Why EY and its rivals may eventually disband after all

“circleHoover Said Do you question things? We question everything. ” started a TV commercial stingray Airing during the Super Bowl in 2021, the sports extravaganza is known not only for its high-priced advertising, but also for the American football they take a break from. On April 11, the professional services giant decided to suspend indefinitely its plans to separate its audit and advisory businesses after receiving too many questions from its American branch. A major pain point was the division of tax practices, coveted by both auditors and advisors. A plan to list its advisory business and load up on debt to pay back its audit partners also seemed smarter when the deal was considered in 2021 amid low interest rates and a bubbling stock price.

This stop is a big blow stingray‘s global bosses underestimated what the arduous climb would prove to be, a splinter project that was unfortunately codenamed “Project Everest.”To stingrayThe so-called “Big 4”, Deloitte, KPMG and P.wC., it looks like proof. Deloitte’s global chief Joe Ucuzoglu claims that a “multidisciplinary model” is the “foundation” of his company’s success.Bill Thomas, his opposite number KPMGsays that his company’s decision to list an advisory arm (since re-growth) in the early 2000s “was not the right thing to do.” Leading Bob Moritz P.wC.argues that keeping the business together is important to his company’s ability to recruit and retain talent.

But the arguments against turning the Big 4 into the Big 8 are not clear. That’s because the commercial logic of the split is becoming more compelling in many ways. stingray There is still the possibility that such an outcome will occur one day. At stake is the future of his one of the most important oligopolies in the business world.

The Big 4 are the professional service heavyweight champions. They dominate the audit market, checking the books of 493 American companies. S.&P. 500 index and a large percentage of European quality chips. We also offer one-stop advice on issues from trading to digitization. As of last year, he employed 14 million people and generated $190 billion in fees, up from $134 billion in 2017 (see Figure 1). KPMGis the smallest of the Big 4 and earns three times as much as McKinsey. High Priest of Strategy Consulting.

The growth driver for the Big 4 in recent years has been the rapid expansion of their advisory business, which now accounts for half of total revenue (see Figure 2). early 2000s stingray, KPMG and P.wC. All have spun off or sold their consulting divisions in response to new conflict of interest regulations. (Deloitte planned a spin-off, but then abandoned it.) But with little room to expand auditing, the giant was quickly pulled back into its burgeoning advice business.

The restructuring has paid off in many ways. A variety of services Having the opportunity to dabble in his line has allowed the Big 4 to attract the bright-eyed youngsters their businesses rely on. Bayes of London His Business Laura His School His Mr. Empson said a bean-counting career would be more attractive if he had the opportunity to work on large acquisitions or advise governments on important issues. It looks like KPMGUK branch of.

The breadth of the Big 4 has also helped us win clients.Expertise in areas such as tax and valuation helped KPMG And others are cementing themselves as auditors of choice for large companies, says Thomas. On the other hand, a widely recognized audit brand enhances the reputation of a company’s advisory department.

Moritz argues that an interdisciplinary model has also helped. P.wC. Other professional services giants are adapting to the digital age. Software and data now underpin nearly every service an enterprise offers. Auditors benefit from the technical know-how of advisors, while advisors benefit from the counter-cyclical nature of audit work, which can fund investments even during downturns.

All things that help explain why some people are hesitant about the idea of ​​separating. Companies operating franchise-like structures and having independent partnerships in each country also make breakups difficult to succeed. Like, it brings a big change in direction. stingray Found in America.

But as more and more of the Big 4 businesses move into consulting, the reasons to stay connected are steadily waning. The auditor-independent rule went from inconvenient to cumbersome.specific bugbear stingrayThe problem is that we can’t team up with audited software companies like Salesforce to help deploy their technology to clients. New requirements, such as in Europe, where companies typically rotate auditors every 10 years, have increased conflicts between audit and advisory partners over who services large clients.

Meanwhile, Empson says audit departments are steadily losing influence within the company.Sarah Rapson Deputy Director FRCUK audit regulators are concerned that companies are no longer fostering the “culture of skepticism and challenge” that audits rely on.

The problem is manifested in a series of widely publicized audit snafus. March 31st APASthe German Audit and Supervisory Board, forbidden stingrayGerman branch of The fintech darling turned German after taking on a new listing audit client for two years over failing to uncover fraudulent activity at Wirecard. scam of the century. last year KPMG was fined £14 million ($18 million) by FRC For providing misleading information to the review of two of the company’s audits. In 2020, Deloitte announced her £15m ($19m) fine. FRC Also about failed audits.

These audit failures hurt the consultants involved. There may also be increased pressure from regulators to invest in audits, especially fraud detection. At the same time, advisors are becoming increasingly underfunded. We are looking to expand into managed services that perform functions such as compliance, payroll and cybersecurity on behalf of our clients and need new technology to do so. The Advisory spin-off will allow auditors to cash in and consultants to raise new equity outside of the partnership.

Being together may not do much to attract talent either. With the increasing amount of professional skills the Big 4 offer their customers, opportunities for younger staff to dabble in a wide variety of tasks are increasing. is decreasing. Few chief executives are willing to take cybersecurity advice from a new CPA.

you can go your own way

Deloitte’s Ucuzoglu warns that the split between auditors and advisors “never worked out as intended.”Consulting business KPMG It went public 20 years ago, went bankrupt in 2009 under the name BearingPoint. stingray‘sand P.wC.old advisory work with Capgemini respectively IBMtwo thatConsultancy firms focused on brought their own nasty culture clashes.

As stingray If unwound from a graceful fall on Everest, it and its three rivals would certainly think twice before embarking on a similar expedition. .far away they see Accenture, the listed consulting behemoth that emerged from the rubble of Arthur Andersen, whose demise in the early 2000s turned what was once the “Big 5” into the Big 4. The company has thrived as an independent company and now has annual sales of his $62 billion, more than any of the Big 4 companies. Since going public in 2001, its market value has risen 20 times to his $185 billion. Such awards may prove too tempting to resist.

https://www.economist.com/business/2023/04/16/why-ey-and-its-rivals-may-eventually-break-up-after-all Why EY and its rivals may eventually disband after all

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