How EY's Ambitious Split Went Awry and What Happens Next | Summary and Q&A

TL;DR

Ernst & Young's plan to split its business into separate audit and consulting companies was derailed due to financial concerns and disagreements over the fate of the tax practice.

Key Insights

• 👨‍💼 EY's plan to split its business into separate audit and consulting companies aimed to unlock value and overcome regulatory constraints.
• 📏 Regulatory reforms, such as the sarbanes-oxley ACT, have increased oversight on the audit industry and created conflict of interest rules for auditors.
• 🥺 Financial challenges and disagreements over the fate of the tax practice were the primary factors that led to the postponement of the split.
• 🛟 The collapse of Arthur Anderson in the early 2000s following the Enron scandal serves as a cautionary tale in the industry.

Transcript

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Questions & Answers

Q: Why did EY plan to split its business into separate audit and consulting companies?

EY saw the split as a strategic move that would allow both companies to grow independently. Regulatory constraints on offering certain services to auditing clients motivated the decision.

Q: What were the temporary names given to the new companies in the split?

The standalone audit firm would retain the EY name, while the consulting company with a dedicated tax advisory practice was assigned the name "Newco."

Q: Why did the planned split fall apart?

The deal faced challenges in securing the necessary funding to sustain the audit firm and launch the consulting firm. Additionally, disagreements over the fate of the tax practice further complicated the situation.

Q: Is there a possibility of the split being revived in the future?

EY's firm leaders insist that the split is still on, even if it may take months or years. However, doubts remain about whether the necessary conditions for the split to proceed can be met.

Summary & Key Takeaways

• Ernst & Young (EY) wanted to split its business into separate audit and consulting companies to allow for growth and profitability.

• The split was motivated by regulatory constraints on offering certain services to auditing clients, which limited EY's ability to expand its Consulting arm.

• However, financial challenges and disagreements over the fate of the tax practice caused the planned split to be put on hold.