EY plans global audit spin-off in drastic Big Four shake-up

EY is working on a split of its audit and advisory operations worldwide in the biggest shake-up of a Big Four accounting firm in two decades, according to three people with knowledge of the plans.

The proposal, which is still being thrashed out by EY’s senior partners, is a bold attempt to escape the conflicts of interest that have dogged the industry and brought regulatory action from the UK to the US.

EY and the other Big Four accounting groups that dominate the industry globally — Deloitte, KPMG and PwC — have been fiercely criticised over a perceived lack of independence in their auditing of company accounts because of the fees they also generate from consulting, tax and deal advisory work.

A voluntary break-up would be a sharp change of position by EY, whose previous global chief executive Mark Weinberger hit out in 2018 at calls for the Big Four to be split up over concerns about a lack of competition.

The firms have rebuilt their consulting arms since initially selling them off after the collapse of US energy company Enron in 2001, which led to the demise of auditor Arthur Andersen and reduced the Big Five to the Big Four.

Senior partners at EY have been discussing their options for a restructuring of its global operations, said three people with knowledge of the matter.

The plans envisage an audit-focused firm being separated from the rest of the business, the people said. This firm would retain experts in areas such as tax to support company audits, one of the people said.

EY’s surprise move is likely to draw significant regulatory scrutiny and would force its rivals to consider following suit.

“We will all need to review our position but that will not be quick or knee-jerk,” said a senior partner at another Big Four firm, adding that regulators’ reaction would affect the other groups’ responses.

An EY split would result in two separately owned businesses and would be a much bigger change than the more limited operational separation of the Big Four’s UK audit and advisory functions, which was agreed after corporate scandals at retailer BHS and outsourcer Carillion.

The exact structure of the shake-up is being discussed, one of the people said, and any overhaul would require a partner vote and broad agreement from the individual national member firms that form EY’s global business. The potential split was first reported by Michael West Media.

Mergers and acquisitions within professional services firms are notoriously difficult to pull off because of the need to build consensus among the individual partners who own and run the businesses in each country.

EY, which employs 312,000 people in more than 150 countries, is structured as a network of legally separate national member firms that pay a fee each year for shared branding, systems and technology.

The firm’s leaders are trying to find an exact structure that “works for everyone”, one of the people said.

The process could take “many months” and it is not yet certain that a dramatic restructuring would proceed, the person added, but acknowledged the changes would be significant if they were voted through.

“We want to lead the profession on a new path,” the person said. “We do realise that it will change the profession.”

EY said: “Any significant changes would only happen in consultation with regulators and after votes by EY partners. We are in the early stages of this evaluation, and no decisions have been made.”