The boss of EY’s UK business has rejected claims that the firm’s audits would be weakened by a separation from its consulting arm and signalled that the group will break up regardless of a forthcoming partner vote.
Spinning off the consulting and deal advisory arm would free up staff and capital to focus on audits, said Hywel Ball, EY’s UK chair and managing partner. “Audit quality is going to be better,” he told the Financial Times.
EY’s top leaders have approved the flotation of the firm’s advisory arm, responsible for $25bn in revenues last year, in an attempt to boost growth by freeing the consultants of conflicts that prevent them working with the firm’s audit clients.
The plan would trigger the most radical reshaping of the accounting industry in two decades and deliver windfalls for partners. But it has sparked warnings that audit quality could be negatively affected if the standalone audit business cannot attract and retain skilled staff.
Being in an audit-dominated business would allow these specialists to focus more on audit work, said Ball. “At the moment, they get pulled in all sorts of ways by the other businesses,” he said.
EY also plans to retain some non-auditors in the audit business and deploy their expertise in areas such as tax and asset valuation. “The design of the whole business separation was based on ‘audit gets what audit needs’,” said Ball.
The non-auditors would also be encouraged to build new advisory practices within the audit-dominated business. EY’s plans assume that most of the firm’s growth would come from expanding its advisory practice.
Ball said the money raised from spinning off the advisory division would enable more investment in the audit business by reducing competition for capital internally from fast-growing advisory service lines.
“At the moment, there’s a huge part of the business that competes for that capital,” said Ball. “In the new business, audit will be the majority sport so will have a much stronger voice.”
A senior partner at another Big Four firm said Ball’s claim that the audit business would have better access to capital “doesn’t stack up” because recent investments in audit quality have mostly been funded by the firms’ wider businesses.
Ball said this was not the case in all jurisdictions and that in some countries, which he declined to name, auditors were subsidising investment in the advisory business. The Big Four do not disclose their profits in most jurisdictions, making the competing claims difficult to verify.
The money raised from the break-up would also strengthen the audit arm’s balance sheet by allowing it to reduce its debts and free up funds for investment in auditing, Ball said. EY expects the advisory business to raise about $11.5bn by selling a 15 per cent stake in an IPO and to borrow another $18.7bn, much of which would be used to pay off existing debts and pension obligations and to fund payouts of up to four times annual salary for audit partners.
The rest of the Big Four have so far stood by their business model of keeping auditors and consultants under one roof. People at the firms have admitted privately that there is internal disagreement between some partners over whether they should emulate EY.
“We all have plans. If we had to, we could split our firms,” said another senior Big Four partner. “I passionately believe it’s the wrong thing to do, but at the same time if the profession is changing we’ve got to be ready to move.”
EY partners are set to vote on whether to proceed with the planned break-up by early next year.
Asked what EY would do if partners rejected a split, Ball said: “If you follow the strategic rationale we’ve been talking about, I don’t think the status quo is an option.”
The firm had not yet decided what it would do if the break-up plan was abandoned, Ball said. Other options could include taking on external investment in the advisory side of the business, though the Big Four’s structure makes this difficult.