Deloitte explores splitting auditing, consulting arms, following Ernst & Young

Deloitte is said to have looked at splitting its audit and consulting practice after fellow big four accounting firm E&Y looks at doing the same.

Delloite is said to have looked at a potential split of its audit and consulting firm. Picture: Supplied.

Deloitte is exploring a plan to split its global audit and consulting practices, following an effort by fellow big four accounting firm Ernst & Young to potentially spin off its consulting arm, according to people familiar with the matter.

The moves would mark the biggest shake-up in the accounting industry in decades, handing windfalls to tens of thousands of the firms’ partners and creating two new consulting giants and two stripped-down auditing firms.

Deloitte reached out to investment bankers at Goldman Sach after news broke of rival EY’s potential worldwide split, the people familiar with the matter said. Goldman and JPMorgan are advising EY on its possible restructuring, the people said.

The Deloitte talks are still at a very early, exploratory stage, according to one of the people familiar with the matter.

After the initial publication of this article, a Deloitte spokesman denied the firm was exploring a plan to split. “We remain committed to our current business model,” the spokesman added.

EY believes a split would allow its rapidly growing consulting side to more easily acquire new clients, without the constraints that restrict the ability of the firms to sell consulting services to their auditing clients.

Regulators worldwide have been increasingly concerned about conflicts of interest - whether auditors, which are supposed to scrutinise a company’s books, will go easy on clients that buy lucrative consulting services from them. In the US, the Securities and Exchange Commission is investigating potential breaches of independence rules by the big four, The Wall Street Journal has previously reported.

The remaining EY mostly audit business, which would likely remain as a partnership, would be freed of at least some of these potential conflicts. But it would be a smaller, slower-growing business, potentially leaving it vulnerable to lawsuits and making hiring tougher.

KPMG and PricewaterhouseCoopers, the other members of the big four, say they will stick to their existing approach of offering consulting and tax services alongside the bread-and-butter audit work. A KPMG spokesman said in a statement the firm remains “committed to our multidisciplinary model” and hasn’t talked to banks about a split-up. PwC last month said that it had “no plans to change course” from its current approach.

Any big four shake-up won’t happen fast.

EY expects it will take at least another 18 months or so to complete any spin-off of its consulting arm, as it scrambles to finalise its strategy for a possible worldwide split following an early leak of its plans, according to people familiar with the matter.

The firm intends to put a formal proposal by mid- to late summer to its roughly 12,000 partners, who own the firm and will need to vote to approve the sell-off, the people familiar with the matter said.

If EY does decide to split, the most likely option is an initial public offering of its consulting arm, according to people familiar with the matter. The firm hasn’t ruled out the alternative of a private sale. But the scale of the business - combined consulting and tax revenue of $US26bn in its last financial year - puts it out of the reach of most private-equity firms, the people familiar with the matter said.

Deloitte’s consulting side is bigger still. The firm’s consulting and tax businesses between them generated close to $US40bn of revenue globally in the year that ended in May 2021, compared with $US10.5bn from its audit work. Deloitte sold its UK restructuring business to consulting firm Teneo Holdings last year.

To gain approval for its plans, EY needs to win over most of its partners in each of the roughly 140 countries that make up the firm’s international network.

Its ability to do that may rest on the size of the price it can get for the consulting business, which will support the payouts it can offer to partners, accounting industry observers said. The size of those windfalls is expected to vary depending on partner seniority, with those closest to retirement likely to get the most.

“The biggest question is ‘how much money would this deal put in the pockets of the remaining audit partners?’” said Lynn Turner, a former SEC chief accountant. “If they can’t sell the consulting arm for enough to generate sufficient cash for the partners, they’re not going to vote to approve it, it’s as simple as that.” As well as getting partners in different business lines and locations on board, EY will need to negotiate the split with regulators worldwide that oversee the audit industry, according to the people familiar with the matter. The last time EY spun off its consulting arm, with its sale to Cap Gemini of France for 11 billion euros, worth about $US10.8bn at the time, in the early 2000s, it took about a year to get SEC approval, according to a person familiar with the matter.

Regulators will want assurance the sell-off wouldn’t make EY more vulnerable to an Arthur Andersen-style implosion, should the firm be hit by a massive lawsuit.

A mostly audit firm could be financially viable, said Derryck Coleman, director of research analytics at data provider Audit Analytics. Strict independence rules in the US and many other parts of the world mean the big accounting firms no longer appear to be subsidising their audit fees from the consulting side, he said. “The audit practices of each of the big four should be able to stand on their own,” Mr Coleman added.

The Wall Street Journal