EY UK boss defends split, saying it would improve audit quality

The boss of EY’s UK operations dismissed claims that the firm’s audits would be weakened by a split from its consultancy arm and signaled the group would spin off regardless of an upcoming partners vote.

Splitting up the advisory and transaction advisory arm would free up staff and capital to focus on audits, said Hywel Ball, chairman and managing partner of EY in the UK. “The audit quality is going to be better,” he told the Financial Times.

EY’s top executives have approved the IPO of the firm’s consulting arm, responsible for $25 billion in revenue last year, in a bid to spur growth by freeing consultants from the conflicts that keep them from working with the firm’s audit clients.

The plan would trigger the most sweeping overhaul of the accounting industry in two decades and deliver bounties to partners. But it has triggered warnings that audit quality could be negatively affected if the stand-alone audit activity cannot attract and retain qualified staff.

Being in an audit-dominated company would allow those specialists to focus more on audit work, Ball said. “Right now they’re being pulled in all sorts of ways by the other companies,” he said.

EY also plans to retain some non-auditors in the audit business and deploy their expertise in areas such as tax and asset valuation. “The design of the whole segregation of activities was based on ‘the audit gets what the audit needs,'” Ball said.

Non-auditors would also be encouraged to develop new consulting practices within the audit-dominated business. EY’s plans assume most of the company’s growth would come from expanding its consulting practice.

Ball said the money raised from the spin-off of the consulting division would enable more investment in the audit industry by reducing competition for capital internally from rapidly growing consulting service lines.

“Right now, a lot of the business is competing for that capital,” Ball said. “In the new business, auditing will be the majority sport and will therefore have a much stronger voice.”

A senior partner at another Big Four firm said Ball’s assertion that the audit industry would have better access to capital “doesn’t stack up” because recent investments in audit quality have been mainly funded by the wider activities of the cabinets.

Ball said this was not the case in all jurisdictions and that in some countries, which he declined to name, auditors subsidized investment in the consultancy industry. The Big Four do not disclose their profits in most jurisdictions, making competing claims difficult to verify.

The money raised from the breakup would also strengthen the audit branch’s balance sheet by allowing it to reduce debt and free up funds to invest in auditing, Ball said. EY expects the advisory business to raise about $11.5 billion by selling a 15% stake in an IPO and borrowing another $18.7 billion, much of which would be used for pay off existing debt and retirement obligations and to fund payments up to four times. annual salary of audit associates.

The other Big Four have so far maintained their business model of keeping auditors and consultants under one roof. Employees at the companies have privately admitted that there is internal disagreement between some partners over whether they should emulate EY.

“We all have plans. If we were to do that, we could split our businesses,” said another senior Big Four partner. “I believe passionately that it’s not the right thing to do, but at the same time, if the profession changes, we have to be ready to move.”

EY partners are due to vote on whether to proceed with the planned breakup early next year.

Asked what EY would do if the partners rejected a split, Ball said: “If you follow the strategic logic that we talked about, I don’t think the status quo is an option.”

The company had yet to decide what it would do if the severance plan was scrapped, Ball said. Other options could include taking outside investment in the consulting side of the business, although the Big Four structure makes this difficult.

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