In a shake up that will restructure the permanence of the Big Four, EY has announced that it will go ahead with splitting into its audit and consulting divisions into two separate companies. All of the Big Four accounting firms—EY, Deloitte, KPMG and PwC or PricewaterhouseCoopers, have been under regulatory pressure in the recent past over concerns that the firms’ advisory services could have a conflict of interest with their independent auditory reviewing. 

For a long time, these companies have managed to escape regulatory action instead arguing for only a virtual wall between the units claiming it helps enhance audit quality while reducing costs. Due to the absence of strict action, the division was deceptive and has led to recent audit failures. The firm faced heat after the Wirecard scandal which led to the fintech company’s insolvency in 2020. EY affiliates had audited Wirecard’s books. 

A namesake wall

In India, the audit and consulting units are already distinct with the statutory audits being performed by a separate entity called SRBC & Co. LLP. Despite the formal separation, EY recently came under the scanner of the National Financial Reporting Authority in India after it found EY’s member firm SRBC & Co. LLP guilty of conflict of interest while offering its auditing services to the state-funded Infrastructure Leasing & Financial Services or IL&FS company. 

While the London-based firm had denied any plans to restructure in June, last week it confirmed the separation and said it would start voting on the matter on a country-wide basis starting in late 2022. Given that the company has 13,000 partners, it will potentially finish voting by early 2023. Once concluded, the move will be the most prominent overhaul in the sector since the erstwhile Arthur Andersen was split up to form Accenture in 2002, bringing down the ‘Big Five’ to ‘Big Four’ eventually. 

Impact on India

Assuming the company is broken up successfully, it would naturally mean an end to the ‘Big Four’ era. Industry insiders believe that it could potentially rush the other consulting giants to break up their business models. Needless to say, this could have widespread repercussions on the industry and the audit economy across and in each country it is present in. Just as a sample, EY has a total of 3,12,250 employees globally and has more than 80,000 employees in India. The company also has over 700 offices in 150 countries. 

In an interview with ET, the CEO of tax and advisory firm, Grant Thornton Bharat, Vishesh Chandiok spoke about the possible implications of the EY split. “Basically the brand will be dead in India forever, which is a sobering thought. Remember for audit you can’t use the global brand in India and globally non-audit will be in a new brand. That’s a massive loss in value which I’m not sure how the India partners will be compensated for,” he said. 

The split will also open up business opportunities for smaller firms. The monopoly that these huge firms create tends to snatch clients away from the smaller fish in middle markets, which might witness a reversal following the break up. This could free up more space for smaller companies and democratise the auditing market. Smaller players in the industry were also prone to talent preferring multinational companies instead of them. 

On the flip side, there are fears that the job market might be adversely affected due to lowered hiring power from the split businesses. In May 2022, EY announced that it will hire 25,000 tax professionals across the globe. It also had plans to bring 6,000 new employees for its Global Delivery Services (GDS) tax team across various countries, including India. The company’s Global Tax GDS head had stated during the announcement that “around 80% of the GDS tax team hiring will be done in India and the remaining 20% will be done in other locations around the world.” 

However, there are some obvious advantages that will improve EY’s ease of business in some ways. After the separation, EY’s audit firm will comprise between 14% to 17% of the combined business and will be expected to function freely. The firm will be able to cater to clients that they were auditing without any fear of regulatory disapproval. EY on its part is putting up an optimistic front. An internal document going around the company stated,

“Now is the time to jump to new growth curves for both businesses.” 

CEO Carmine di Sibio has assured employees that the split will propel the company’s growth potential. “The separation can bring in an additional $10 billion a year for the advisory business in consultancy fees from big tech companies, as the business will be freed from conflicts that bar it from winning work with EY’s large audit clients.”