Possible changes to the EY structure
Posted: 31 May 2022, 11:33
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.
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.