Media contributions
1Media contributions
Title EY considers spinning off audit arm Degree of recognition National Media name/outlet The Australian Financial Review Media type Print Duration/Length/Size 661 words Country/Territory Australia Date 28/05/22 Description Conflict concerns
Global consulting powerhouse EY is considering splitting off its audit arm, amid increasing regulatory concerns about the conflict that has risen from the firm and its big four rivals providing non-audit work to auditing clients.
A string of audit-related failures across the world have triggered the regulatory crackdown, including the collapse of EY clients Wirecard and Luckin Coffee and KPMG UK audit client Carillion.
In Australia, regulators have repeatedly complained that the firms have compromised their "appearance of independence" by providing non-audit work for audit clients and the poor quality of corporate auditing.
"We routinely evaluate strategic options that may further strengthen EY businesses over the long term. Any significant changes would only happen in consultation with regulators and after votes by EY partners. We are in the early stages of this evaluation, and no decisions have been made," EY said in a statement.
The EY plan, which has been in the works for months and would involve spinning out the auditing division into a separate company, was first reported by Michael West Media.
EY is legally structured as a network of independent national firms that pay to use the common brand and systems, and employs about 312,000 staff across more than 150 countries.
Any decision would require a vote of the almost 4000 partners who are scattered across these independent national firms. This might result in some individual national firms keeping their auditing arms, while others are spun out from the auditing business into a separate entity, three people with knowledge of the matter told The Australian Financial Review.
Regulators worry that the provision of non-audit services to audit clients compromises the ability of the firm's auditors to form an independent view about whether the information presented in the financial report reflects the financial position of the company.
Any breakaway audit unit would also have a range of non-audit experts to ensure the quality of the service, and an independent large-scale audit firm would provide corporate clients an alternative external auditor.
In Australia, EY made about $550 million from its audit clients, of which about one-fifth, or $120 million, was for non-audit services.
Although the EY insiders acknowledged that the decision was partly caused by the global regulatory crackdown, they denied it had any link to the firm's involvement in the collapse of Wirecard and Luckin Coffee.
Regulators around the world have moved to rein in the non-audit work the big four firms do for audit clients.
Britain's Financial Reporting Council has already ordered the firms to structurally separate their auditing operation by mid-2024.
In the US, the Securities and Exchange Commission is investigating conflict-of-interest concerns about the audit and consulting arms of the big four, according to a report in The Wall Street Journal.
A split of the big four auditing and non-auditing businesses was inevitable, said Johannes Dumay, an accounting academic from Macquarie University.
"The writing has been on the wall for many years as far as splitting auditing and non-auditing work for the same client. For the big four, audit is part of the overall service that they offer all clients, so doing non-audit work goes hand-in-hand with being a one-stop-shop for their customers, and partner profits," Dr Dumay said.
It is understood that about 18 months ago, KPMG's partnership examined splitting off its audit arm but decided to stick with the multidisciplinary model.
A spokesman for PwC said the firm was not planning to split off its audit business and continued to believe that "access to a wide range of expertise and competencies is essential to serving our clients".
Deloitte declined to comment.
Key pointsA string of audit-related failures has triggered a regulatory crackdown.
Any move would require a vote of the partners across EY's national network.
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Document AFNR000020220530ei5s00015Producer/Author Ed Tadros Persons John Dumay