![]() For example, knowing thoroughly the complications that a tech company faces when navigating the treacherous waters of the tax system, an auditor is in a much better position to advise a similar (or the same) company on those issues. Such findings are consistent with the argument that knowledge spillovers exist between the two tasks. ![]() Indeed, some studies show that audit quality is improved by certain non-audit services. Over the past few decades, most empirical studies that look at actual audit outcomes have failed to find evidence that non-audit services impair audit quality, implying that the benefits of synergy outweigh the costs, if there are any, of reduced independence. The simple argument is that, if an accounting firm is providing both services to a client, the firm has an incentive to make the client’s numbers “look good”. While regulators are always eager to intervene and find some problem to fix, academic research shows that there may not be a problem after all. EY’s plan to split in two is a preemptive response to such a perennial regulatory demand. Their main worry is that auditors may depend financially on their clients and find it hard to maintain their independence when conducting auditing work. Still, it misses one obvious problem that the plan will create for EY’s businesses in Great China.įor over half a century, regulators have been concerned with auditors providing non-audit services. Most reports in the media focus on the large windfall that EY partners will get from the IPO and other financial moves. ![]() The consulting part will appear as one firm to be listed in the US stock market. Under the plan, EY’s auditing business will keep its current structure of having regional, largely separate offices. But in a surprising development, EY Greater China was quick to announce its decision not to participate in the plan.īut why would the Big Four’s Greater China practice go against all odds to make such decision? Is it a “rebel” as some media have described? Or does it make business sense?īryon Tsang, Associate Professor in the Department of Economics at Virginia Tech (a US-based university), shares his view on the matter, and explains why EY’s local partners may have a good case for their decision.ĮY has two main businesses: the auditing part is the one that most of us have heard of, and the smaller but more profitable consulting part is less well known. Last week EY’s global leaders approved the plan to break up its audit and consulting business, in a move that is set to rock the world of accountants and consultants. ![]()
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