Possible changes to the EY structure

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Leo
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Possible changes to the EY structure

Post by Leo »

Hi everyone,

Recently, some of the major media in the financial sector have relayed the information that EY could reshape its structure by splitting up its audit service from the advisory.

1. One of the main reasons they mentioned was that this could improve the auditor's independence, hence, delivering a better quality of audit work.
2. The other reason, more as a business opportunity, was that by spinning off audit and consulting units and creating two separate businesses, it could benefit the latter enormously by lifting of the independence constraints and helping to achieve even higher growth.

I think that the first point is just a pretext for the second one, which is the real reason. All the big four firms run strict independence/conflict checks before starting a new assignment with an existing or a new client. There is no such thing as an auditor delivering consulting service whilst carrying out audit (I've never seen it).

However, one true thing is that once the audit mandate expires, and the client switched to another auditor, the retired auditor may continue to serve the client by switching channels (from audit to consulting). Because of that, they might want to maintain a good relationship with their client.

I think the second point is more like the real reason. But to be disruptive, the two entities must be completely independent, which means no sharing of information between the auditing entity and the consulting entity and no financial ties whatsoever between them. For example, if the consulting entity is pitching a client, asks the audit entity for some information, etc... which will easily happens and could lead to unnumbered law suits.

In terms of the poorer quality of audits delivered by the main actors of the audit sector in recent years, I think it's not an independence problem but more of a time planning, budgeting, and talent problem. Auditing firms generally have a tight schedule to improve the profit margins on jobs. I've personally been part of a few audit assignments. I was lucky that an assistant was helping me to accomplish all the administrative formalities so I could focus on doing some real field digging. Still, one-third of the engagement time is consumed by filling out unnumbered forms...so in the end, there is not enough time for some real audit work. The problem comes from the budget allocated; sometimes, the fees are so low that it's hard to mobilize resources. Talents are another problem as well. I feel the turnover has accelerated throughout the recent years. It's hard to keep the same team for even two consecutive years. And I've also noticed that 90% of the auditors aren't accounting wizards. I've been the one who's found audit adjustments, but I was only there to fill a shortage...

It is the reason why I'm not for the spin-off because I think that an efficient audit needs the contribution of participants from various backgrounds (accounting, IT, valuation, etc...). It's too costly to have them only to do the audit, and it's definitely less fun.
Last edited by Leo on 31 May 2022, 12:25, edited 2 times in total.
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Marek Muc
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Re: Possible changes to the EY structure

Post by Marek Muc »

Interesting!

https://www.bloomberg.com/opinion/artic ... -appealing

I also think it's a revenue-driven step. Big4 has been traditionally reliant on hiring smart graduates, but smart graduates are now looking to work elsewhere...
Leo
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Re: Possible changes to the EY structure

Post by Leo »

Yea, talents still love to work for the big four but more in consulting. The audit has suffered from bad media coverage, tighter regulations, and a change in people's mentality.
It's highly risky, long hours, hard work, all for a lower profit than consulting. Sometimes I felt that the regulators should cut auditors some slack by not systematically sanctioning them with heavy fines every time an audit fails. Otherwise, it won't be anyone left to do the work in the future.
JRSB
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Re: Possible changes to the EY structure

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And a new powerful regulator in the UK was confirmed today, to make it all even more attractive.... I like the idea of IPOing EY Advisory as has been noted in the press.
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Re: Possible changes to the EY structure

Post by Marek Muc »

This part sounds interesting!
To curtail the unhealthy dominance of the ‘Big Four’ audit firms, FTSE350 companies will be required to conduct part of their audit with a challenger firm.
https://www.gov.uk/government/news/audi ... g-business
pub_acco
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Re: Possible changes to the EY structure

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To curtail the unhealthy dominance of the ‘Big Four’ audit firms, FTSE350 companies will be required to conduct part of their audit with a challenger firm.
Cool! I'd hire flexible challengers for some tough areas e.g. impairment testing :roll:
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Re: Possible changes to the EY structure

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Can't see any of the challengers being in a position to tackle anything of interest (key audit matter let's say) of a 350, eg a bank ECL testing. will be interesting when they start coming through (no dates given for implementation). What does the junior auditor do in France for example?
Leo
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Re: Possible changes to the EY structure

Post by Leo »

Auditing the bank or intercompany section I'd say.
JRSB
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Re: Possible changes to the EY structure

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although the idea is that it'll help challenges 'challenge' for the full audit in future, so that might not quite get them up to speed. anyway I'm sure they don't have the resource to do it even if they did have technical capability
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Re: Possible changes to the EY structure

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So you think that BDO or Grant Thornton wouldn't have resources to audit some of the smaller companies on the FTSE350 list?

related:
https://www.accountancyage.com/2018/04/ ... dominance/
Leo
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Re: Possible changes to the EY structure

Post by Leo »

And Mazars
JRSB
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Re: Possible changes to the EY structure

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well I think GT have ruled out pitching for FTSE350 work altogether because they keep losing out. could change.

I expect BDO is bursting at the seams as they are masses bigger than GT and often the only non Big-4 capable firm hoovering up big jobs
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Re: Possible changes to the EY structure

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JRSB
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Re: Possible changes to the EY structure

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No doubt those 'former partners' are upset they didn't get their big spinoff payday when they were still equity partners :lol:
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Re: Possible changes to the EY structure

Post by Marek Muc »

... and perhaps they are fighting to get some right now :)
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