Will EY be remembered as a trailblazer or a guinea pig

EY has decided to move ahead with Project Everest, splitting its audit and consulting practices into two separate entities, with the audit entity retaining the EY brand. If ratified, it would mark the biggest shake-up in the sector since the collapse of Arthur Andersen 20 years ago. The Global Chairman and CEO Carmine Di Sibio is taking a big risk to disrupt the world of professional services partnership, but will EYs’ split yield significantly greater growth opportunities for each firm?

It’s perfect timing for such a bold decision—EY has tremendous momentum, but the great is sometimes the enemy of the good

EY recently announced combined global revenues of $45.4 billion for the financial year ending June 2022 (FY22), an increase of 16.4%. FY22 was one of the most successful years in the organization’s history, with the highest growth in nearly two decades, mainly attributable to the EY NextWave strategy. EY’s assurance practice has been the firm’s biggest revenue generator in the last 13 years, and 2022 was no different. Audit brought in nearly $14.4 billion, followed by consulting with $13.8 billion. But consulting has been the fastest-growing business and it had the biggest revenue increase year over year at 24.5%, compared to only 6% for the audit business.

So, the billion-dollar question: When you have something good, why would you want to risk making it worse because you are tempted to try to make it great?

The split is not only about easing pressure from regulators over concerns around conflicts of interest—it’s about immediate business acceleration for NewCo

Two main sources will help achieve the ambitious $25 billion target revenue of the newly spun-off consulting business: new alliance partners and existing clients. First, NewCo will finally be able to venture beyond the walls of auditor-independence rules and collaborate with like-minded alliance partners (see Welcome to OneEcosystem™ POV for more details). Removing current independence restrictions with the likes of Amazon, Apple, or Alphabet would immediately open the door to new possibilities and a market that EY couldn’t address previously.

With 632 clients, EY audits 28.4% of the largest public companies registered with the Securities and Exchange Commission, according to Audit Analytics. Overnight, NewCo will be able to propose a wide range of advisory services to these clients, a market it couldn’t previously address. The chances of winning large projects will be high, given the close relationships and deep business understanding that NewCo will have. Client-specific knowledge is key to winning large and complex engagements, and NewCo will be in a prime position to advise these clients.

The biggest risk is failing to retain all the skills required to deliver the highest audit quality standards

Failure to uphold the highest level of quality that meets or exceeds regulatory requirements and customer expectations can have disastrous consequence for the audit entity. Financial audits for large multinational organizations require multidisciplinary skills and deep domain expertise in specialized areas such as tax and valuation. EY announced that some experts would remain on the audit side, and it will move other professionals to the new consulting business. EY must carefully manage the reorganization process and avoid losing these experts at any costs. Additionally, complex IT audits require a wide range of deep technical expertise, such as infrastructure, automation, cybersecurity, and cloud. These skills are usually supplied through the advisory business to support financial auditors, and EY will need a solid plan to build such capabilities.

The good news is that EY invested $3.2 billion in audit quality, innovation, technology, and people as part of a $10 billion, three-year commitment it announced in FY21. A tech-enabled audit transformation might be the key enabler for retaining expertise and maintaining high quality standards.

The Bottom Line: Being a trailblazer can be as rewarding as it is risky; the momentum is here, but EY should take nothing for granted.

Like climbing Mount Everest, Project Everest will face frustration not from known difficulties but from more difficulties than initially anticipated. One of the many would be an emotional one. For some audit partners, the financial compensation cannot lessen the emotional impact of losing a big part of the business they have built on years of hard work and dedication.

Far from the pessimistic view that Project Everest is doomed to failure, the split may prove to be a massive value-unlocking exercise for EY. But the journey to mitigate all operational risks and get the necessary approvals from partners and regulators won’t be a walk in the park.