Inspired by Ernst & Young, Deloitte plans to rotate its consulting and auditing businesses.

Deloitte is investigating a plan to scrap its global auditing and consulting business, following an attempt by accounting firm Ernst & Young, another Big Four player, to spin its own consulting branch, according to close sources.

The transfers are the accounting industry’s biggest adjustment in decades. They will provide unexpected inflows of money to tens of thousands of partners of these companies, give birth to two consulting giants as well as two audit firms reduced to their simplest expression.

Deloitte contacted Goldman Sachs investors after news broke of rival EY’s potential global spin-off, sources said. Goldman and JPMorgan Chase & Co. was reported to be advising EY on a possible reorganization.

Deloitte’s negotiations are still in the very early stages of exploration, the source said.

After this article was first published, a Deloitte spokesperson refuted the idea that the company was considering a spin-off. “We remain true to our current business model,” he added.

EY believes a spin-off will make it easier for its fast-growing advisory arm to acquire new clients, without barriers limiting freedom of movement in the sale of counseling services to clients. audit.

Regulators around the world are increasingly concerned about the possibility of conflicts of interest-whether auditors who should look at a company’s accounts are likely to be more lenient with clients buying services from them. . profitable advice. In the United States, the Securities and Exchange Commission (SEC, the American stock market policeman) is investigating potential violations of the Big Four’s independence rules, as previously reported. The Wall Street Journal.

The rest of EY’s core auditing business, which is likely to remain in partnership, will be free of at least some of these potential conflicts. But his activity will be smaller and grow more slowly, which will make him more vulnerable to lawsuits and complicate recruitment.

If EY chooses to split, the possible option is an IPO of its advisory arm

KPMG and PricewaterhouseCoopers (PwC), the other two members of the Big Four, said they would not change their current approach to providing advice and tax in addition to traditional auditing services. A KPMG spokesperson said the company remained “committed to [son] multidisciplinary model “and he did not approach a bank with the intention of spin-off. Last month, PwC announced that it had” no plans to change course “.

A change in the Big Four is not expected to happen in the near future.

While trying to finalize its global split strategy after the early leak of its plans, EY estimates it will take at least another approximately eighteen months to complete the spin-off of its consulting arm, according to close resource.

The company intends to submit a formal proposal by the end of the summer to 12,000 of its associates who own the business and need to vote to approve the sale, sources said.

If EY chooses to split, the most likely option is an IPO of its consulting arm, sources said. The company does not exclude the alternative of a private sale. But the size of the business – $ 26 billion in combined tax and advisory revenue for the last fiscal year – puts it beyond the reach of most private equity firms.

Deloitte’s consulting arm is even bigger. Advisory and tax activities generated a total of nearly 40 billion in revenue worldwide between May 2020 and May 2021, compared to 10.5 billion for its auditing activities. Deloitte sold its restructuring division to consultancy Teneo last year.

To get approval for its projects, EY must convince a majority of its partners in each of the 140 countries in which it operates.

Its persuasive power could depend on the figure it is likely to get for its consulting arm, which will fund the compensation offered to its partners, industry observers say. The amount offered should vary according to the age of the partners, where those closer to retirement are likely to benefit more.

“The key question is, ‘How much will this deal cost the remaining audit partners?’ “Summarizes Lynn Turner, former chief accountant of the SEC.” If they can’t sell the consultancy arm high enough to generate enough money for the partners, they won’t vote to sell, it’s as simple as that. “

In addition to having a win over partners from different business sectors and geographically dispersed, EY will have to negotiate the split with regulators around the world responsible for overseeing the auditing industry, according to nearby sources. The last time EY parted ways with its consultancy arm, it sold 11 billion euros to Frenchman CapGemini, or $ 10.8 billion at the time, in the early 2000s, it had to wait a year for the green light from the SEC according to a well- known source.

Regulators want assurances that the sale will not make EY more vulnerable to an Arthur Andersen-style implosion, in case the company faces large lawsuits.

A firm primarily focused on auditing can survive financially, says Derryck Coleman, director of research at data provider Audit Analytics. Strict independence rules in the United States and many other parts of the world mean that major accounting firms no longer seem to subsidize their audit fees to their consulting branch, he added. “The auditing skills of everyone in the Big Four should keep themselves to themselves,” Coleman concludes.

(Translated from the original English version by Bérengère Viennot)

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