September 22, 2021

EY’s Europe Restructuring Is Just ‘Rearranging the Deckchairs on the Titanic’

Atul Shah

“This is rearranging the deckchairs on the Titanic. To regulators, they have always been giving warnings that if you close one down, we will be the Big 3 – so leave us alone, as we are ‘too big to fail’. Fundamentally, it’s the leadership culture and aggressively commercial model of these firms which is broken and this cannot be fixed by changing ownership structures.”

Atul Shah, professor of accounting and finance at City University of London, told City A.M. regarding EY’s plan to centralize power in a new European executive team, which the Financial Times first reported would pool resources across the region but also raises concerns that any financial hit from the Wirecard scandal might also be shared.

And you better believe EY, especially in Germany, will take a financial hit from the Wirecard scandal.

According to the Financial Times, EY’s plan “breaks from the federated business model of the Big 4 firms in an attempt to cut management costs by half and will authorize the central team to decide on partners’ pay.”

The new Europe West region, which will be launched on July 1 (New Year’s Day in the Ernstiverse), will include Germany, France, the Netherlands, Italy, Spain, and 20 other western European and north African countries, according to City A.M.

But FT reported that EY partners are concerned the new structure may lead to penalties related to Wirecard being shared beyond the German team that handled the work, and the FT article included this equally wonderful quote about how French EY partners feel about that:

“French partners are going ballistic about it because they say ‘why should we pay now for the Wirecard mess?’,” said one person close to the firm.

Another person close to the matter said there was “not a lot of transparency” on whether any financial hit from Wirecard-related lawsuits or regulatory action will end up being shared by partners in other countries.

But according to sources, FT and City A.M. reported that separate legal entities will be retained in each country despite the centralized power.

Even though the Big 4 are considered “too big to fail,” can EY Germany survive potentially having to settle a slew of lawsuits from Wirecard shareholders for God-knows-how-much money and possible fines from regulators for its horrible auditing of Wirecard and the resulting fraud that collapsed the payments company?

Sure, they could call on partners to invest capital in the firm, but would that be enough to cover all the legal costs and potential legal losses? If not, how could EY Germany stay afloat without money being funneled in from its other mates in the Europe West region or from the Mothership in London? Could EY Germany be the next Laventhol & Horwath?

Who knows! But it’ll be interesting to see how it all plays out.

EY to centralise power in Europe in break from typical Big Four model [City A.M.]
EY Europe revamp has partners worried over Wirecard damage [Financial Times]

Related articles:

German Investigator Can Confidently Prove EY Was Unbelievably Bad At Auditing Wirecard
EY Partners Told How to EYsplain Wirecard Mess to Clients

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