Market watchers say no easy way out of conflict-of-interest problems as EY halts break-up plan

EY’S HALT of a plan to split its audit and consulting divisions came as no surprise to some in the industry, given the complexities of such a split and the synergies of the combined group.

But market watchers also noted that conflict-of-interest problems – a motivating factor behind the plan – remain unresolved for the industry.

On Wednesday morning (Apr 12) Singapore time, EY announced in an internal memo to its partners that it was halting work on the plan after resistance from its United States branch.

The break-up plan, dubbed “Project Everest”, began in end-2021. It entailed getting the approval of more than 10,000 EY partners across 140 countries in a vote that was to take place by the first quarter of this year.

Tong Yen Hee, an associate professor in accounting at the Nanyang Technological University (NTU), told The Business Times: “Given the varied interests and demands of different partners, the split was always expected to be complex and difficult to pull off.”

Likewise, Mak Yuen Teen, professor of accounting at the National University of Singapore (NUS) Business School, said he was not surprised that the firm’s breakup plan fell apart, as there are “strong synergies” between its auditing and consulting units.

“Audit by itself may find it hard to attract talent, and audit can open the door for other work, which benefits the consulting (side), subject to conflict rules,” he said.

“I spoke to a couple of former partners of the Big Four firms; they don’t believe that consulting benefits from audit, but I believe it does,” Prof Mak added, noting that the network of an audit firm may be beneficial.

While he pointed out that the other Big Four firms may have been monitoring EY’s developments, there was “no sign” that they were thinking of going down the same path. He added that partners he has spoken to from these firms did not think the split was a good idea.

The Big Four firms are EY, KPMG, PwC and Deloitte.

Indeed, shortly after EY’s news broke, Bill Thomas, global chairman and chief executive of KPMG International, wrote in a LinkedIn note that his firm would not be changing its business model.

“While there is a lot of conversation about the future of our profession following the news of EY’s decision not to separate its audit and advisory businesses, I want to leave no room for doubt about where KPMG stands.”

He said KPMG remained “firmly committed” to its business model: “Our multidisciplinary model ensures we are always able to bring the right expertise and skills into the room at the right time to tackle any issue, enabling us to provide the very best advice to clients. It allows us to be an agile and resilient business, that can more easily respond to market conditions.

“To monetise the goodwill of our firm that has been created for more than 150 years in many of our member firms, at the expense of the next generation, would be entirely contrary to our values and culture,” he added.

However, EY’s decision to halt work on Project Everest, and the decisions of the remaining three of the Big Four professional-services firms to maintain their business models, do not solve a long-standing conflict-of-interest problem.

NTU’s Prof Tong noted that accounting firms continue to face regulatory pressures – such as from the UK’s Financial Reporting Council – “to mitigate conflicts of interest between their auditing and consultancy businesses”.

That conflict of interest had been one of the reasons EY had proposed the split.

“Thus, even if a structural split like the one proposed by EY is not feasible, accounting firms will have to find ways to convince stakeholders and regulators that an effective operational split, that is a ‘Chinese wall’, exists between both businesses,” Prof Tong added.

Prof Mak of NUS Business School said that, given the “continuing concerns about conflicts between audit and consulting, there may be some thought of spin-offs of certain services, but not a full split”.

In response to media queries, EY said its global executive committee “remains committed to moving forward with creating two world-class organisations that further advance audit quality, independence and client choice”.

“However, after much diligence, we are stopping work on Project Everest.”

EY said it has businesses “that need to be operated differently to reach their full potential”, and that this was a “core tenet” of Project Everest.

“Winning in a rapidly evolving market and better preparing ourselves for a future transaction will require us to adapt our governance, operating model, cost structures, capital investments and go-to-market approach. Globally, we are committed to changes that allow all of our businesses to thrive.

“As a result, we will begin taking actions based on what we have learned from the work done over the past year – actions that will both benefit our businesses today and better prepare us for a new transaction,” it said.

The timing may not be opportune for a spin-off of a consulting business. While EY’s consulting business had been growing faster than its audit business – also referred to as assurance – the tide may be turning.

Prof Mak noted that the consulting industry had contracted in the first quarter of 2023. EY’s consulting unit could also have been disadvantaged relative to its peers because of factors such as “uncertainty, concerns about flight of talent and quality of service after the split”, he added.

Prof Tong said: “If the global recession becomes increasingly likely, given the environment of heightened interest rate and geopolitical risks, the market for consultancy will probably shrink as companies avoid expansion, investment and other growth plans.”

In one of its biggest rounds of layoffs, consulting giant McKinsey said in February that it would be cutting 2,000 jobs. KPMG also announced that it would be cutting 2 per cent of its staff in the US, following a slowdown in mergers and acquisitions activity.

Last month, tech consulting firm Accenture said it was planning to slash 19,000 jobs worldwide to cut costs.