Deloitte is exploring a plan to split its global auditing and consulting practices, following an effort by fellow accounting firm Big Four Ernst & Young to potentially spin off its consulting arm, according to people familiar with the matter.
The moves would mark the biggest jolt in the accounting industry in decades, delivering unexpected gains to tens of thousands of business partners and creating two new consulting giants and two small-scale auditing firms.
Deloitte contacted Goldman Sachs Group investment bankers Inc.
after news of rival EY’s potential worldwide split broke, people familiar with the matter said. Goldman and JPMorgan Chase & Co. are advising EY on its possible restructuring, people said.
Deloitte’s talks are still in a very early exploratory stage, according to one of the people familiar with the matter.
After the initial publication of this article, a spokesperson for Deloitte denied that the company was exploring a plan to split. “We remain committed to our current business model,” the spokesperson added.
EY believes that a spin-off would allow its fast-growing consulting side to more easily acquire new clients, without the constraints limiting the ability of firms to sell consulting services to their own audit clients.
Regulators around the world are increasingly concerned about conflicts of interest – whether auditors, who are supposed to check a company’s books, will go easy on clients who buy profitable consulting services from them. In the United States, the Securities and Exchange Commission is investigating potential breaches of independence rules by the Big Four, as previously reported by the Wall Street Journal.
EY’s remaining mostly audit business, which would likely remain as a partnership, would be freed from at least some of these potential conflicts. But it would be a smaller and slower growing business, potentially making it vulnerable to lawsuits and making hiring more difficult.
KPMG and PricewaterhouseCoopers, the other members of the Big Four, say they will stick to their existing approach of offering advisory and tax services alongside bread and butter audit work. A spokesperson for KPMG said in a statement that the company remains “committed to our multidisciplinary model” and has not spoken to the banks about a split. PwC last month said it has “no plans to change course” from its current approach.
Any Big Four shake will not happen quickly.
EY predicts it will take at least another 18 months or so to complete any spin-off of its consulting arm, as it hurries to finalize its strategy for a possible world split following an early flight of its plans, according to people familiar. with the question.
The company plans to submit a formal proposal by mid- to late summer to its approximately 12,000 partners, who own the company and will have to vote to approve the selloff, people familiar with the matter said.
If EY decides to split, the most likely option would be an initial public offering of its consulting arm, according to people familiar with the matter. The company has not ruled out the alternative of selling between individuals. But the size of the business – consulting and combined tax revenue of $ 26 billion in the last financial year – makes it out of reach for most private equity firms, people familiar with the matter said.
Deloitte’s consulting side is even bigger. The firm’s advisory and taxation businesses between them generated nearly $ 40 billion in revenue globally in the year ended May 2021, compared with $ 10.5 billion of its audit work. Last year Deloitte sold its UK refurbishment business to consultancy Teneo Holdings LLC.
““The bigger question is’ how much money would this deal put in the pockets of the remaining audit partners? ‘If they can’t sell the consulting arm enough to generate enough money for the partners, they won’t vote to approve it, it’s that simple.’“
To gain approval of its plans, EY must win over the majority of its partners in each of the approximately 140 countries that make up the company’s international network.
Its ability to do so may hinge on the size of the price it can get for the consulting business, which will support the payments it can offer to partners, accounting industry observers said. The magnitude of these unexpected gains is expected to vary depending on the seniority of the partner, with those closest to retirement likely achieving the most.
“The bigger question is ‘how much money would this deal put into the pockets of the remaining audit partners?'” Said Lynn Turner, former SEC chief accountant. “If they can’t sell the consulting arm for enough to generate enough money for the partners, they won’t vote to approve it, it’s that simple.”
In addition to involving partners across different lines of business and locations, EY will need to negotiate the split with regulators around the world who oversee the audit industry, according to people familiar with the matter. The last time EY spun off its consulting arm, with its sale to Cap Gemini Group SA of France for 11 billion euros, worth about 10.8 billion dollars at the time, at the beginning of the 2000s, it took about a year to get SEC approval, according to an expert on the subject.
Regulators will want assurance that the selloff wouldn’t make EY more vulnerable to an Arthur Andersen-style implosion if the company were hit with 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 United States and many other parts of the world mean that large accounting firms no longer seem to subsidize their audit fees on the consulting side, he said. “The audit practices of each of the Big Four should be able to stand up on their own,” added Coleman.
Corrections and amplifications
Deloitte is exploring a plan to split its global audit and consulting practices. An earlier version of this article mistakenly Deloitte as Deliote in a title. (Corrected June 8).
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