Deloitte looks into consulting business spinoff
Following news that EY was exploring splitting its global audit and consulting businesses, Deloitte is now charting a path towards a potential spinoff of its consulting business, The Wall Street Journal (WSJ) reported yesterday.
According to anonymous sources cited by WSJ, Deloitte reached out to investment bankers at Goldman Sachs after news broke last month of EY’s potential split. Goldman Sachs is also advising EY on its split planning, which has been initiated as regulators increasingly scrutinize the audit independence and quality of the Big Four.
The SEC is currently investigating potential conflicts of interest at the big accountancies and has warned against creatively skirting regulations relating to concurrent provision of audit and consulting.
Following the collapse of Arthur Andersen and the resulting Sarbanes-Oxley law, auditors were barred from providing consulting services to audit clients.
A split of audit and consulting businesses would allow the separate companies to operate more freely and with reduced compliance risk. An IPO of a Big Four firm’s consulting business would also generate a massive windfall for the partner-owners of the company.
Deloitte’s actions toward a global split are still at a “very early, exploratory stage,” according to WSJ’s sources.
When asked about their own plans for a split when EY’s plans leaked last month, the remaining Big Four members, including Deloitte, said they were not considering dividing their businesses.
As in the case of EY, the spin-off of the revenue-driving consulting business may face stiffer resistance from audit partners, depending on the size of their payout.
The resulting independent audit business would likely remain a partnership, and would retain the business’s lower margins and revenue growth compared to consulting and tax services. It may also have trouble attracting and retaining talent.
Deloitte’s consulting and tax businesses generate close to $40 billion annually versus $10.5 billion for audit.
EY, meanwhile, appears to be moving ahead with its split strategy, according to WSJ’s sources. The firm plans to put a formal proposal to its 12,000 global partners by late summer. It would take at least 18 months for any spin-off to complete, with the likeliest option being an IPO of the consulting business.
