Examiners will have to earn the money they need to invest heavily in digital testing on their own.
(Photo: imago images/Michael Gstettenbauer)
After months of debate, the auditing company EY has presented its plans for a split. Even if there is little concrete beyond the announcement, the will alone to separate auditing and consulting will redefine the future of the auditing industry. And: It is a complex adventure that the EY leadership is embarking on.
Nevertheless, it is a correct and important step by the third largest auditing and consulting company. If the partners agree to the project, EY has the chance to redefine the rules of the game in the industry and present itself as modern.
Ultimately, the company implements what many in the public, politicians and regulatory authorities consider necessary after the numerous accounting scandals of recent years: In their perception, it does not fit that large-scale auditors are also consultants.
EY acts as a driven person – and there are great risks. The company is involved in numerous accounting scandals in many countries – above all Wirecard. The allegations of incorrect certifications at the collapsed group have caused massive reputational damage to EY – in all business areas.
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Possible financial consequences from the Wirecard scandal will have to be borne by all newly created EY successor companies. But the damage to the image is due to the name EY, which in all likelihood will continue to be borne by the test unit. And this is exactly where the risks are: How strong are the two divisions that are going their separate ways in the future?
For the tax and management consultants, the matter is simple. You can act freely in the future and no longer have to take into account the constraints of the audit. Some consultants at EY and other companies gave up in frustration because they were not allowed to recruit or keep clients for compliance reasons.
New consulting group will be unique
Now they are forming an independent consulting group that will be unique with a mix of tax, legal, management and strategy advice, including a possible stock exchange listing (IPO). And they can look forward to a proper “payday” when the split-off group actually implements an IPO and shares are allocated to them.
It is different with the partners in the EY test unit. For them, the question is rather whether their company is attractive enough in its new form – in terms of both finances and personnel.
It is not for nothing that three of the “Big Four” stick to the mixed structure. This enables you to maintain high capacities of employees and skills and to use them where they are needed. Motto: Anyone who understands and checks the sophisticated tax-saving model of an audit client can contribute their expertise to other clients in the consultation.
With the interlocking, the mixed model offers young auditors career options in lively consulting if they get bored with the attestation of balance sheets. EY as “Pure Play” will not be able to offer this. There is a great danger that EY, which is based on exams, will be less attractive to young and older talents and that the necessary flow of new employees will be lost.
No question: EY will initially provide the testing unit with billions in capital. But the examiners will then have to earn the money they need for high investments in the digital examination on their own. You will no longer be able to draw from the entire pot of an integrated group – and that on the basis of margins that are far less generous than in the consulting business.
Reputation, finances, employees: If an EY that focuses on auditing falters in this triad, there are two options:
EY could lose a lot of its importance, but nobody in the economy, among regulators and among the other “Big Four” actually wants that. Because if the four become only three globally active companies, large international customers will have even less choice when looking for an auditor.
Examination and advice attract each other magically
The second option would be: EY is gradually building up a consulting business again in order to offer employees careers and make better use of the competent people in-house. But that would be a first-class déjà vu. That already existed a good 20 years ago: After accounting scandals like Enron, many of the large auditing companies sold their consulting units at the time.
It wasn’t long before the companies started building lucrative consulting businesses again. It is quite possible that this will also happen with the new EY audit. Because testing and advice attract each other almost magically. But then nothing would be achieved in terms of exemplary organizational separation of the two businesses.
More: Audit firm EY gives the go-ahead for split