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 business circles on Friday. Australian investigative journalist Michael West’s blog first reported on it.
The motive for the split is the increasing state regulation of the auditing business. Lawmakers in many countries have reacted to the numerous scandals, such as the Wirecard case in Germany, with new restrictions for auditors. They make it increasingly difficult for companies to combine auditing, tax and management consulting under one roof.
The authorities, especially in the USA and Great Britain, have been targeting possible conflicts of interest between audit and advice for some time.
In recent years, the British audit supervisory authority has already brought into play a state-mandated split of the large auditing companies. In addition to EY, the so-called “Big Four” include the companies PwC, KPMG and Deloitte.
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EY – formerly known as Ernst & Young – would forestall government action by breaking up. 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.
It remains to be seen whether this will meet with the approval of the thousands of partners worldwide who have to agree to such a drastic restructuring. EY did not officially deny the plans on Friday. 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 ideas 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 of district courts could not be proven guilty. However, further processes are also pending on a higher instance. 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 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 control 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 this increasing legal regulation – not only in Germany. 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 in accordance with 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 split up, this should also put pressure on the other “Big Fou”. You could then take similar steps to anticipate a possible legal obligation.
EY’s auditing partners would probably not welcome this. 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