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EY Weighs Audit, Advisory Split After Wirecard, NMC Woes (2)

May 26, 2022, 8:05 PMUpdated: May 26, 2022, 10:57 PM

Ernst & Young could separate its audit practice from the rest of its business and is weighing whether to restructure the firm as part of a routine review of its global business, an assessment that comes as European regulators eye tougher oversight after a string of accounting scandals.

“We are in the early stages of this evaluation, and no decisions have been made,” EY’s global arm said Thursday in a statement to Bloomberg Tax. “Any significant change would only happen in consultation with regulators and after votes by EY partners.”

Such a move—which would be the largest shake-up in the accounting industry since Arthur Andersen’s collapse 20 years ago—marks a major departure from the Big Four firm’s traditional operating model that generated $13.6 billion in audit revenue last year alone. EY and its largest competitors continue to face regulator and shareholder fallout after repeated audit failures around the world, and EY affiliates now face suits over audits for Wirecard AG in Germany and NMC Health in the UK.

EY along with Deloitte, PwC, and KPMG also face increasing pressure from US regulators to prevent lucrative consulting work from weakening their auditors’ objectivity and their ability to protect the needs of investors.

The firm, which reported $40 billion in total revenue last year, said it regularly reviews its businesses to ensure it can deliver effective audits and other services, and described itself as the “most globally integrated professional services organization.”

The Big Four firms have long argued that their multi-service-line business models actually bolster audit quality, but they have agreed to limited operational separation in the UK to avoid a forced break-up. Strict conflict-of-interest rules in the US haven’t stopped the American firms from amassing large consulting arms in the wake of the 2002 Sarbanes-Oxley Act, which regulated audit firms after the Enron and WorldCom accounting scandals.

“This is huge. This is the biggest deal in the structure of the large firms since Andersen fell apart,” said Jim Peterson, a former in-house Andersen lawyer. “And it will have complex, long-term consequences.”

EY, like its largest competitors, operates as a network of individually owned and operated partnerships with a global administrative arm that oversees strategy and branding and allows the individual members to share technology, training, and audit methods.

The firm’s global chairman, Carmine Di Sibio, a U.S. audit partner who took the helm as CEO in 2019, has previously said that he regretted that the firm didn’t uncover fraud at payments processor Wirecard and told clients that the firm would “raise the bar” to improve its standards.

EY, which sold its global consulting business for $11 billion two decades ago, wouldn’t be the first Big Four firm to rethink its operating model in recent years. PwC’s US member firm restructured its major practices last year to bring its tax and audit compliance work under a single service line and move tax advisory into its consulting arm.

(Updates with references to Arthur Andersen in paragraphs three and seven, and adds EY consulting sale in paragraph 10. Previous update added context throughout. )

To contact the reporter on this story: Amanda Iacone in Washington at aiacone@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergindustry.com; Kathy Larsen at klarsen@bloombergtax.com