EY likely to score more clients after demerger

Press/Media: Expert Comment

Period4 Oct 2022

Media contributions

1

Media contributions

  • TitleEY likely to score more clients after demerger
    Degree of recognitionNational
    Media name/outletAFR Online
    Media typeWeb
    Duration/Length/Size675 words
    Country/TerritoryAustralia
    Date4/10/22
    DescriptionClients would be more likely to buy EY’s audit and consulting services if they were offered by separate outfits instead of as a combined firm because the split entities could offerhigher quality audits and more technology-focused advice, new research shows.

    Companies would be 62 per cent more likely to use EY's audit business and 57 per cent more likely to use its consulting services if they were offered by two standalone firms, according to Source Global Research, which provides research about the management consulting industry.

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    EY is considering splitting its audit and consulting divisions globally, in what would be the biggest shake-up in the accounting profession in more than 20 years.

    The move has already been flagged as a potential money spinner for partners, but the Source research suggests it could also lead to additional revenue.

    The proposed division, which partners will vote on in the new year, would involve EY’s consulting practices spinning off as a new listed company called NewCo and its other services remaining under the existing partnership structure as an accounting firm named AssureCo.

    Source surveyed 400 senior buyers of audit services globally. Most said they would be more likely to hire EY if they split their services. The research also showed the firm was unlikely to lose work from the division.

    Thirty-nine per cent of respondents said that the split would not change whether they hired EY for consulting work, while 32 per cent said the same for auditing.

    Source principal consultant Martin White said respondents who were likely to increase their use of EY after a split pointed to the possibility of higher quality audits and advisory work that was better focused on technology from separate firms.

    “Those who prefer to work with a separate audit firm expect to get a higher quality audit from a firm that focuses just on audit and think audits will be perceived by external stakeholders as more independent,” Mr White said.

    Too soon to know

    The proposed split is geared toward helping EY get around global regulatory rules that prevent professional services firms providing lucrative non-audit services to audit clients, as high-profile company collapses and government inquiries cast doubt on how the big four manage conflicts of interest.

    “If EY has proved it can be done, and in doing so removed any conflicts of interest and improved audit quality ... there may be pressure from regulators to split the rest of the big four,” he added.

    But Macquarie University professor of accounting and finance Johannes Dumay said it was too soon to say whether the proposed split would lead to improved audit quality.

    “[That] is still yet to be determined until such time the split happens and we can see the results,” he said.

    “In theory, splitting audit from advisory services is a good idea to eliminate potential conflicts of interest.

    “However, [whether] it will prevent the large business failures that have happened from time to time is another open question ... it is a mistaken belief that it is audit’s job to catch the criminals, it is just another tool in the line of that defence.

    “Regulators and investment due diligence are other crucial lines of defence.”

    Professor Dumay said if customers were more likely to use EY’s demerged services and the firm was successful in monetising the split, then going ahead was “good business”.

    On the advising side, Mr White said there was a “real opportunity” for EY to rebrand the advisory business as “a more dynamic, technology-focussed consulting firm” than the reputation of accounting firms allowed. Money from the IPO could be invested in new technology, he said.

    “Clients also think an independent advisory firm will have better technology and be more flexible than an integrated firm.”

    But he warned that EY risked “getting the rebrand wrong” and that the IPO might not be as successful as the firm hoped, meaning those benefits may not eventuate.

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    Fairfax Media Management Pty Limited

    Document AFNROL0020221007eia30005l
    Producer/AuthorHannah Wootton
    PersonsJohn Dumay