In Essays

Accounting giant Ernst & Young (“EY”) is reportedly close to splitting its audit and consulting functions into two separate companies.

It’s a huge proposition, not only because it will make its 13,000 partners even more hugely rich. And it could change how the industry functions, though I’m not betting on it.

EY, along with Deloitte, PwC, and KPMG constitute the “Big Four” accounting firms advising companies how to structure and manage their operations and then assessing and certifying their financials, legal liabilities, and tax exposure. It’s wildly lucrative, worth more than US$200 billion this year.

But there’s always been a scam at the heart of the industry: Allowing the same firm to advise a client on how to comply and otherwise work around regulations and social norms and then certifying its behavior kinda sounds like a judge also working for one of the parties in a courtroom case.

Each of the firms have incurred millions in fines for mixing up their advisory and audit priorities. Deloitte advised both MG Rover Group and the directors who wanted to take it over in 2013. PwC was fined almost $8 million in 2019 for mixing its advisory and audit roles at 15 clients. KPMG was deemed “untruthful” by failing to disclose its conflicts in a deal last year. EY was fined $100 million in late June, 2022, because “a significant number” of its audit staff cheated on the ethics component of their CPA exams (and the firm did nothing about it).

Most tax officials don’t trust the Big Four to do the right thing according to a new poll. UK regulators called for breaking up the companies in 2018 and potential conflicts of interest are under investigation in the US.

So, EY’s strategy is likely intended to get ahead of these issues and both generate new business (separate consulting and audit companies could pitch companies that are competitors) and insulate them from reputational or financial liabilities should either company get in trouble. Oh, and there’s also all the buzzworthy nonsense of focus and fostering innovation.

But what if the plan was to change the businesses of audit and management consulting?

Here are three radical things EY could do:

First, establish independent ethics functions.

“Ethics” at most companies involve lawyers who want to avoid lawsuits, marketing communicators who want to sell stuff and make customers feel good, and maybe a board member (or committee) made up of like-minded business people nodding in agreement. These odd bedfellows are an afterthought to most management decisions and confuse ethical actions with the law, public opinion, and maintaining board members’ remuneration.

What if EY created functions comprised of different people…folks they never hear from, like religious leaders, philosophers, poets…who could bring a more neutral and thoughtful component to management decisions? What if such capabilities were built into the work offerings of its audit and consulting services, so each business could promise clients truly independent perspectives on their plans?

The challenges would be immense, starting with keeping the PR people away from turning it onto propaganda and then determining even the rough framework of the moral dimensions of business practices or tax avoidance strategies. But it would go a long way toward asserting a new, more credible and sustainable role for its newly-formed businesses. It might also challenge its competitors to do the same.

Second, establish a healthy “cross town rivalry.”

My bet is that many people will suspect financial legerdemain drove EY’s split (probably correctly), so proving those suspicions wrong will take more than words.

EY could build a friendly competition between its two now-separate businesses in which they strive to out-analyze, out-morality, and out-advise the other within or between clients. It could actively seek, perhaps even incentivize, situations wherein its consulting and audit businesses don’t agree with one another’s work, even use it to build a book of insights on making both practice areas better.

Also, having one business reject a portion of the other’s work might warrant inviting the PR people back into the room. It would be great to publicize a spat over substance. It’s also just as likely that the other Big Four firms will take special interest and glee in dinging one of EY’s businesses. A smart strategy would be to anticipate that and be tougher on one another.

Third, refuse to take on certain clients (or insist on standards beyond the mercenary).

Almost all of the coverage of EY’s plans highlights its intention to grow its businesses and make its partners richer. What if realizing those goals meant not just doing more but doing better work?

Publicly refusing to work for clients and/or broad categories of businesses would demonstrate the application of standards and strategic consistency. Perhaps EY could declare specific criteria for clients, like they can’t be aggressive contributors to climate change, though those businesses are often the most lucrative for consultants of all shapes and sizes (the PR biz makes oodles helping such companies “tell their side of the story”).

But what good are standards if you don’t apply them, even when they have negative financial implications? Perhaps the new consulting and audit businesses assert some sort of criteria for engagements, so that it’s not a matter of saying no to clients but rather insisting that every client embrace advice according to so-and-so standards. Imagine if that included doing more tangible things for the environment and not exploiting as many tax loopholes as possible (see Ethics content above)?

EY’s move could be a game changer. Would you bet on any of it happening?

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