Last year, we wrote a blog in response to Ernst & Young’s announcement that they would be splitting off their audit and advisory operations, which would have been the first time a Big Four accounting firm has ever done this. EY’s split would have created two new companies: Assureco and Newco. Now, it appears this decision will not be going through after all. What happened?
At the beginning of this month, Ernst & Young officially called off their plan to overhaul their company and break up their audit and advisory services. The split was originally proposed after EY and the rest of the Big Four were put under regulatory scrutiny for an increase in audit failures from the U.S. Securities & Exchange Commission, which was in the midst of investigating all four accounting firms. The SEC had to fine EY $100m after it came to light that their auditors had cheated on an exam that gave them their Certified Public Accountant licenses.
The Securities & Exchange Commission wasn’t the only organization to shine a spotlight on the Big Four; the Financial Reporting Council (FRC) has also been putting pressure on EY and the other accounting firms to separate their audit and consulting units for years now because they believe these companies cannot justly be auditors of clients who are also clients of their advisory services as well.
EY’s plan, which was given the code name “Project Everest,” seems to have dissipated as a result of conflicts of interest. Reuters’ reported that Ernst & Young’s plan to split their operations actually received some resistance from some of the company’s partners. After deliberating on this decision for the last year, EY decided to cancel the split because their U.S. Executive Committee decided they did not want to move forward with the decision after all.
If “Project Everest” had gone through, it would have been the most groundbreaking shakeup to happen to the accounting industry in over two decades. Ernst & Young would have been able to successfully distance themselves from the rest of the Big Four, which may have reduced the risk of further reputational damage and given them an opportunity to reinvent their brand.
The BCC reviewed an internal note within the firm and reported this quote from an executive at the company: “We acknowledge the challenges with separating some of our businesses that have the deepest technical expertise in a way that gives both organisations the capabilities they need to compete in the market effectively” … “We also recognise that we need more time to make the necessary investments to prepare the businesses for a separation.”