Ernst & Young LLP is coming off its most profitable year in recent memory for the tax and audit giant. However, the company is deep in the process of splitting up its business – a decision that, if implemented, could cause initial upheaval for both remaining companies.
On the surface, the timing of the move seems odd. But last month’s announcement from a senior executive at EY that it had decided to split into “two separate multinational firms” was the latest sign that the financial sector, perhaps the business as a whole, is undergoing a transformation.
Arthur Andersen’s collapse Twenty years after the Big Five became the Big Four, EY is voluntarily losing its status as one of the world’s largest and most prestigious professional networks. Multi-billion dollar global conglomerates do not make these decisions easy. What was EY’s initiative and how might it reflect the future of financial services?
Conflicts of interest
EY’s most recent fiscal year, which ends in June 2022, saw the biggest growth in two decades, including a reported $11.3 billion tax service line, the largest among the Big Four. However, recent criticism and crackdowns on the firm’s audit body—including an unprecedented $100 million fine by the SEC over a scandal involving employees cheating on ethics exams—have led to greater internal scrutiny of EY’s defense and compliance.
At least one feature of EY’s division could be described as a “defensive measure” against conflicts of interest. That applies to the current climate, but the reality is that every major accounting firm—including every one of the Big Four—has built potential conflicts right into their business models. And even the critic who likens tax and audit work to the fox must admit that the regulatory powers are at least somewhat tolerant of the event. Obviously, there are other motivations.
Consulting is the goal.
EY’s split was expected to lead to a windfall for some of the company’s partners, which was reason enough for some stakeholders to support the split. But for an organization that spans 140 countries and wants to sign up more than 10,000 partners, a one-time payment to a few leaders would not be enough to push the institution even further into disintegration.
Instead, EY sees an opportunity for long-term growth. In theory, an auditing firm can’t reliably maintain its independence (and thus not perform its mandated duties) when tied to consulting services. Because EY has taken some heat for its attributes on the audit side and seen its tax business flourish, the move to separate the two makes logistical sense, especially given the ongoing scrutiny by regulators.
But from a financial perspective, it appears to be a winner. The process of getting a firm audited for exemption from tax services typically takes a month or more—in today’s world, the risk of a move to a competitor is too high. Separation of services should eliminate that step and, in EY’s case, allow the audit firm to gain more business.
At the same time, it will dispose of EY’s tax services business. Although the divestiture process is expected to be complicated, the company’s tax arm will be freed up to focus on one vertical, sell prospects in that area of expertise, and avoid conflicts of interest moving forward. And with the advent of new accounting technologies that allow accountants to spend more time on correspondence and advising and consulting clients, the division allows EY to double its profitable consulting opportunities.
EY’s statement announcing the split read, “We firmly believe that by embracing the changing landscape, we can build businesses that define the future of our profession, create exciting new opportunities and deliver long-term value to EY’s people, clients and customers.” communities”
An opportunity for financial tech companies
For now, the other members of the Big Four have shown no public interest in decentralization and in some cases will split EY into two. But don’t be surprised if others join EY soon to try to establish the independence of their tax and audit services. Deloitte LLP, KPMG LLP and PricewaterhouseCoopers LLP are likely to follow suit, as regulators continue to pile pressure on the accounting giants struggling to resolve their conflicts. Smaller companies that have not yet cemented their brands in the public consciousness may be more reluctant to divest, but may decide that the associated growth opportunities are too great to ignore.
Ultimately, the biggest winner could be financial technology firms that equip these professional services with the software to streamline their operations. Full-service tax and audit accounting firms are subject to certain technology limitations based on common conflict-of-interest concerns. But dedicated tax advisory services like EY’s NewCo tax business can bypass that checkpoint and quickly engage new clients with emergent fintech software, amplifying the firm’s authority across the board and accelerating growth.
Fast and efficient business operations may be too much for large accounting firms to pass up. If the remaining members of the Big Four accept the opportunity, and others may follow. At that time, automated accounting, expense management and other fintech software will not be a hot trend in the accounting space, but an essential business tool.
This article does not necessarily reflect the views of the Office of National Affairs, Bloomberg Law and Bloomberg Tax, publisher or its owners.
Author information
Sid Saxena He is the CEO and co-founder of Docyt, an accounting automation software platform. It’s a single system that uses machine learning to automate all financial workflows—both income and expense accounts—and provides real-time ledger reconciliation and financial statements.
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