Professor Elam

form WSj Weekend Aug 25, 2024

Ernst & Young said it is cutting ties with many U.S. public companies as audit clients, a move to revamp its audit practice and improve the quality of its work. 

Eighty-four public companies exited EY as audit clients between Jan. 1, 2023, and Aug. 15 of this year, according to data from research firm Ideagen Audit Analytics. The firm also added 21 clients in that time. That is at least 50 departures more than at the other three large accounting firms—Deloitte, KPMG and PricewaterhouseCoopers—during the same period. In contrast with EY’s net loss of 63 clients, Deloitte, KPMG and PwC had net arrivals of 46, 13 and four, respectively, in that period. 

2010'15'20-50-40-30-20-10010203040EYDeloitteKPMGPwC

For the past couple of years, EY has navigated several challenges. The U.S. unit laid off partners across its business lines amid slowing demand for certain consulting services, and played a key role in the blowup of plans to globally split the auditing and consulting sides of the business into two different companies. Following the scuttled split, the firm has sought to unify its workforce under a new global chair, Janet Truncale, who started in the role in July and ruled out reviving plans for a split. 

EY began the revamp, including resigning from serving certain public-company audit clients and limiting new clients, roughly 18 months ago, people familiar with the matter said.

The move came after the Public Company Accounting Oversight Board found the rate of EY’s auditing deficiencies, based on a sampling of audits of 2021 financial statements, surged to 46% from 21% in the previous year. It was the highest deficiency rate among the Big Four in the U.S. 

The findings led EY to revamp its U.S. audit practice, focusing on standardizing its approach and building centralized teams to provide audit support on various topics. 

The firm last November said it was also enhancing portions of its audit methodology and tools and refreshing its approach to improve training. In June, EY said it planned to invest $1 billion over three years in part to strengthen artificial intelligence-enabled audit and tax platforms and lift U.S. early-career compensation. The firm hadn’t previously said the overhaul involved these client reductions.

But EY’s audit issues haven’t stopped yet. Companies such as networking solutions provider Infinera and supply-chain technology provider Trimble in recent months said their auditor, EY, identified issues in managing financial risks during the PCAOB inspection of the audit work rather than during the audit itself, according to SEC filings. Neither Infinera nor Trimble has said it is changing auditors. The companies didn’t respond to a request for comment. 

“Those companies wanted to be transparent with investors and explain why they reported issues outside of the standard reporting cycle so they voluntarily provided disclosure,” said Olga Usvyatsky, an accounting researcher. 

Last week, the PCAOB issued the latest inspection reports for audits of financials. Again, EY had the highest deficiency rate of 37% among the Big Four, though it was lower than the previous year.