Separate auditing is less lucrative, so may have to raise salaries to attract talent
EY is studying a daring spin-off. The accounting giant is considering separating its advisory business from its audit unit. That could create a $60 billion consulting group free to grow with fewer regulatory hurdles. But the audit side would have a hard time attracting talent and would lose experience.
EY is assessing a path that regulators have avoided for years. Scandals such as the collapse of the British outsourcing company Carillion in 2018 or Germany’s Wirecard in 2020 prompted calls to separate consulting from auditing. The fear is that auditors’ desire to sell lucrative products makes them less able to detect fraud. However, regulators have stopped short of forcing a full separation. In Germany, for example, the laws are intended to limit a company’s ability to sell consulting services to audit clients.
The possible spin-off of EY, which would see the fast-growing consultancy arm go public or be sold to the private equity, shows that the current rules have some effect. Audit work was once viewed as a gateway to a larger business. However, accounting firms are increasingly concerned that rules limiting cross-selling to a single country will cost them a lucrative IT or strategy contract if they have committed to audit work, lower margin, of a company.
A spin-off would therefore allow EY talent to engage in more deals and give them a global platform less likely to be tainted by future Carillions. If you take the combined 2021 revenue of EY’s consulting and strategy divisions, and multiply it by 4, like that of rival Accenture, it could be worth $60bn.
However, while a spin-off could give the business a boost, it probably won’t bring about a paradigm shift. EY’s revenue, including its audit business, has grown by more than 7% on average over the last seven years. This figure is close to that of the French computer consulting group Capgemini, which increased its sales by around 8% in the same period.
But the audit business is unlikely to make a profit. Firms like EY and Deloitte can offer novice auditors the unspoken promise of a more lucrative career advising on acquisitions or corporate strategy. Without that, an outright accounting firm may have to pay higher wages to attract workers. Therefore, they may have to charge companies more for audits. If EY goes ahead with the plan, other companies like KPMG are likely to follow suit. If so, there are likely to be some winners and many losers.
