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 which pay to use the common brand and systems, and employs about 312,000 staff across more than 150 countries.
Any decision on the split would require a vote of the almost 4000 partners across these independent national firms.
This might result in some individual national firms keeping their auditing arms, while others spun out the auditing business into a separate entity.
Regulator crackdown
Driving the decision is the increasing regulatory scrutiny the big four firms are facing.
The crackdown has been driving by a string of auditor failures including the collapses of EY clients Wirecard and Luckin Coffee and KPMG audit client Carillion.
Wirecard, a German payment processor, filed for insolvency in 2020 after admitting that €1.9 billion ($3 billion) of cash on its books probably never existed, while Luckin Coffee filed for bankruptcy this month after allegations the company’s executives inflated income, costs and expenses for 2019.
Both scandals have badly hurt the EY’s ability to win work in Europe and China. In a 2021 partner briefing, Deloitte Global CEO Punit Renjen said EY’s Wirecard issues would “haunt them, certainly in Europe” and the firm was “persona non grata in terms of audit in the Chinese market because of Luckin Coffee and Wirecard.”
The UK accounting regulator, the Financial Reporting Council, has already ordered the firms to structurally separate their auditing operation by mid-2024.
In the US, securities regulator the Securities and Exchange Commission is conducting a probe into conflict-of-interest concerns about the audit and consulting arms of the big four, according to a report in the Wall Street Journal.
In Australia, corporate regulator Australian Securities and Investments Commission has repeatedly complained about the big four compromising their “appearance of independence” by providing non-audit work for audit clients and about the quality of corporate auditing in the country.
In 2019, EY denied there was any conflict in providing an independent prudential report for NAB while the firm was also collecting $20 million as the bank’s external auditor.
ASIC’s most recent quality inspection reports found that one in five audits reviewed by the big four lacked the desired assurance that company financial statements were free from material error.
EY had by far the best results of the major auditing firms with ASIC finding the firm did not do enough work on 7 per cent of the key areas of work it did on audits of risk-targeted companies in the 2020-21 financial year. This is down from 14 per cent for 2019-20 and 22 per cent for the 2018-19 financial year.
In contrast, the findings ranged from 25 per cent for PwC through to 29 per cent for Deloitte and KPMG.
It’s understood that about 18 months ago KPMG’s partnership examined splitting off its audit arm but decided to stick with the multidisciplinary model.
EY Asia-Pacific area managing partner Patrick Winter, EY Oceania chief executive David Larocca and its local managing partner for assurance, Glenn Carmody, all declined to comment. Comment has been sought from PwC and Deloitte.
