scorecardresearch
Why EY’s decision to split is actually a protective measure

Why EY’s decision to split is actually a protective measure

The firm has not had it easy for a couple of years; impact on India is still unknown

Last February, the head of EY's Germany operations, Hubert Barth stepped down following the collapse of payment services entity, Wirecard. (Photo: Reuters) Last February, the head of EY's Germany operations, Hubert Barth stepped down following the collapse of payment services entity, Wirecard. (Photo: Reuters)

EY (Ernst & Young), a key part of the Big Four, which also includes Deloitte, KPMG and Pricewaterhouse Coopers, has decided globally to split its audit and non-audit practices. The primary objective is to ease any regulatory concern over potential conflicts of interest. Interestingly, the other three have decided to keep auditing and consulting under one roof.

There is a bit of a background to the development at EY, (it had revenues of $40 billion in 2021), with the recent past posing several challenges. Last February, the head of its Germany operations, Hubert Barth stepped down following the collapse of payment services entity, Wirecard. It later transpired that there were allegedly “serious shortcomings” in EY’s audit. Wirecard was not a case in isolation as EY’s other audits, among which were NMC Health, the largest private healthcare provider in UAE and China’s largest coffee chain, Luckin, were in the middle of serious financial scandals. Conversations that BT had with a few executives informally with those in the audit business seem to point out that EY’s decision to split the two businesses was triggered by these developments. Earlier this year, EY was fined $100 million for a cheating scandal by the Securities and Exchange Commission (SEC). “There has been a serious reputational damage and to that extent, it was expected,” says one chartered accountant familiar with the issue.  

According to David Gilmour, Managing Partner at the Melbourne-based strategy consulting firm, Gilmour & Associates, EY’s decision to split its operations is likely to go down well with many of its audit clients since they will see less of a problem as far as potential conflict of interest is concerned.  “Having said that, it might be tempting for the free-standing EY Audit to then recreate a consulting division in say 5-10 years after the split.  Remember that their consulting business of today really only got started around 15 years ago,” says Gilmour, who over a twenty-year career in consulting, worked with McKinsey, BCG and EY. 

There has been a discussion on what will eventually happen globally to EY’s prominent rivals. “The others forming the Big Four must be thinking on the lines of what EY is considering. It is an interesting development but each of them must consider if it makes business sense,” thinks Gilmour. The trigger, for EY’s decision, he adds, “likely comes from a restricted ability to serve the audit clients and also to pursue the opportunity for managed services.” 

In India, there is already a distinction between EY’s audit and non-audit practice. The statutory audit is under SRBC & Co LLP. Without a doubt, the growth story in consulting and advisory easily surpasses that of audit. “Auditing is about checking things, while the rest of the piece is about building things and that is a big difference,” says a top executive at one of Big Four. In his opinion, the current development at EY will be an “unnecessary diversion” and could take the focus away from building the business. From a client point of view too, there could be concerns. “A large company will want many services from a firm ranging from supply chain to taxation or cyber assurance. The preference is to find all that under one roof and that could be an issue,” he says.

Also read: India's 25 most profitable listed companies in 2021-22

Also read: Infosys, TCS or HCL Technologies: Which stock do analysts recommend?

Published on: Sep 09, 2022, 4:24 PM IST
Posted by: Tarab Zaidi, Sep 09, 2022, 3:56 PM IST