Deloitte explores the audit division, consulting arms, following Ernst & Young

Deloitte is exploring a plan to split up its global auditing and consulting practices, after fellow Big Four accounting firm Ernst & Young attempts to Separates from her advisory armAccording to people familiar with the matter.

These steps would mark the biggest change in the accounting industry in decades, handing windfall gains to tens of thousands of corporate partners and creating two new consulting giants and two divested audit firms.

Deloitte reached out to investment bankers in

Goldman Sachs Group a company

Following news of the potential global split of rival EY, the people familiar with the matter said. Goldman and

c. B. Morgan Chase

The people said EY & Co. is advising on a potential restructuring.

Deloitte’s talks are still in a very early exploratory stage, according to one of the people familiar with the matter.

Following the initial publication of this article, a Deloitte spokesperson denied that the company was exploring a plan to split. “We remain committed to our current business model,” the spokesperson added.

EY believes the division will allow its rapidly growing advisory side to more easily acquire new clients, without restrictions that restrict companies’ ability to sell advisory services to their vetted clients.

Regulators around the world have been increasingly concerned about conflicts of interest – whether auditors, who are supposed to scrutinize the company’s books, will make it easier for clients to buy profitable consulting services from them. In the United States, the Securities and Exchange Commission Investigation of possible violations of independence rules By The Big Four, The Wall Street Journal previously reported.

EY’s remaining audit work, which will likely remain as a partnership, will be freed of at least some of these potential conflicts. But it will be a smaller and slower-growing company, which could make it vulnerable to lawsuits and make hiring more difficult.

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KPMG and PricewaterhouseCoopers, other members of the Big Four, say they will stick to their current approach of providing tax advisory and services in tandem with the bread and butter auditing business. A KPMG spokesperson said in a statement that the company remains “committed to our multidisciplinary model” and has not spoken to banks about the split. PricewaterhouseCoopers said last month that it has ‘No plans to change course’ from his current approach.

No change in the Big Four will happen quickly.

EY expects it will take at least another 18 months or so to complete any part of its advisory arm, as it strives to finalize its strategy in order to potentially Split around the world After an early leak of her plans, according to people familiar with the matter.

People familiar with the matter said the company plans to make a formal offer by mid- to late-summer to the roughly 12,000 partners who own the company and will need to vote to approve the sale.

If EY decides to split, the most likely option is an initial public offering of its advisory arm, according to people familiar with the matter. The company has not ruled out a private selling alternative. But the scale of the business — which combines consulting with tax revenue of $26 billion in the last fiscal year — puts it beyond the reach of most private equity firms, people familiar with the matter said.

Deloitte’s advisory side is even bigger than that. The firm’s advisory and tax businesses among themselves generated nearly $40 billion in revenue globally in the year that ended in May 2021, compared to $10.5 billion from the audit business. Deloitte sold its UK restructuring business to consultancy Teneo Holdings LLC last year.

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“The bigger question is ‘How much money will this deal put in the pockets of the remaining audit partners? If they can’t sell the advisory arm enough to generate enough cash for the partners, they won’t vote to approve it, it’s that simple.

– Lynn Turner, former chief accountant at SEC

To get its plans approved, EY needs to win over most of its partners in each of the roughly 140 countries that make up the company’s international network.

Accounting industry watchers said its ability to do so may depend on how much it can get for the consulting business, which will subsidize the payments it can make to partners. The magnitude of those windfalls is expected to vary depending on the seniority of the partner, and those closest to retirement are likely to receive the most.

“The bigger question is ‘How much money is this deal going to put in the pockets of the remaining audit partners?’” said Lynne Turner, a former chief accountant with the SEC. “If they can’t sell the advisory arm enough to generate enough cash for the partners, they won’t vote to approve it, it’s that simple.”

In addition to getting partners in different lines of business and locations on board, EY will need to negotiate the split with regulators around the world who oversee the audit industry, according to people familiar with the matter. The last time EY split from its advisory arm, with its sale to France’s Cap Gemini Group SA for €11 billion, valued at about $10.8 billion at the time, in the early 2000s, it took about a year to get approval The Securities and Exchange Commission, according to a person familiar with the matter.

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Regulators will want to ensure the sale does not make EY more vulnerable to Arthur Andersen-style internal meltdown, if the company is hit with a massive lawsuit.

An often audit firm can be financially viable, said Derek Coleman, director of research analytics at data provider Audit Analytics. He said strict independence rules in the United States and many other parts of the world meant that major accounting firms no longer subsidized audit fees from the advisory side. “The audit practices of each of the Big Four should be able to stand on their own,” Coleman added.

write to Jane Eaglesham at [email protected] and Corey Driebusch at [email protected]

Corrections and amplifications
Deloitte is exploring a plan to split global audit and consulting practices. An earlier version of this article misspelled Deloitte as Deliote in a headline. (Corrected June 8).

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