Big-four consulting firm EY is planning to spin off its global audit unit in an effort to avoid conflicts of interest.

EY, along with Deloitte, KPMG, and PwC that make up the «Big Four» consulting firms, have faced mounting criticism about conflicts of interest over generating fees from advisory work from the same firms which they audit.

Now, EY is making an effort to hive off its audit unit from its advisory operations, according to a report in the «Financial Times» (behind paywall), citing people familiar with the plans. 

According to the «FT», senior EY partners have been discussing options for restructuring the firm's global operations, which include the audit portion of the firm being separated from the rest of the company.

A Surprise Move

The news comes as a surprise and marks a dramatic change in EYs position considering previous global CEO Mark Weinberger who in 2018 came out strongly against chopping up the Big Four. 

Regulators say the large consulting firms use audits, which are comparatively inexpensive as a gateway to more lucrative services that other parts of the business offer. 

Who Audits the Auditors?

To illustrate the point, the bankruptcy of the former high-flying German fintech Wirecard in 2020, was particularly embarrassing for the firm. For years, auditors had certified the client's books which later were found to have a €1.9 billion ($2.2 billion) balance sheet hole which led to bankruptcy proceedings and the indictment of former bosses, including CEO Markus Braun, as finews.com reported. 

Recently, the auditors of EY Switzerland have also come under fire, related to the bankruptcy case of Uzbek conglomerate Zeromax, based in Zug.  EY is threatened with a billion-dollar lawsuit from investors who want to take EY Switzerland to task as Zeromax's long-standing auditor.

Measures Taken, Measures Planned

To address the scandals, EY launched various measures last year aimed at improving the firm's reputation. In September, the firm pledged to spend around $2 billion to improve audit quality of which $500 million be spent on training auditors to spot fraud schemes.

The spending is part of a wider plan in which the firm will invest $10 billion over three years in various initiatives, including machine learning and artificial intelligence, which will also benefit auditing in general and also the Swiss business.

Now for the Hard Part

If the reports are proven to be true, one of the firms will still conduct business under the EY brand, with the other having to operate under a new name. 

Any change or overhaul of that magnitude would require the partners to vote on it, and can be difficult due to the need for consensus among partners that own and run individual businesses in various countries, the «Financial Times» said.

Many Months

Such a process could take «many months» said the news outlet citing one of the people familiar with the proceedings, and it is not yet a given that will even happen. But any changes that are voted through would be significant, they added.

EY was quoted by the «FT» as saying «any significant changes would only happen in consultation with regulators and after votes by EY partners. We are in the early stages of this evaluation and no decisions have been made.»