COMING TOGETHER
Ernst & Young merges its individual country operations.
By Don Durfee

There’s long been a mismatch between the big audit firms and their main clients. The world’s largest companies—the primary source of audit revenue for the Big Four—are increasingly global, operating not just with a common brand, but with global incentive schemes, training programs, and information networks. The accounting profession has more of a feudal arrangement: hundreds of small fiefdoms that sometimes rally beneath a common banner, but more often pursue their own interests in their own way.

Over the years, all of the audit firms have made moves to improve matters. But Ernst & Young has taken such efforts to a new level, announcing in late April that it would merge its European, Middle East, and African operations, and do the same with its Far East partnerships. There will be a unified management team for each region and a single profit-sharing scheme.

There are clear reasons why the old structure of individual country partnerships has persisted. Individual countries have their own regulations and accounting rules, requiring a degree of local specialization. More importantly, audit firms worry about liability—for example, the risk that a problem in Japan (witness the 2006 failure of Chuo Aoyama PwC, an affiliate of PricewaterhouseCoopers, following fraud allegations and a suspension of business order by Japan’s Financial Services Agency) could bring down the rest of the firm.

While good for the partners, however, the structure hasn’t been ideal for clients. Audit quality isn’t always consistent from one practice to another. Arranging for a partner from one country to be seconded to another requires haggling over transfer prices and often encounters opposition, since the local partnership has little financial incentive to spare its resources for someone else’s project. Another change, suggests T.J. Wong, an accounting professor at the Chinese University of Hong Kong, is the rising demand from corporations for auditors to be cross-border specialists in industry-specific accounting issues. “You see firms claiming to be global experts in industries such as oil and gas,” says Wong. That, he says, is harder to do if a firm is just a loose network of partnerships.

E&Y’s change will help in several of these areas, says David Sun, the firm’s Far East area co-managing partner. It will be easier to ensure consistent audit quality. And with the arrival of IFRS, integration will ease that transition. “We’re transitioning from national accounting standards into a common set of standards,” says Sun. “During that process, there will be issues such as confusion about how to apply and implement [the rules]. We can now centralize this process better.”

There’s another benefit for the audit firm. Competition for accountants is fierce these days, especially in Asia. Unifying profit-and-loss ledgers in Asia means that the partnerships can pool their resources and invest in big new training centers (such as the one E&Y is building in Shanghai, which will provide training for Asia as a whole). And the falling barriers between country operations allows for better rotation of young auditors around the region. Wong says that such changes will be appealing to his students at CUHK. “One thing that really attracts young talent is the opportunity to get free training and earn their qualifications,” he says.

What about the risks of this strategy? Sun argues that Asian operations, at least, are shielded, since the in-country legal structures won’t change, even though the management of financials and incentive structures will. How true that is will only been seen after the next auditing blowup, which, as history suggests, is only a matter of time.