⚡ EY's Big Break Up Plans
One of the world's biggest accounting firms is considering splitting its business. Here's why.
With our backbreaking workloads nowadays, all of us are trying to learn how to multitask.
But surprisingly, most major companies are going the opposite way.
Major conglomerates are now splitting up so that they can better focus on one area of business and increase efficiency.
Some like Ford are even splitting up their automobile business to give special attention to electronic vehicles.
Now one of the Big Four accounting firms in the world is also thinking of doing the same.
Ernst & Young (EY) is considering splitting up its auditing and consulting businesses.
Wondering why it is thinking of doing so? ReadOn!
🔍 The Problem
For years now, EY and the other Big Four firms (KPMG, Deloitte, and PwC) have been minting money by providing both advisory and auditing services to companies.
But both regulators and investors have had an issue with their dual roles. Why?
Imagine if your school teacher was also your tuition teacher.
To ensure that you keep coming back to their tuition, they would check your paper leniently and give you more marks.
That's what people think these firms are doing.
To make sure that their consulting business keeps booming, they apparently go easy on clients when they are auditing.
And this has led to a lot of companies failing miserably and investors losing loads of money.
One prime example of this is Enron.
The company's auditors failed to identify its mountains of debt and bad assets, paving the way for the company's fall in 2001.
Its share price went from $90.75 at its peak to $0.26 at bankruptcy.
And that's when regulators decided to make it difficult for firms that audit to give advisory services to the same clients.
Because of these regulations, these firms' consulting operations have become severely limited.
The problem? Consulting is where the real money lies.
And because of the restrictions on these firms that offer both auditing and consultancy services, many clients are now choosing to go to firms that only offer consultancy services.
For instance, Accenture, which separated from the Big Five firm (Yes, originally it was Big Five) Arthur Andersen in 2000, reported a consultancy revenue of $27.3 billion, which is double that of EY's advisory sales.
For EY the situation is worse. You see, the firm audits a lot of Silicon Valley firms. So, it cannot really partner with them and offer digital consulting services to its other clients.
And despite these regulations which are costing these companies millions of dollars, many still don't trust these companies' auditing process.
So, these firms may be the top four in terms of revenue, but their eminence is slowly declining.
No wonder EY is thinking of separating its auditing and consulting business.
🤔 Would Splitting the Business Help?
Yes, it would. At least for the consulting business.
EY would be able to attract more clients without the restrictions placed on it as an auditor.
But experts doubt whether the audit side of the business would be able to survive on its own.
You see, after the Enron scam was unearthed, all Big Four companies (except Deloitte) sold their consulting arms.
But when they saw Deloitte's revenues rise because of its dual role, they once again started off their consulting business from scratch.
So, separating the two arms may not be that good for business as a whole.
Plus, it would take a lot of effort to actually separate the two businesses.
For starters, the firm would have to get the approval of regulators all over the world to separate the two businesses. This could take years.
Secondly, the separation could bring a lot of stress, extra work, and even dissatisfaction among a lot of employees. Other firms have shown an interest in poaching any employees who feel they cannot take the burden of the split. So, EY would lose precious resources.
Thirdly, there is the question of how the separation will take place. Which entity will keep the EY tag? Who will take on the existing liabilities?
These are all increasingly difficult questions that need to be answered before EY can consider splitting.
However, with regulators making auditing and consulting related rules even more strict, splitting up may pay off for EY.
And moreover, it could convince other Big Four firms to do so as well.
So, if EY actually goes ahead with the separation plan, it could be the end of the Big Four as we know them.
However, EY's CEO has claimed that the splitting up plan is not final and the firm was only considering its strategic options.
Only time will tell if EY will actually go through with its plan and change the accounting industry as we know it.
⚡ In a line: EY is considering finally separating its audit and advisory arms to avoid restricting regulations and gain more clients.
💡 Quick question: Do you think other Big Four firms will also split up their businesses in the future?
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