Ernst & Young’s leaders on Thursday agreed to separate its auditing and consulting businesses, potentially marking the biggest change in the accounting profession in more than 20 years. The breakup will create two companies: EY’s accounting business, which audits companies, and its more lucrative and faster-growing consulting business, which advises companies on their technology systems, deals and other issues.
Under the plan, the company’s $45 billion global network would divide roughly 60/40 between the consulting business and the audit-focused partnership, which would retain the EY brand, The Wall Street Journal reported. The new consulting company would go public, with plans to sell about 15% though an IPO to raise about $10 billion to help fund partner payouts, which could be in the multi-million dollar range for some.
“From a customer point of view, it will eliminate any kind of conflict of interest,” said Evan Schultz, SAP global vice president of Services and Financial Services Industries Ecosystem and Partner Ecosystem Success. “And it could potentially lead to a kind of rebirth of the audit market, in which you have pure audit firms that can focus entirely on that single business. This would be helpful from a customer standpoint, especially if you think about integrated reporting.”
Traditionally, the auditing business made its way through the customer’s door on the back of the consultancy’s established relationship. “It’s really kind of raising the profile of the [auditing] business,” Schultz said. “This might be an opportunity to make it more attractive, spruce it up a little bit.”
The consultancy business is facing its own challenges, as companies move their systems to the cloud from on premise, where charges for installing customer software and services and ongoing maintenance fees are much higher.
“That means that the consulting services companies are also in the midst of a transition, and they need to change their mindset of not sitting on the client for two to three years,” Schultz said.
Currently, the consultancy does not have relationships with some large companies that EY audits. The split could allow the newly independent consultancy company to go after those companies. But that could detract from current customers, especially technology companies with which they co-innovate by spreading the effort across a bigger playing field. “There wouldn’t be as much focus,” Schultz said.
Although the split is not expected to occur until late next year, the other three accounting/consultancies — Deloitte, KPMG and PwC — will be watching, Schultz said.
“I think KPMG and PwC will be under pressure to follow what’s going on, especially the attractive payout,” Shultz said. “If you are a partner and you’re looking at that, you’re going to start getting interested.”
Deloitte said it was not planning a similar move — for now.