PwC set for record revenues as it rejects audit and consulting split

Ella Castle

The global boss of PwC said the firm would report record revenues of about $50bn this year as he defended the model of combining audit and consulting services that Big Four rival EY is threatening to abandon in the industry’s biggest shake-up in decades. Keeping the audit and advisory arms […]

The global boss of PwC said the firm would report record revenues of about $50bn this year as he defended the model of combining audit and consulting services that Big Four rival EY is threatening to abandon in the industry’s biggest shake-up in decades.

Keeping the audit and advisory arms 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 an interview with the Financial Times.

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

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

PwC was still finalising its results for the 12 months to June 30 but expected to report that revenues rose by at least 10 per cent, he said. “Just about every business unit is up significantly.” The firm is expected to publish its global revenues in October.

EY’s planning for a possible break-up of its audit and consulting divisions, potentially through a public listing of its advisory business, would be the biggest shake-up of the Big Four oligopoly that has dominated the sector since the collapse of Enron auditor Arthur Andersen in 2002. Since EY’s plans were revealed in May, the other Big Four firms — Deloitte, KPMG and PwC — have stood by their model of marrying audit and advisory divisions.

PwC should not split because it does not need to raise capital and there was no first-mover advantage to be gained, said Moritz, who led PwC’s US operations before being elected global chair in 2016.

“If I was in search of capital, I might have a different answer,” he said, adding that the firm had already committed to investing $12bn as part of its New Equation strategy launched last year. The plan was aimed at winning more business advising companies on environmental, social and governance matters.

Any reshaping of PwC’s business was more likely to involve acquisitions in response to booming demand from companies for advice on technology and ESG. “We’ll continue to look for those in a big-time way to build out those capabilities,” he said. “I’m not going to be limited on size.”

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

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

A break-up of EY could generate a windfall for the current partners, with consultants in some countries receiving shares worth up to $8mn on average when they move to the standalone advisory business.

Moritz said PwC’s partners were not clamouring for a similar payout, saying the firm did not have a short-term focus and “the partnership has the responsibility to build for the partners yet to come”. Partners’ pensions would also be funded by future earnings in many parts of the world, he said.

Sticking with a multidisciplinary model would improve PwC’s chances of retaining consultants in the event of a recession by offering them opportunities in the audit business, whose revenues are more resistant to downturns, he added.

The firm’s headcount rose by 32,000 to 327,000 during the 12 months to the end of June despite the loss of 10,000 people through the disposal of its global mobility business and cutting ties with its Russian operations.

Audit revenues have grown more slowly than those in the advisory divisions but the business remained attractive because of the commercial opportunity from vetting companies’ ESG disclosures, Moritz said.

He did not completely rule out a U-turn on the idea of a split during his tenure, saying: “You have to re-evaluate based on how consumers buy, your ability to retain . . . or recruit talent, or whether or not the market moves against you.”

But Moritz questioned whether the spinning off of an advisory business by a large audit firm might signal an unwillingness to invest in systems to prevent conflicts of interest between auditors, who must demand evidence from company management before signing off the accounts, and consultants who want to please clients so they can win more work.

PwC has spent hundreds of millions of dollars on improving its controls on conflicts of interests, 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 concentrated on winning clients’ trust. Asked whether fines for PwC, EY and KPMG for mass cheating by staff on exams reflected a broader problem in the industry, Moritz said: “Any large organisation has a series of issues because [they] are reflective of society today.”

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

Asked whether regulatory scrutiny was making the audit industry unattractive to prospective recruits — a view expressed by PwC’s UK boss Kevin Ellis in December — Moritz said: “I don’t put it on the regulators that they’re not getting that balance right.”

Making sure his firm remained attractive was “a leadership responsibility, not a regulatory responsibility”, he said.

​Letter in response to this article:

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

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PwC set for record revenues as it rejects audit and consulting split

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