PwC expects record earnings as it rejects audit and advisory split – Financial Times | Region & Cash

PwC’s global chief said the firm will report record revenue of about $50 billion this year as he defended the model of combining audit and advisory services that Big Four rival EY has been using in the industry’s biggest upheaval in decades threatened to give up.

Keeping the audit and consulting divisions under one roof is critical to attracting staff, and the benefits of the model outweighed the difficulty in managing the risk of conflicts of interest between the two departments, Bob Moritz said in an interview with the Financial Times.

“Basically, our bet is that we’re comfortable managing those risks,” Moritz said. Offering both assurance and advisory services — including advisory, transactions and tax advice — would give PwC a competitive advantage, despite regulations restricting the sale of advisory services to assurance clients, he added.

The biggest limitation in expanding the business is being able to hire the right people, not access to capital or conflict of interest rules, Moritz said.

PwC is still finalizing its results for the 12 months ended June 30 but expects to report that revenue was up at least 10 percent, he said. “Almost every business unit has grown significantly.” The company is expected to release its worldwide sales in October.

EY’s planning for a possible spin-off of its assurance and consulting divisions, possibly by listing its consulting business publicly, would be the biggest shakeup of the Big Four oligopoly that has dominated the industry since Enron’s auditor Arthur Andersen collapsed in 2002. Since When EY’s plans became known in May, the other Big Four companies – Deloitte, KPMG and PwC – have stuck to their model of merging the assurance and advisory departments.

PwC shouldn’t split because it doesn’t need to raise capital and there’s no first-mover advantage to gain, said Moritz, who led PwC’s US operations before being elected global chairman in 2016.

“If I were looking for capital, I might have a different answer,” he said, adding that the company has already committed to investing $12 billion as part of its New Equation strategy launched last year . The plan aimed to attract more companies to advise companies on environmental, social and governance issues.

Any restructuring of PwC’s business has tended to involve acquisitions in response to booming corporate demand for technology and ESG advice. “We will continue to search intensively for those to expand these capabilities,” he said. “I will not limit myself to size.”

The sale of niche businesses is also being considered, Moritz added. The sale of PwC’s $2.2 billion global mobility business to a private equity group last year was the largest sale by a Big Four company since the aftermath of the Enron collapse. “I think you’re going to continue to see circumcisions around the edges,” Moritz said.

Moritz declined to comment directly on EY’s plans for a potential split, but said he didn’t think a split by a Big Four firm would jeopardize the viability of their accounting business. “Do I see the risk of four becoming three? No, that is currently not a risk at all on our radar screen.”

A dissolution of EY could be a godsend for the current partners, as advisors in some countries receive shares worth up to $8 million on average when they switch to the standalone advisory business.

Moritz said PwC’s partners weren’t asking for a similar payout because the firm doesn’t have a near-term focus and “the partnership has a responsibility to build for the partners that are yet to come.” Partners’ pensions are also funded by future earnings in many parts of the world, he said.

Adhering to a multidisciplinary model would improve PwC’s chances of retaining advisors in a recession by giving them opportunities in the accounting business, whose revenues are more resilient to downturns, he added.

The company’s workforce increased by 32,000 to 327,000 in the 12 months to the end of June, despite the loss of 10,000 employees through the sale of its global mobility business and severed ties with its Russian operations.

Audit revenue has grown more slowly than that in consulting departments, but the business remains attractive because of the commercial opportunities arising from reviewing companies’ ESG disclosures, Moritz said.

He didn’t completely rule out a reversal of the splitting idea during his tenure, saying: “You need to improve your ability . . . or recruit talent, or whether the market is moving against you.”

But Moritz questioned whether the spin-off of a consulting firm by a major accounting firm might not signal a willingness to invest in systems to avoid conflicts of interest between accountants, who need to ask for evidence from management before signing the financial statements, and advisors who want it Please customers to prevent so that they can win more work.

PwC has spent hundreds of millions of dollars to improve its conflicts of interest controls, he said. “If you’re not willing to spend that money, you might get a different answer [on whether to split],” he said.

PwC’s strategy focuses on earning the trust of clients. Asked if fines for PwC, EY and KPMG for mass employee cheating on audits reflect a broader problem in the industry, Moritz said: “Every large organization has a set of problems because [they] reflect today’s society.”

The firm has changed the way it administers tests in response to fraud on internal assessments by employees in Canada, he added.

Asked whether regulatory scrutiny is making the auditing industry unattractive to potential candidates – a view expressed by PwC’s UK CEO Kevin Ellis in December – Moritz said: “I don’t blame regulators for not getting that balance right .”

Ensuring his firm remains attractive is “a managerial responsibility, not a regulatory responsibility,” he said.

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Better information trumps auditor independence / By Jan Bouwens, Professor of Accounting, University of Amsterdam, The Netherlands

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