Michael West is an Australian journalist who publishes a website. Something normal. Less common is that the information from a blog shakes the business world and becomes the front page of international financial media. West has done so by publishing that EY, one of the big four international professional services firms (known as the big four), plans to split the company to separate auditing and consulting activities. A plan that can drag its three competitors, KPMG, PwC and Deloitte. In fact, the latter is also studying a similar plan, according to The Wall Street Journal (although the firm has denied this operation to this newspaper). In Spain, the four firms audit the entire Ibex 35: KPMG controls 13 companies; PWC, 9; EY, another 9, and Deloitte, 4.
EY’s plan, in essence, would be to approve a historic breakup of the business to fix conflicts of interest that have alerted regulators. Options under review include a possible IPO or sale of a stake in the advisory business. Goldman Sachs and JPMorgan advise the firm. EY neither confirms nor denies. The official statement from EY Global after the leak was terse. “Any significant changes to our structure would only occur after consultation with regulators and after votes from EY partners. We are in the early stages of this evaluation and no decisions have been made.” His three competitors stand in profile. They agree that EY’s plans are none of their business. The three contemplate keeping their businesses as they are, with auditing as a source of secure income and consulting —Deloitte is more focused on this activity than the rest— as a lever for growth.
Industry sources admit that the EY plan forces us to reflect on what customers want. Because the breakups can give these a greater variety of advisers and auditors, by reducing the risk of conflicts of interest, but there is a question whether the big clients, the base of the business, really want that.
The stir created after the leak of the plan is better understood with numbers. The big four are the survivors of the mergers that transformed the sector in the 20th century. A jump from big eight (Arthur Andersen; Arthur Young; Coopers & Lybrand; Ernst & Whinney; Deloitte Haskins & Sells; Peat Marwick Mitchell; Price Waterhouse, and Touche Ross) at big four. Less to share. The four earned 155,000 million euros in 2021 for their activity in 150 countries. The best result since the Enron electricity scandal in 2002 burned down the auditor Arthur Andersen and gave rise to Accenture, specialized in consulting. In Spain, the turnover of the big four in 2021 reached 2,659 million, 4.1% more.
West’s slam hasn’t just shocked EY’s 312,000 employees. The employees of the big four — an army of 900,000 workers — fear the wave. The turmoil has already claimed a piece at EY: the company’s US director, Kelly Grier, facing global boss Carmine Di Sibio. Grier’s departure reveals the tensions between the group’s competing feuds. A delicate matter for the company that “confesses” to the best of Silicon Valley: Amazon, Google, Oracle, Salesforce and Workday.
The tensions are due to the internal workings. The big four they are structured as networks of legally separate national firms that pay a fee each year for the brand, systems and technology they share. A system between the concession and the franchise. Not surprisingly, the split announcement unsettled EY’s 13,000 associates. They face a complex process that, if carried out, would require the approval of hundreds of regulators worldwide and would take years, according to industry sources.
He knows in depth all the sides of the coin.
For veterans music is not new. At the beginning of the century, the big ones also liquidated consulting activities. PwC sold its consulting division to IBM; KPMG split its advisers between Bearing Point and Atos, while EY sold Cap Gemini. The only holdout was Deloitte, which continued to expand its consulting business.
Now, the runrún extends in spite of the resistance of the companies to repeat the play. The question is why. Signatures move on the razor’s edge. On one side, reputation; to the other, ethics. A minimal sanction can lose millions. Perhaps for this reason, the effects of the fraudulent bankruptcy of the company weigh heavily on EY’s plans. fintech German Wirecard, in which its supervisory role was questioned. But the business obituary that marks the fine line of the business of the big firms covers scandals such as Enron, Parmalat, Carillion, BHS, Thomas Cook, Wirecard or Pescanova, to mention the best known.
The cases of Wirecard in Germany and the construction company Carillion in the United Kingdom have increased the pressure. In the United Kingdom, the Financial Reporting Council (FRC) promotes a reform so that the big four separate their activities before 2024. In the European Parliament, MEPs Luis Garicano and Sven Giegold also ask for more height for the Chinese walls and review community regulations.
Spain faces the debate with a regulation (2015) approved to transpose community legislation and prevent Enron-type scandals. The law imposed measures such as mandatory rotation of signatures after ten years. The decision, at least in large companies, does not seem to have given positive results in terms of opening up the market to other firms, according to the sources consulted. To summarize: those who controlled, control. Apparently, the regulations are enough to curb bad practices. In the last three years, according to the reports of the Institute of Accounting and Auditing of Accounts (ICAC), an organization that depends on the Ministry of Economic Affairs, only 147 sanctioning files have been opened. A drop in a sea of more than 65,000 audits each year. ICAC has not wanted to participate in this report.
Ferrán Rodríguez, president of the Institute of Certified Public Accountants of Spain, has it clear. “Our regime of incompatibilities”, he assures, “is the strictest and most severe of any profession. Our independence regulations are one of the most demanding in the world. Despite this, in our country there have been hardly any sanctions in this area. Having carried out some 120,000 audit reports in Spain, in the last two years only four disciplinary proceedings have been resolved for lack of independence”.
EY Spain agrees. “In the process of adapting to European regulations, the Spanish regulator, with regard to independence and services, decided, within the options proposed by the regulation, to adopt standards among the most restrictive —and those finally implemented— , both at European and global level”, he assures. Sources from another of the big ones add a nuance: the politicians reformed, but without listening to the technicians, something delicate in a “complex” business. The simplest conclusion of the situation in Spain from the point of view of the sector could be this; The current regulation is enough because the system works. Which does not fully answer the question of the Roman Juvenal: who will watch the watchers? About 2,000 years have the issue.