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EY ‘to tender for most audits’ post split

Dec 6, 2022

EY hopes its radical proposal to split its audit and consulting arms into standalone outfits will allow the resulting accounting firm to tender for “most audits that come to market” and nab clients from rivals who have too many conflicts of interest to pitch for work.

Speaking publicly on the firm’s proposed separation for the first time, EY’s head of audit and assurance Glenn Carmody said the split would ramp up competition, improve audit quality and increase EY’s market share of audits.

He said there was “not a tender on the market” that all big four professional services firms – Deloitte, EY, KPMG and PwC – could all pitch for because of conflicts with their consulting work. Increased regulatory intervention around this issue provided a “very real” motivation for the split, he added.

Under EY’s proposed split, the firm would separate its audit and consulting divisions globally into a partner-owned accounting arm known as AssureCo and a listed-advisory outfit named NewCo to help the firm get around rules that prevent auditors providing lucrative non-audit services to their clients.

Mr Carmody said regulatory pressure was “playing out overseas more so than” in Australia – the UK in particular is leading the crackdown – but that it was “starting to happen” domestically as well.

“Firms like ours continue to grow their footprint into managed services and tech consulting and all those things that are incompatible with providing audit services ... for the same companies,” he said.

“That means that there are a number of audits where we just can’t tender for the audit if it comes to market because we’re doing lots of other work for that company already.”

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While some of this work could be unwound or systems put in place to prevent information sharing between staff, Mr Carmody said this was often “too difficult” or “the company actually doesn’t want to unwind it in the first place”.

He estimated that EY had to consider such conflicts of interest at least weekly when tendering for work, with the “hot” tender market “seeing more and more of that play out”.

The audit chief hoped that the proposed split would open up this market for EY, especially as rivals would likely still grapple with conflicts. While other professional services firms such as KPMG have ruled out splitting their own audit and consulting practices , some experts have predicted they would need to do so out of commercial necessity if AssureCo pitched for their clients.

“We will be able to tender in reality for most audits that come to market because we won’t be part of a firm that’s doing any other services for companies in the market,” Mr Carmody said.

“From our perspective, it means more competition, if we’re able to play in those tenders and win some of them, it means our staff and our partners will get a greater experience on a broader range of clients, and it means that their ability to deliver quality audits is enhanced because they’re getting different experiences.”

But the EY boss acknowledged the split – which would be the biggest shake-up in the accounting profession in more than 20 years – had to clear several hurdles before becoming reality, starting with a partner vote early next year.

“It’s a very large, very complex transaction, probably the largest and most complex of its kind, certainly in our industry, for a long time,” he said.

[Financial Review]

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