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Home BUSINESS In the EY division, fortune may favor the bored

In the EY division, fortune may favor the bored

mealright monty python Sketch from 1969, the middle-aged Mr. Anchovy, played by Michael Palin, wants to leave what he calls the desperately boring world of public accounting to become a lion tamer. His “vocational counselor,” also known as John Cleese, suggests that he consider an interim career, say banking, while he works to tame lions. “No, no, no, no, no,” Mr. Anchovy interrupts. “I do not want to wait. At nine in the morning I want to be in there, taming.”

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Echoes of Mr. Anchoa’s longing can be heard in the haste with which Hears, a Big Four accounting firm, is considering spinning off its fast-growing consulting practice from the old-fashioned auditing side of the business. Not only is it a bold move for accounting firm standards, to the point, says Michael Izza of the Institute of Chartered Accountants in England and Wales, that HearsDeloitte’s three rivals, pwC other kpmg, you will consider your next steps in light of your decision. There’s also a touch of Pythonic farce about it. Such is the enthusiasm that the details of an initial public offering proposal (IPO) in 2023 were leaked to the Wall Street Journal, who published them on June 20. They included the size of the potential bonanza for some of the company’s 13,000 partners, something HearsBean counters of yesteryear would have preferred to keep them under their bowler hats.

The firm insists no final decision has been made. However, a split would make sense. Regulators are concerned that consulting services create conflicts of interest for companies that also perform statutory audits. After a series of accounting scandals in recent years, they are urging auditors to fend for themselves. As to IPO, which will make consultants’ hearts race. But just like Mr. Anchovy, they should think twice before jumping into the lion’s den. In the long run, auditing may well be the most prudent bet.

Make no mistake, counseling practice is the red side of business. It represented two-thirds of Hears$40 billion in revenue last year. Releasing much of the tax, consulting, strategy and transactional work from auditing would give the consulting arm more room to maneuver and free it from a partnership model that stifles quick decision-making. The new advisory firm could more easily raise capital to invest in technology, as well as develop trendy outsourcing businesses, such as the total management of the tax affairs of multinationals. You could bolster your fortune by ditching niche businesses. (Not that you have to wait a IPO do that: last year pwC sold one that handles the overseas publications of global companies to a private equity firm for $2.2 billion, its biggest divestiture in nearly two decades).

There is an even more tempting precedent. Accenture, which was spun off from Arthur Andersen and then went public a year before the accounting firm collapsed in 2002, has grown in value to $190 billion. HearsThe consulting arm of would not be worth anywhere near that. However, leaked documents, based on recent market conditions, suggest he could raise $10 billion by selling a 15% stake. The partners who join would receive 70% of the shares (the remaining 15% would go to lower-ranking personnel).

However, not everything is positive for consultants. The division would involve a cash payment from the spun-off company to the remaining partners in the group. Hearsand would cover potential claims against the company for issues such as Wirecard, a bankrupt German payment company, and nmc Health, a collapsed British hospital chain, both Hears audited To make the payment, the new company would have borrowed $17 billion, a large sum considering that publicly traded rivals such as Accenture and tcs have low debt.

Those aren’t the only competitors, either. Barriers to entry into consultancy are low. Big tech companies like Microsoft and data miners like Palantir may try to get into the space. the Hears The brand may have raised the stature of the consulting practice, but it will likely come out with a new name. Like some other consultants, you could be a victim of delusions of grandeur.

That is why, despite being the pedestrian side of the business, auditing could be a dark horse. Its shortcomings are well known: lack of trust, conflicts of interest, low pay compared to other professional services, the risk that HearsBoosted “audit bots” will crawl over your business model. However, it has some advantages.

For one thing, it remains an entrenched oligopoly. The Big Four audit 99% of companies in the world. s&p 500 indexes. In addition, structural changes are underway that could benefit it. The first is normative. As the Big Four auditors are forced to become more independent, their fees increase. As the pressure to improve audit quality increases, they will charge more for it. The second change is at your fingertips. Firms expect plenty of new work as regulators force companies to disclose more about their climate impact. Much of this will have to be reviewed and approved by auditors. A senior accountant raves about hiring “thousands of eco-warriors.”

If history is any guide, the split’s windfall may also favor auditors. While partners who stay on the audit side would receive lower payouts than those who go consulting, the cash on hand is valuable, especially in times of volatile markets. The last time Hears spun off his consultancy and sold it to Capgemini, a French firm, in 2000, the partners who received cash, not stock, fared better. And after that, the auditors just rebuilt the consulting side of the business. Even now they plan to retain elements of the advisory work, as parts of the tax practice. These could be rebuilt again into something bigger.

ants in the pants

Those with long memories, such as senior partners, will know all this. Many of the younger ones may be drawn to the eat-your-kill thrill of consulting. But if you ignore history, you must not ignore comedy. Anchovy never became a lion tamer. What he thought he was a lion was instead an anteater. Showing him a picture of a real lion, he fainted.

Read more from Schumpeter, our columnist on global business:
Amazon has a problem with the rest of the world (June 16)
What went wrong with the Committee to Save the Planet? (June 9)
Why proxy advisors are losing their power (June 2)

For more expert analysis of the biggest stories in economics, business and markets, sign up for Money Talks, our weekly newsletter.


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