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EY split plan raises concerns for audit business

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Industry executives have warned that a radical plan to dismantle EY’s business risks depriving the audit practice of the expertise it needs to scrutinize the complex accounts of the world’s largest multinational corporations.

The big four corporate partners will begin voting in November on EY’s proposal to spin off EY’s advisory business and go public.

However, EY and its big four rivals Deloitte, KPMG and PwC rely on advisory departments to provide the tax and asset valuation expertise often required to approve corporate accounts. increase.

” [audit and consulting] The skills are complementary,” said Sandy Peters, senior head of global advocacy at the CFA Institute, a professional body for the investment industry and against splitting the Big Four during deliberations by the UK competition regulator in 2019. said.

Former KPMG partner Peters said regulators and companies that must rubber stamp the split should ask how EY will replace the experts needed to perform quality audits. “There’s $5 trillion in goodwill on the books of US public companies that need to be tested for impairment. Are all those skills staying on the audit side?”

Deloitte, KPMG and PwC have so far favored a model that combines audit and consulting work, even though the EY split would be the biggest change for the accounting industry in two decades. KPMG says the model “encourages innovation and the highest quality standards” across its operations, including audits.

Some of EY’s competitors have wondered whether the newly separated audit firm could attract the tax and valuation professionals needed to check the books of large companies.

“Anyone sitting there saying, ‘You can have an audit-only company with a few tax professionals, and that’s great at audit quality.’ [has] We completely missed the point,” said a senior partner at another Big Four company.

Few tax professionals can tackle the most complex corporate accounts, and audit-dominated companies will struggle to pay enough to keep them going, he added.

EY’s new audit-focused business includes a team that generated $20 billion in revenue last year. The company expects to grow at a rate of 7% to 8% annually after the split.

However, like its competitors, EY has struggled to hire enough auditors in some countries to meet demand, and is subject to greater regulatory scrutiny than law firms and investment banks. Some have accused EY of low salaries. said a person familiar with the matter.

Under the planned split, a separate advisory business will launch with $25 billion in revenue and $4.4 billion in ebitda, according to figures shared with partners last week.

EY says its new audit business has the skills needed to handle the complex accounts of large companies. The firm’s current audit work is almost two-thirds of an independent group, with the rest being advisors, some of whom will help with the audit, EY told partners last week.

Only 14% of new audit work will be tax services, 7% accounting advisory and 6% technology risk consulting, EY told partners. Valuation, actuarial, forensic accounting, and financial risk specialists are retained by the firm to support audit work, each representing her 1-2% of the business.

Despite skepticism within the industry, a new survey by consulting analysts Source Global Research found that the majority of large company executives said they would be willing to work with both EY’s audit and advisory divisions in the event of a split. are more likely to adopt

Sixty-two percent of business executives in the US and UK say they are ‘more likely’ to hire EY as an auditor after leaving the company, and only 6% say they are less likely to do so.