Dusseldorf The international auditing company EY is working on plans for a global spin-off of the auditing business from the consulting units. This project is currently being discussed at a global level behind closed doors, but is still at a very early stage, the Handelsblatt learned from company circles.
All options are on the table. Fresh capital could also be raised for a newly formed, focused consulting group through a partial sale. The tax, legal and management consulting services, which generated sales of a good 26 billion dollars in the past financial year, would be merged into the unit.
The motive for the demerger is the increasing government regulation of the auditing business and the associated restrictions on the advisory teams of the companies. Lawmakers in many countries have reacted to the numerous scandals, such as the Wirecard case in Germany, with new regulations.
This makes it increasingly difficult for companies to combine auditing, tax and management consulting under one roof. In recent years, the consulting business has become the dominant growth driver for the Big Four, which also includes PwC, KPMG and Deloitte. There, the companies achieve significantly higher profit margins than in the final examination.
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Authorities, especially in the US and UK, have long been targeting potential conflicts of interest between audit and advice. There is a threat of a state-enforced splitting up of the companies. EY – formerly known as Ernst & Young – would anticipate this compulsion with the announced plan.
According to industry sources, the company is considering a spin-off of the audit business under the existing name. The consulting units would then merge into a new company with a new name.
For this consulting firm, EY could also create new ownership. So far, the integrated and independent national companies have traditionally been solely in the hands of the partners. According to the British “Financial Times”, the company is also discussing an IPO in addition to selling shares to investors.
model for the plans
EY should look to the success of the technology consultancy Accenture here. It is currently valued on the stock exchange at a good 192 billion dollars. An IPO is internally controversial, it said in the circles. Because the consultants often recommend this step to customers, but they shy away from it themselves because they do not want to go public and leave control to the partnership.
An alternative to going public would be to sell a stake to a financial investor. The partners of a new EY consulting group would then have a professional partner at their side. There is a need for capital in the consulting business: the industry is consolidating and the top providers are also making acquisitions to become comprehensive technology partners for their customers who are in the middle of the digital transformation.
It is unclear whether such plans will meet with the approval of the thousands of EY partners around the world who have to agree to such a drastic restructuring. EY does not officially deny the plans. One works regularly on scenarios and questions whether one has the optimal strategy, structure and presence, said in a statement of the company from the USA.
The Wirecard case harbors high legal risks for EY
Behind the separation plans are also the recurring accounting scandals in which auditing companies are involved – and their financial consequences. The most striking example of this is Wirecard. EY is accused of failing as the auditor of the collapsed payment service provider. The auditors had not uncovered Wirecard’s bogus transactions and had signed the balance sheets over all years.
The Wirecard case caused massive damage to EY’s reputation, which at times also affected the flourishing tax, legal and management consulting business. Of more existential importance, however, are possible compensation payments that EY Germany would have to pay to complaining investors, banks involved or Wirecard’s insolvency administrator in the event of defeats in court.
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Billions are at stake here. So far, EY has been successful in court because the examiners in regional courts could not be proven guilty. However, further processes are also pending in higher instances. In addition, the district court in Munich has cleared the way for an investor test case. This is intended to bring about a decision on behalf of thousands of other lawsuits.
However, a split of EY Global would not mean that the separated consulting units in Germany would not have to bear possible compensation payments. The defendant is the German EY GmbH, whose legal successors must also assume the legal burden. Corporate lawyers point this out, and an internal analysis at EY also comes to the same conclusion.
However, a split in future balance sheet scandals could damage the consulting units – both financially and in terms of reputation.
The strongest motive, however, is that both businesses are becoming increasingly difficult to reconcile under one roof, according to company circles. The Big Four are hardly allowed to advise their audit clients anymore. After the Wirecard case, the federal government further restricted this possibility, and since then tax advice for audit clients has also no longer been permitted. This has been the case for other consulting areas for a long time, there are upper limits for the commitment of the auditors.
Auditors see integrated business as an advantage
EY has already felt the effects of increasing legal regulation. For example, employees from the consulting units complained that they were also restricted in their business due to the regulations in the field of auditing.
The industry strictly rejects the accusation that conflicts of interest between auditing and consulting are the reason for the numerous accounting scandals. The integrated business under one roof is an advantage for the Big Four: If they have to give up an audit client after ten years according to the statutory rotation, they use their knowledge of the group to be able to advise them on a large scale afterwards.
If EY decides to separate, this should also put pressure on the other Big Four. You could then take similar steps to anticipate a possible legal obligation. At the moment, however, there is no discernible urge among the competitors to split up. Statements from the other large auditing firms at the weekend said they were sticking to the integrated business model and saw great advantages in it.
EY’s auditing partners are unlikely to welcome a split. Because they have benefited so far from the fact that the consulting business yields far higher profits than the attestation of balance sheets. And they would have to stand alone for future accounting scandals.
EY has global sales of almost $40 billion, of which $13.6 billion is accounted for by auditing. The company does not disclose profits. But in consulting, it is likely to bring in double-digit returns – in the business with balance sheet attestations, on the other hand, fees have stagnated for years.
More: Stricter rules, more quality: How EY is realigning the test after the Wirecard case