The EY network of examiners is considering a split

DThe auditing and consulting company EY fuels the discussion on the reorganization of the profession of auditors and consultants. Because at the top of the EY international network, plans to separate audit from consulting activities are discussed. EY head Carmine di Sibio justified the considerations in an internal memorandum from last week, cited by Reuters as a desire to improve the quality of corporate balance sheet auditing.

EY sent a memorandum to its employees in response to media reports that the company was considering spinning off testing activities. However, according to di Sibio, such a decision was not made. Officially, EY has only said this so far: it routinely evaluates strategic alternatives to improve the quality of audit and all other services in the long term. The process is still at an early stage. Significant changes to the structure would only be introduced after consultation with regulators and only with the consent of EY’s international partners.

Should a high growth consulting firm be made public?

As reported over the weekend in the Financial Times, EY’s considerations also include an IPO of a consulting firm or its partial sale to investors. According to the newspaper, 166,000 of EY’s 312,000 employees worldwide work in the consulting industry, which generated sales of $ 26 billion in the past fiscal year. If spun off, the $ 14 billion test business would likely remain in the hands of partners – responsible management.

There are well-known examples of stock exchange debuts organized by a partnership, such as the investment bank Goldman Sachs in 1999 or the consulting company Accenture in 2001. Accenture was originally a sister company of Arthur Andersen’s audit network, which was founded more than 20 years ago, and involvement in Enron’s accounting scandal internationally disappeared from the scene.

Since the end of Arthur Andersen’s existence, only four auditing and consulting networks dominated the international market. These are PWC, KPMG, Deloitte and of course EY. What is currently being discussed behind EY facades should also apply to other large and international test groups. All four are in the same position, grappling with accounting scandals and allegations of lack of independence. The internationally changed rules also apply to all of them.

With around 600 partners, the German branch of EY is an important part of EY’s international network and one of the top five revenue streams. EY Germany is also represented on the international network management committee. EY’s German partners were responsible for auditing the annual accounts of the scandalous Wirecard, for which the company is not only heavily criticized. The APAS audit body also examines EY and the responsible employees. In addition, the company is dealing with compensation claims from Wirecard victims.

Down with the legacy of Wirecard?

It can be assumed that the discussed separation of audit and consulting should look like a convenient way, at least for EY consultants, to free themselves from the financial and reputational legacy of the audit division. Schirp & Partner’s investor lawyers have already warned that the specific consequences of the separation of auditing and consulting activities for EY companies and their creditors are currently difficult to assess and wonder if EY wants to limit its liability for the Wirecard disaster.

As has been heard so far, EY does not justify its split considerations with the Wirecard scandal. Instead, a possible step should help both the testing firm and the consulting firm achieve greater growth. After separation, consultants were able to accept orders from companies where auditors now conduct annual audits. On the other hand, auditing and consulting are not possible under one roof at the same time, which limits the opportunities for lucrative credentials.

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