PwC set to post record revenue as it rejects audit and advisory split

PwC’s global boss says the firm will post record revenue of around $50 billion this year as he defends the model of combining audit and advisory services that Big Four rival EY is threatening to give up in the biggest industry upheaval in decades.

Keeping the audit and consulting businesses under one roof was crucial to attracting staff, and the benefits of the model outweighed the difficulty of managing the risk of conflicts of interest between the two divisions, Bob Moritz said in a statement. Financial Times interview.

“Our bet is basically that we feel comfortable managing those risks,” Moritz said. Offering both audit and advisory services – including advice, transactions and tax advice – would give PwC a competitive edge despite rules restricting the sale of advice to audit clients, he added. .

The biggest constraint to expanding the business was being able to hire the right people, rather than having access to capital or conflict-of-interest rules, Moritz said.

PwC was still finalizing its results for the 12 months to June 30, but was expected to report revenue rose at least 10%, he said. “Almost all business units have grown significantly.” The company is expected to report global earnings in October.

EY’s planning for a possible spin-off of its audit and advisory divisions, potentially through a public listing of its advisory business, would be the biggest upset to the Big Four oligopoly that dominates the industry. since the collapse of Enron auditor Arthur Andersen in 2002. Since EY’s plans were unveiled in May, the other Big Four firms — Deloitte, KPMG and PwC — have maintained their model of marrying audit and consulting divisions.

PwC shouldn’t split up because it doesn’t need to raise capital and there was no first-mover advantage to be won, said Moritz, who led PwC’s U.S. operations before being elected world president in 2016.

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

Any overhaul of PwC’s business was more likely to involve acquisitions in response to growing corporate demand for technology and ESG advice. “We will continue to seek them out intensively to develop these capabilities,” he said. “I’m not going to be limited on size.”

Sales of niche lines of business would also be considered, Moritz added. PwC’s $2.2 billion sale of its global mobility business to a private equity group last year was the biggest sale by a Big Four company since the fallout from the collapse of Enron. “I think you’re going to continue to see cuts around the edges,” Moritz said.

Moritz declined to comment directly on EY’s plans for a possible separation, but said he did not believe a breakup by a Big Four firm would threaten the viability of its audit business. “Do I see the risk of four becoming three? No, it’s not a risk at all that’s on our radar screen right now. »

A spin-off from EY could generate a windfall for current partners, with consultants in some countries receiving shares worth up to $8 million on average when they move into the stand-alone consultancy business.

Moritz said PwC’s partners were not asking for a similar payment, saying the company had no short-term goal and “the partnership has a responsibility to build for future partners.” Partner pensions would also be funded from future earnings in many parts of the world, he said..

Sticking to a multidisciplinary model would improve PwC’s chances of retaining consultants in a downturn by providing them with opportunities in auditing, whose revenues are more resilient to downturns, he added.

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

Audit revenue grew more slowly than that of consulting divisions, but the business remained attractive due to the business opportunity to audit companies’ ESG disclosures, Moritz said.

He did not completely rule out a reversal on the idea of ​​a split during his tenure, saying: “You have to reevaluate based on how consumers are buying, your ability to retain. . . or recruit talent, or whether or not the market is moving against you.

But Moritz wondered if the spin-off of a consultancy business by a major audit firm could be a sign of reluctance to invest in systems to prevent conflicts of interest between auditors, who must demand evidence of company management before signing accounts, and consultants who want to please clients so they can earn more work.

PwC has spent hundreds of millions of dollars improving its controls over conflicts of interest, he said. “If you’re not willing to spend that money, you may end up with a different answer [on whether to split],” he said.

PwC’s strategy has focused on winning the trust of clients. Asked if the fines imposed on PwC, EY and KPMG for massive cheating by staff on exams reflected a wider problem in the industry, Moritz said: “Any large organization has a series of problems because [they] reflect today’s society.

The company changed the way it administers the tests in response to cheating on internal assessments by staff in Canada, he added.

When asked if regulatory scrutiny was making the audit industry unattractive to potential recruits – a view expressed by UK PwC boss Kevin Ellis in December – Moritz said: “I don’t Don’t make regulators think they’re not getting that balance.”

Ensuring his business remained attractive was “a leadership responsibility, not a regulatory responsibility,” he said.

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