News that Big Four accounting firm EY is considering spinning off its global audit business should sound a warning bell to law firms, as the big consultancies continue to encroach on the legal services business, according to industry observers.
While the development seems aimed at dodging the increasing regulatory scrutiny that audit businesses appear to be facing, it also solves the conflict of interest barriers that EY faces in providing legal services. And there’s speculation that, if EY succeeds in jumping through the substantial hurdles necessary to separate the units, its Big Four peers will follow.
James Jones, a senior fellow at the Center for the Study of the Legal Profession at Georgetown University Law Center, said accounting firms with audit businesses currently face a genuine constraint in moving seriously to legal because they cannot provide legal services for corporations that they audit.
“I think [EY’s spinout] removes that. It’s very smart on their part,” Jones said.
Over the last several years, revenues from the advisory and consulting side of the Big Four accounting firms have vastly outstripped the auditing side, he said.
“Most of the profit is now coming in from the consulting side,” said Jones, adding that some of the most “creative work” being done by these firms is on the consulting side. “That’s where people are putting together creative deals and arrangements.”
And legal services also are becoming a growth area for accounting firms.
Tomek Jankowski, director of the Pacesetter Research team at ALM Intelligence, a sister company of The American Lawyer, said EY itself has undergone a significant internal reorganization over the past year, beefing up its M&A practice and absorbing some operational elements from its consulting practice to create the new Strategy and Transactions practice.
“Auditing is a less and less attractive business line. With regulators around the world becoming far more aggressive with auditing oversight, auditing has become something of a minefield and a brand liability,” he said.
But while law firm managing partners may believe that the Big Four will never go head to head with them on litigation or legal advice, Jankowski said they are still an existential threat to law firms.
Jankowski explained that the Big Four use their legal service offerings as a way to become stickier with their clients.
“They approach clients when the client has a key event, such as M&A restructuring, an IPO, change management, or digital transformation projects,” said Jankowski. “Being able to provide the legal services for these events is central to a law firm, but it’s a value add to an accounting or consulting firm.”
“If I were a big global law firm, I would view this with a little bit of alarm. I think it’s removing the last major obstacle to these firms providing legal services,” said Jones, explaining that the definition of “legal services” introduces a gray area. For instance, in some practice areas, like tax, nonlawyers—CPAs, for example—draft documents all the time, and therefore compete with lawyers already.
“You don’t have to be a lawyer to give tax advice to someone. In the U.S., you don’t have to be a lawyer to represent a client in the U.S. tax court,” Jones said.
And just because certain lawyers specialize in other areas, such as M&A, doesn’t mean that they are providing a legal service, as long as they’re not issuing a legal opinion when doing so, Jo nes said.
Jankowski noted that last year, KPMG and Deloitte both sold off their U.K. restructuring businesses in anticipation of regulations that may force them to separate their auditing from their nonauditing businesses and that PwC has lately repositioned its risk-assurance services, which historically have worked closely with their auditing business.
“Providing legal services, while not central to any of the Big Four’s offerings, is nonetheless seen as an important value add to their businesses,” said Jankowski, intimating that EY’s most recent move should worry law firms.