EY Sheds U.S. Audit Clients in Response to Shortfalls
Aug 23, 2024
The accounting firm, which has led market share in U.S. public-company auditing for the past decade, had 84 companies depart since the start of 2023, at least 50 more than at each of its Big Four peers
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.
Some of those clients include drugmaker Catalent, hydrogen truck maker Nikola, real-estate investment trust SL Green Realty, transportation software developer Verra Mobility, farm equipment manufacturer CNH Industrial, and business-software provider Bill Holdings.
The reduced roster and loss of roughly $215 million in fees could threaten EY’s status as the largest auditor of U.S. public companies by market share, but that isn’t something the firm is worried about yet.
The reduction is largely by design and is intended to “accelerate our transformation efforts,” said Dante D’Egidio, the firm’s Americas vice chair for assurance. A regulator found that EY’s rate of audit shortfalls, or deficiencies, had soared, leading the firm to simplify and improve its approach, the firm has said.
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.
“Our ongoing transformation efforts are continuing to drive improvements, and we are confident that future inspections will further recognize that progress,” D’Egidio said, adding that last week’s report “shows that we’re moving in the right direction.”
In 2023, EY provided 932 audit opinions, comprising 13.5% of all views, followed by Deloitte at 866, or 12.5%, Ideagen said. EY’s market share was generally flat over the past decade, while Deloitte’s increased 2.7 percentage points since 2014.
“Market share is important but not as important as transforming our audit practice and driving higher quality audits,” D’Egidio said.
The Big Four firms collectively issue about 45% of all public company audit opinions in the U.S., the data showed.
Typically, public companies switch auditors either to pay lower fees or because they have gone private, been acquired or outgrown the capabilities of the original firm. Audit firms also can drop clients, potentially if they have become overly risky or serving them presents a conflict of interest. Companies must disclose if they dismissed their auditor or their auditor resigned, though they don’t have to provide additional detail that in some cases would further clarify the circumstances.
“If something goes wrong with a company’s financial statements or management, the auditor’s reputation may be affected because the public can associate the auditor with whatever the management does,” said Charles Cullinan, an accounting professor at Bryant University.
Since January 2023, EY is the only Big Four firm to have lost more in audit fees than it gained from client turnover. Its client departures in that time represented roughly $215 million in audit fees, based on the most recent year, compared with $31 million in audit fees from the clients it gained.
EY’s lost audit fees are at least $130 million greater than at each of its Big Four peers. Deloitte’s lost fees totaled $70.5 million, while lost fees were $61.4 million at KPMG and $80.5 million at PwC, data showed. Catalent, which in February named Grant Thornton as its new auditor, paid the highest audit fees among EY’s recently departed clients, at nearly $13 million for the latest year.
KPMG, whose rate of auditing shortfalls dropped to 26% from 30% in the latest inspections, said it hasn’t needed to reduce its U.S. client portfolio to increase audit quality. “New technology capabilities help us seamlessly audit new companies, allowing us to grow our portfolio with quality,” KPMG spokesman Russ Grote said.
Deloitte has been the biggest beneficiary of the EY moves, having gained 22 EY clients in that time, according to Ideagen data. EY also gained two big-ticket clients, energy-drink maker Monster Beverage and server manufacturer Super Micro Computer, from Deloitte, which is a sponsor of CFO Journal.
[Wall Street Journal]
