020 RC The same is true for audit failures.

These audit lapses have tarnished the association’s advisers. They could also lead to more pressure on regulators to invest more in audits, especially in fraud detection. At the same time, consultants have a growing need for capital — they want to expand into managed services, running functions such as compliance, payroll and cybersecurity on behalf of clients, and they need new technology to do so. A spin-off of the consulting business would keep auditors cash-rich, while allowing consultants to enrich themselves with new equity from outside the partnership.

Staying together may no longer be conducive to attracting talent, either. The big four banks are offering more and more specialized skills, and there are fewer and fewer opportunities for entry-level staff to dabble in different tasks. Few bosses want cybersecurity advice from fresh-faced accountants.

Deloitte’s Mr Ucuzoglu warned that audit consultant breakups “never happened as expected”.Consulting business KPMG It went public as BearingPoint two decades ago and went bankrupt in 2009. Ernst & Young‘sand PwCThe old consulting businesses of Capgemini and IBMtwo itFocus on consulting leads to chaotic culture clashes.

as Ernst & Young While it stumbled from its Everest defeat, it and its three competitors would think twice before embarking on similar expeditions. Still, the breakup logic is unlikely to disappear. Consulting giant Accenture rose from the ashes of Andersen, which collapsed in the early 2000s, turning the “Big Five” into a Big Four. It has since boomed and now has annual sales of $62 billion, more than any of the Big Four. Since listing in 2001, its market capitalization has risen 20-fold to $185 billion. Such a prize might be too tempting to resist.

To stay on top of the most important news in business and technology, subscribe to The Bottom Line, our weekly newsletter for subscribers.

Related Articles


Please enter your comment!
Please enter your name here

Stay Connected

- Advertisement -spot_img

Latest Articles