22 June 2022 EY Moving Ahead with Carve Out Plans

EY Moving Ahead with Carve Out Plans​

What do you need to know this week?

Big Four professional service firm Ernst & Young (EY) appears to be moving ahead with its plan to break up its business by possibly listing its advisory business on the public market.

If EY’s advisory service does go public, this could bring certain partners massive windfalls of up to $8m in shares.

The impetus for the carve-out may in part stem from mounting regulatory scrutiny facing the Big Four on both sides of the Atlantic.


Why is this important for your interviews?

Certain practice groups such as tax, corporate finance, M&A, and private equity have clients that also rely on other advisers, especially in the course of their transactions.

A common interview question you are likely to face is, “Why law?”. A common and perfectly justified answer is wanting to work with clients and advise them on complex matters. But what many applicants forget is that law firms are one among a few sets of advisers clients rely on for both transactional and contentious work. These other advisers include investment banks, consultants, and professional service firms like the Big Four.

By doing a bit of digging into some of the commercial challenges facing the Big Four, in addition to gaining a general sense of the work they do, you can use this to hone your answer by signposting how lawyers — and the law firm you are interviewing with — are distinct from other professions. This will go a long way to evidencing your motivations for law in general and the firm in particular.

The Big Four, which also consists of PwC, Deloitte, and KPMG, started as auditing firms. But in more recent times, they have moved into advisory and consulting services. In fact, for EY, its Transaction and Consulting divisions’ revenue has respectively grown by 12% and 9% year-on-year in FY21, compared to its Assurance and Tax division, which respectively grew 5.8% and 4%

Critics argue that audit and advisory services are fundamentally opposed. Advisory work, which is also provided by investment banks and consulting firms, is all about fee generation and bringing clients on board. Audit work, on the other hand, is more rigorously regulated with laws that require audit firms to hold their clients (quite literally) to account by conducting investigations into their books and making them justify the numbers in their financial reports.

Regulators point to a series of accounting scandals at the Big Four as proof that the conflict between the two business divisions is becoming a hazard to the financial markets as a whole. This is in part why the UK government has launched a sweeping course of regulatory reform in the audit sector.

How is this topic relevant to law firms?

Another angle to EY’s story relates to their encroachment into the legal market. Following the Legal Services Act 2007, which allowed non-lawyers to own firms that provide regulated legal services, the Big Four started offering legal advice. For their clients, the unique selling point is that they are already well-established in the market and can leverage their expertise in other business divisions to better serve their clients.

This has put added pressure on traditional law firms to innovate and expand their service offerings to stay competitive. Will a breakup of advisory and audit services lessen the pressure on traditional law firms?