Ernst & Young, one of the world’s biggest auditing and consulting firms, announced earlier this month it is effectively on track to split into two totally separate entities.
Now the focus is turning to how that process will play out and what a divided EY will mean for CFOs of the firm's auditing and consulting clients.
“We've spent the last several months going through a process that I would call the feasibility phase to see if there were drivers that warranted a reorganization of business, or a potential separation of the business,” said John King, EY Americas Vice Chair, Assurance Services, in an interview with CFO Dive. The firm has now moved from that feasibility phase to a design phase, he said.
The current state of the separation is not a “go forward on separating the business, but a go forward on our partners voting on a separation,” noted King. “That’s an important distinction,” he said.
A longer process
The movement from what King characterizes as the feasibility phase to the design phase is part of a much longer process, he said.
If EY partners vote to approve the plan, EY will divide into two companies, allowing the company to avoid conflicts of interest between corporate clients.
Once separated from the accounting business, consulting operations could be more profitable being that they would be less restricted by regulatory pressures.
With strong competition and a slowing economy, EY runs the risk of struggling as two separate entities; however, spinning off its consulting arm into a company that could file for an initial public offering (IPO) could allow for more profitability, according to the New York Times.
The company reported combined global revenues of $45.4 billion for the fiscal year ending June 2022, an increase of 16.4% in local currency and their highest growth in nearly two decades, according to a Sept. 21 company statement.
More options for CFO clients, EY entities
Under the planned split, the two auditing and consulting arms are broken down into entities that, for now, are called AssureCo and NewCo.
AssureCo would remain a $20 billion dollar business and retain and operate under the EY name. According to a spokesperson from the company in an email to CFO Dive, this entity would “be committed to assurance, tax and advisory services with all the capabilities required to deliver high-quality audits, serve the public interest, and focus on the CFO agenda and sustainability.”
NewCo, on the other hand, would be the new consulting arm and would “support clients’ growth, risk and transformation agendas,” the EY spokesperson said. Prior to the split, due to potential conflicts of interest EY could not provide both consulting and audit services to the same firm but under the new plan a client could potentially be a customer of both successor entities, a spokesperson said.
“From a CFO perspective, this split provides them with more choice,” said King, who will be a part of the audit business AssureCo. “This split is also a reaffirmation of the real strength of these different businesses and their ability to gain access to leading global enterprises in working with them,” he said.
Quality, fees top of mind for CFOs
Still, the changes will mean that finance chiefs, especially those at firms that are EY audit clients, will likely be watching for potential changes in the new succesor entities they end up working with, said Cassandra Estep, accounting professor at Emory University in an interview.
“I think these CFOs are going to be most concerned about making sure that the audit business will be able to retain the talent to support audits so that they remain of high quality,” said Estep. “These CFOs will also be interested to see how this will affect the audit fees that they pay for,” she said.
In the short term; however, Estep does not see the split affecting CFOs in the financial seats at current EY consulting clients.
“Arguably, I guess audits could continue on as normal and so perhaps fees won't be affected. But I think that's probably top of mind for CFOs in terms of quality and fees, if EY is currently their auditor,” said Estep.
Increased effects of regulatory scrutiny
The last time an accounting firm split into audit and consulting entities was in the early 2000s, and that move stemmed from from regulatory requirements. This split, however, is completely voluntary.
Although EY expects this to be the way of the future, it’s not clear other firms are following. In June, Deloitte denied media reports of any restructuring plans.
Securities and Exchange Commission (SEC) Chair Gary Gensler recently expressed concern about conflicts of interest stemming from auditors and affiliated firms. However, King asserted that this did not play a role in the split, although they do have the “utmost respect for Gensler and the SEC,” he said.
Ultimately, if the vote for the split does go through, King said that EY thinks this is “an opportunity to improve the experience of our clients and the experience of our people”
Estep thinks this is a change that EY’s counterparts will be wacthing closely to see if it is successful, and then decide whether or not they will follow suit.