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November 30, 2022

EY UK Chair Insists Audit Will Not Be the Red-Headed Stepchild of Professional Services if the Split Goes Forward

EY stress balls

For years, audit has struggled to attract talent and especially leadership because let’s be honest, audit is awful. You’re clients least favorite person, you have regulators breathing down your neck, and one little mistake can ruin your whole career. Plus the pay is…not great compared to other service lines.

EY UK Chair and Managing Partner Hywel Ball says all that will change if and when EY splits off its audit and consulting arms. Because reasons.

“Audit quality is going to be better,” he told Financial Times. Oh. Well. Guess that’s settled then.

A few reasons Mr. Ball gives for why audit will be stronger post-split given in the FT article:

  • Spinning off the consulting and deal advisory arm would free up staff and capital to focus on audits.
  • Being in an audit-dominated business would allow these specialists to focus more on audit work.
  • Money raised from spinning off the advisory division would enable more investment in the audit business by reducing competition for capital internally from fast-growing advisory service lines.
  • Money raised from the break-up would also strengthen the audit arm’s balance sheet by allowing it to reduce its debts and free up funds for investment in auditing

“At the moment, there’s a huge part of the business that competes for that capital,” he said. “In the new business, audit will be the majority sport so will have a much stronger voice.”

A senior partner at another firm that isn’t EY told FT Ball’s claim is nonsense.

A senior partner at another Big Four firm said Ball’s claim that the audit business would have better access to capital “doesn’t stack up” because recent investments in audit quality have mostly been funded by the firms’ wider businesses.

Ball said this was not the case in all jurisdictions and that in some countries, which he declined to name, auditors were subsidising investment in the advisory business. The Big Four do not disclose their profits in most jurisdictions, making the competing claims difficult to verify.

EY announced a $1 billion investment in next-gen assurance technology this past summer, part of a wider $2.5 billion investment over the next three years.

The firm expects to raise about $11.5 billion in the consulting IPO and to borrow another $18.7 billion, “much of which would be used to pay off existing debts and pension obligations and to fund payouts of up to four times annual salary for audit partners.” Questions have been raised about EY leaders’ ambitious post-split predictions; branding and marketing the separated consulting business is a huge undertaking and it won’t come cheap. The firm expects the consulting biz to start operating with between $25 billion and $27 billion of revenue, and grow at between 20% and 25% a year. All without the benefit of the EY brand attached to it.

When asked what happens if partners don’t approve the split — the vote is expected early next year — Ball said “I don’t think the status quo is an option.”

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