The Big Four’s love affair with consulting is alive and well, after EY announced it has suspended its plans to divorce its auditing and advisory brands. The firm’s ‘Project Everest’ plan would have seen the group split into an accounting and consulting firm in more than 100 countries, but stalled after fierce resistance in some of the firm’s most important markets, including the US.
EY unveiled its split plan in September 2022, following years of regulatory concerns regarding alleged conflicts of interest over the dual-role of the Big Four, as auditors and consultants. With new rules forbidding the firm to offer both lines to clients in key markets like the UK, EY’s top leadership also believed that a standalone consulting arm would be in better shape to bag major contracts at large accounts.
Despite assurances from the leadership – and a symbolic appointment of the heads of both firms for post-split life – though, the move was clearly struggling to receive partner-approval ever since its announcement. A long line of refusals was capped by trouble in EY’s US wing – its largest globally – and this seems to have been the coup de grâce for the plans, which are now suspended.
The halt on Project Everest was first reported by the Financial Times, which has been watching the developments closely. EY told the paper in a statement that “given the strategic importance of the US member firm to Project Everest, we are stopping work on the project”. It also maintained the assertion that the rationale behind the carve-out plan remains strong, telling partners EY is still committed to “creating two world-class organisations that further advance audit quality, independence and client choice” – but how it is unclear how serious that statement is, considering how poorly it faired in its initial efforts to divide the firm.
Indeed, beyond wanting to show regulators it was taking their concerns seriously, and offsetting state intervention in the market, it is difficult to see how EY intended to sell the move to its partners. In its 2022 results, EY announced combined global revenues of $45.4 billion, an increase of 16.4% in local currency. While all EY service lines recorded strong revenue growth, consulting experienced the most exceptional expansion of 27.1% in local currency – hitting $13.9 billion in fees, worldwide. As such, it is unclear exactly why the firm believed its audit partners would sign up to a plan that would sever their connection to that lucrative line of income.
At the same time, EY has been sinking huge amounts of its combined resources into growing its consulting line further. In April 2022, EY launched ambitious growth plans within its consulting practice, with a £75 million investment being made in the UK alone over the coming four years, aiming to see the practice expand its team with more than 5,000 consultants. In this context, the idea that the plan to spin that business off after spending significant amounts on it would go ahead, without any significant backlash, seems naïve at best.
The advents of the last year have led some to question how serious EY was about splitting at all. After all, the accounting industry’s Big Four have a notable history of shedding, or promising to shed, consulting wings, before quickly finding a way back into the market.
Split or no split
The last two decades have hosted a glut of accounting scandals, which have led to the collapse of numerous multinational conglomerates. One of the earliest and most famous of these was Enron – an energy giant which filed for what was then the largest bankruptcy in US history, in 2001. Arthur Andersen – the professional services firm which had audited the group – was convicted by a United States District Court of obstructing justice by illegally destroying documents relevant to an investigation into Enron’s collapse.
Arthur Andersen, which offered both consulting and accounting services to clients, subsequently had its license to audit public companies voided. Even when that conviction was overturned, as the destruction of documentation was within the firm’s document retention policy, its reputation had been damaged beyond repair, causing the de facto dissolution of the former competitor of Deloitte, KPMG, PwC and EY. In the fallout of the saga, the remaining Big Four resolved to sell off their consulting arms, out of concern that the perceived conflict of interest between offering both advisory and audit services could see them become the next Arthur Andersen.
KPMG, PwC, EY and Deloitte all announced plans to spin off their consulting wings by the following spring. But while EY, PwC and KPMG went through with the move – selling practices to Capgemini, IBM, and BearingPoint – Deloitte reneged on its decision, citing weakened demand for consulting, the declines in the stock market and the risk that added debt would pose to each part of the divided firm. The firm went from strength to strength in the following years, and its revenue growth has become increasingly been driven by the robust pace of its consulting business.
The success of Deloitte’s consulting wing soon prompted its Big Four competitors to return to the consulting space too. In order to boost these efforts, acquisitions have routinely been leveraged by the Big Four, for both niche and mainstream consultancies, to help them develop multifaceted and holistic offerings, which dominate the global consulting market.
In this instance, though, there are also signs that EY’s push for a split may have been earnest. Putting the plan on ice by no means signals a return to business as usual for the firm – and in the UK, where it had previously been spending hefty sums to expand, bosses have now indicated that cuts are on the cards.
EY’s UK leaders have reportedly informed partners to prepare for a fresh cost-reduction plan, and a stream of staff departures, after the collapse of the firm’s long-running attempt to split its global business. On a call with partners, Anna Anthony, UK Managing Partner for financial services, warned that EY now has “inefficiencies in our business,” which the firm would “start to address now so we are already working on reducing our costs.”