EY consolidates continental power with European executive plans

03 June 2021 Consultancy.uk 3 min. read
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EY is set to centralise its European executive, in a bid to enhance cross-border collaboration and optimise costs. The move is not without its risks though, as some members of the firm are concerned this could leave them open to liability for the Wirecard scandal in Germany.

Formed in 2008, EY Europe does not provide any services, but instead pools voting rights from EY’s European entities. Ahead of the culmination of Brexit in 2019, it announced plans to move its headquarters from London to Brussels, something which coincided with the group forming a new legal umbrella entity, EY Europe SCRL – managing around 40 firms across the continent. According to a release from EY at the time, there would be no changes in leadership or relocation of employees as a result of the move.

Two years on, EY Europe has continued its continental overhaul, with the news that it plans to centralise power in a new European executive team, pooling resources across the region. Traditionally, the Big Four firms have run a federated business model, but EY is hoping the consolidation will allow for it to cut management costs by half, while enabling a central team to decide on partners pay.

EY consolidates continental power with European executive plans

While ring-fencing national branches of the Big Four has enabled them to control liability for local actions spreading throughout the firm, it is thought that EY and rivals Deloitte, KPMG and PwC have been hampered by this business model, in which profits and resources are largely separated within national member firms or small subregions. Countering this, under the EY plan business lines such as consulting and M&A advice will instead be run to a single income statement – though the extent to which audit and tax can be merged is limited by regulations.

The consolidation efforts were initially announced in February, when EY said it was creating a new Europe West region – though it did not go into detail about the implications. Now, it is expected that the new Europe West subregion will replace three smaller subregions, with an aim of cutting management costs. The regional grouping – apparently scheduled for July 1st – includes 27,000 staff and $4.7 billion in annual revenues, across 25 of EY’s Western European and North African locales. These include Germany, France, the Netherlands, Italy, and Spain, but not the UK, Ireland or Scandinavia.

Internal resistance

As reported by the Financial Times, however, while the plans may enable for EY to shrug off some of the financial burden placed on it by the pandemic over the last year, other sources briefed on the plan are concerned that it could place them in a compromising position. The business broadsheet stated that one person close to the firm suggested, “French partners are going ballistic about it because they say ‘why should we pay now for the Wirecard mess?’”

EY was previously the decade-long auditor of Munich headquartered Wirecard, but last year the company collapsed after it disclosed a €1.9 billion accounting black hole. The collapse marked one of Europe’s largest accounting frauds in recent history – and Germany’s audit watchdog since suggested it suspected EY partners were aware they were issuing a “factually inaccurate” audit for Wirecard in 2017. While this is something the Big Four firm disputes, Deutshe Bank is now reportedly considering ditching EY as its own auditor.

As the scandal continues to rock the firm’s German presence, some partners fear EY Europe’s new structure may lead to penalties related to Wirecard being shared beyond the team which handled the work. Another source speaking to the Financial Times denied this though, stating such concerns were “unfounded,” as well as clarifying that separate legal entities would still be retained in each country.