Ernst & Young Splits into Audit and Advisory Divisions

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There’s perception, and there’s reality. For the Big Four accounting firms — Ernst & Young (EY), Deloitte, KPMG, and PricewaterhouseCoopers — there’s a perception, at least among critics, that providing both auditing as well as consulting & advisory services constitutes a clear conflict of interest.

Whether that is reality is difficult to say. But EY has apparently had it with the perception nonetheless. On Thursday The Financial Times reported the accounting titan is working on a split of its audit and advisory operations.

Close Accounters of the Two Kinds

It’s not the first time one of the Big Four firms has splintered off its consulting arm. In fact, each of the Big Four did just that following the infamous Enron-Arthur Andersen scandal in 2001, which ultimately sank the former fifth plank of the then Big Five. Let’s mark that as one point on reality’s ledger.

Each of the big firms rebuilt their consulting divisions in the following years, pushing back on criticism every step of the way — though all four firms have each paid millions of dollars in fines to the SEC since 2014 to settle claims of conflict of interest. While the details of the voluntary break-up are reportedly still being hashed out, such a dramatic move still represents a remarkable reversal for the industry:

  • EY’s audit-focused arm would be split off from the rest of the organization, but would still retain some staff in tax and other areas to support company audits, according to sources who spoke to the FT.
  • The decision would likely spur similar moves from the other Big Three — and could even motivate regulators to codify such divisions into law. “We will all need to review our position, but that will not be quick or knee-jerk,” an anonymous senior partner at another Big Four firm told the FT.

Any decision will ultimately be put to a vote by the firm’s roughly 3,800 partners, who span 150 countries. We count on these accountants being able to handle a simple vote count.