Breaking Up is Hard to Do!
The Financial Reporting Council (FRC), which regulates external auditors, informed the Big 4 accounting firms in 2020 that it expected them to separate their audit divisions from the rest of their operations by June 2024. This was partly in response to: high profile ‘audit’ scandals; MPs demanding these firms break up to reinvigorate the financial market and improve standards; claims that audit firms’ independence and judgement could be impaired if they provided both audit and non-audits services to the same clients; suggestions that audit quality had fallen due to the wide range of services offered by the Big 4 firms to clients.
Numerous stakeholders criticised the troubling optics of the same Big 4 firm completing the audit of a client while providing the same client with a range of expensive and extensive consultancy services.
Government backed reviews proposed the clear separation of audit work from the other services the Big 4 offer, claiming the historical informal measures used by the Big 4 to be inadequate.
Ernst & Young (EY), one of these Big 4 firms, proposed in 2021/22, in its plan known as Project Everest, to break up its global business. Its global consultancy service division had been booming, it would be separated from the audit division, and then the lucrative consultancy division would be floated on the stock exchange, possibly generating windfalls worth about £7 million for each EY partner. Meanwhile, the audit division would remain within the partnership. This global EY split received the approval of EY bosses in early September 2022. However, problems soon emerged: its practises in China and Israel refused to participate in the planned break up; US partners’ expressed concerns; disagreements over which assets, liabilities and people stayed with each division became more vocal; partners argued over which division kept the tax consultancy business; some partners worried they would be worse off; over 13000 partners across the world could not agree. Following months of disagreements, EY scrapped Project Everest in April 2023, but claimed it would retain the vision to create two distinct organisations.
EY recognises that the FRC still expect all the Big 4 firms to separate their audit divisions from the rest of their business. How this separation will now occur for EY and the other firms is unclear. Divorce is messy. Dividing assets is difficult. Breaking up is hard to do!
The Auditing Team
Department of Finance, Accounting and Economics