Big four consultancy firm EY’s audit split driven by bigger profits says expert Fiona Czerniawska
The firm announced a fortnight ago it would open a new service delivery centre in regional Victoria that will initially provide outsourced verification services for banks and other financial institutions.
Ms Czerniawska said that one model for a separate company would be the initial public offering of Accenture in 2001, but she warned this would change the culture from a partnership to a more corporate model.
“One of the motivations for Accenture’s IPO was to be able to invest more, and that’s clearly paid off looking at the scale and diversity of Accenture’s business today. However, Accenture had a fairly corporate structure in the first place, so the IPO wasn’t a cultural stretch for them – and it would be for a big four firm,” she said.
History might repeat itself
Three of the big four firms have previously split off consulting arms. In 2000, EY sold its consulting business to French IT services company Capgemini for $US11 billion ($15.4 billion).
The next year, 2001, KPMG floated its US consulting business as BearingPoint and in 2002, the UK and Dutch consulting businesses were sold to French IT services company Atos for €657 million ($984 million). BearingPoint filed for Chapter 11 bankruptcy protection in 2009.
PwC sold its consulting business to IBM in 2002 for about $US3.5 billion in cash and shares. Deloitte was the only big four firm not to sell its consulting arm.
“There’s a possibility that the big four history will simply repeat itself, with consulting practices being sold off, only for the audit businesses to subsequently re-build the latter, but there are differences this time around,” Ms Czerniawska said.
She said that potential buyers included large technology companies such as AWS or Microsoft “but the situation is complicated by the fact that many technology companies have partnered with the big four, and the gain from buying one big four (firm) is unlikely to offset the inevitable loss of partnering with the other three”.
She said that EY’s rivals would be closely “watching how the media, regulators, clients, and employees react to the news that EY is considering a split”.
“The question for the others being the extent to which they want to seize the initiative and shape the change, rather than being seen as a laggard at a later stage,” she said.
“So far as other professional service firms are concerned, the separation will allow EY and other audit firms to compete for consulting and other non-audit work from audit clients, so competition will increase.”