THE EY-BREAKUP

In a move that may restructure the Big Four's stability, EY has announced a global split.

Following the breakup of EY, there has been speculation in the market that the other big four may follow suit.

Ernst and Young is a company that was created to solve all tax, transaction, law, and strategy difficulties. Being one of the world's largest consulting organizations, it’s supposed to be a solution to all the challenging and perplexing problems in the given areas. On 8th September 2022 EY announced its split. EY's separation will result in two businesses, one concentrating on audit, assurance, and tax services and the other on advisory services such as strategy, risk management, and valuation/business consultancy. The audit business will retain the EY name, while the advisory firm will have a new brand identity.

The circumstances that could have led to the split of EY have a long history. EY's audit included "severe deficiencies." Hubert Barth, the head of its Germany business, resigned in February following the failure of payment services firm, Wirecard. The Wirecard scandal was a series of fraudulent financial reporting and unscrupulous business practices that led to the collapse of Wirecard, a payment processor and financial services provider located in Munich, Germany. The firm was included in the DAX index. They provided consumers with electronic payment transaction and risk management services, as well as physical card issuing and processing. Wirecard Bank AG, a subsidiary, owned a banking license and had arrangements with a number of international financial services firms. Allegations of accounting fraud have followed the firm since its inception, and questions have been raised about possible malpractice of Wirecard's long time auditor EY. Wirecard was not an isolated example, as EY's other audits, including NMC Health, the largest private healthcare provider in the UAE, and Luckin, China's largest coffee chain, were embroiled in severe financial issues. The Securities and Exchange Commission fined EY $100 million earlier this year for a cheating scam (SEC). These incidents have caused serious reputational damage to the company and may have triggered the split.

The second reason for the split could be to avoid conflicts and interference between the auditing and consulting services provided by the company to various corporate clients. In other words, the split removes significant conflicts of interest with the rest of the business which means that they might be in a position to grow further, whilst also producing quality audits.

Thirdly the split allows both parts of the business to operate under their names when working with clients or potential customers who may not yet be aware of them - but once the clients are aware of them, they can focus on what distinguishes both the parts of businesses from other firms in their field rather than being lumped together as part of the "big four" category. It's difficult to imagine why regulators would be opposed to separation. Conflicts of interest between audit and consulting have brought humiliation to some of the world's largest organizations like Deloitte and PwC.

The Big Four auditing firms (Deloitte, PwC, KPMG and EY) entered India and democratized the auditing profession. Before their entry, many audit firms were family businesses passed down from generation to generation. But these large multinationals, in their search for talent, hired professionals without nepotism. This meant new and young professionals could move up the ranks and become recognized experts in the field. However, companies like the Big Four crushed small companies that were actually the doing well. These smaller companies have faced issues like retaining talent due to better offers at larger companies. So, the split of the Big Four could mean that smaller companies have a better chance of survival.

This split may conjointly have an effect on the job market negatively. Post EY’s split, government agencies might ask the other 3 companies to separate their auditing and consulting business too. This can affect their revenue and thus their employability. The Big Four are major employers and have vowed to hire around one lakh individuals within the next 12-24 months, according to a report revealed by The Economic Times in June 2022. This hiring spree won't achieve success if they're compelled to split their business.

Despite the drawbacks, one should not ignore the advantages associated with the EY split. The business division plans of EY would be benefited in various ways. Initiatives by the Big Four auditing firm to split up its advisory and consulting divisions may allow EY to expand further by reducing serious conflicts of interest. The benefits of separating audit and assurance tasks formally are clear to see. By becoming exempt from the regulations prohibiting it from providing advice to audit clients, a global split might enable the accounting firm to earn an additional $10 billion in advising fees annually from the largest IT companies in the world.

EY is particularly under pressure because of the defective audits EY made to slumped German payments company Wirecard AG; although it is unclear whether a separation would free it of any responsibilities due the failure.

Perhaps, EY might simply be looking for a chance to monetize some of its assets, or it may have been anticipating stricter regulations. According to the Financial Times, one choice that is taken into consideration to monetize EY's assets is the promotion of the consulting firm's stocks to a personal customer or to an inventory exchange, as a result developing a windfall for existing EY partners. But what about the rump that remains?

It is comprehensible that rookies frequently leave their positions to pursue more lucrative and secure employment in consulting or investment banking as soon as they become certified. Therefore, it will be necessary to increase auditing's financial and cultural appeal.

Expanding the role of auditing's financial statement to include thorough audits of corporations' assertions regarding non-financial performance, such as environment and social effect, is a good place to start. Additionally, the way managers frequently choose the audit partners who are supposed to be their watchmen is the main offender. However, better audit quality is the prize for stock market investors, and a breakup could help. The creation of a beneficial cycle should be the aim. This aim could be achieved by drawing in workers who are better at their respective profession and reducing the amount of blow ups, hence making auditing more appealing as a long-term career.

By Khyati Sharma, Simiy Maria Tomy and Sanaa Chawla