EY partner earnings drop as fee income hits £2.45bn

Partner earnings at EY have fallen matched by a modest rise in annual fee income of £2.45bn, up 1.5%, as the Big Four firm focuses on improving diversity at partner level and investing in audit quality

The EY results showed that total revenue increased from £2.41bn to £2.45bn for year end 30 June 2019, growing at a slower rate than its Big Four competitors, although it retains the number three slot in the Top 75 Firm rankings.

Audit fees accounted for 19% of total UK revenue (up 1%), while audit profitability improved year on year at £68m, up from £58m FY18. Audit profit is calculated based on the revenue and direct costs associated with audit engagements, together with specific overheads for the audit practice and an allocation of total firm overheads, such as property and technology costs.

Revenues from transaction advisory services and tax grew strongly by 9% and 8% respectively.

Tax revenue increased to £680m, up 8% year on year from £734.4m, while transaction advisory services were up 9% at £653m (FY2018: £633.4m). Advisory services, including consulting, insolvency, restructuring and corporate finance, were hit by a 3% downturn in client business, falling to £571m (FY18: £643m).

The average distributable profit per partner was cut by £14,000 to £679,000 from £693,000 in FY18, seeing partner earnings cut for the first time in three years as distributable profits before tax increased by a modest 1% from £472m to £477m.

Financial information FY19

Service Revenue £mFY 19 %Restated revenue £mFY 18 %
Total audit revenues45319%44418%
Non audit services to audit clients1185%1276%
Total revenues from audit clients57123%57124%
Non-audit services provided to other entities1,85575%1,82175%
Total revenue 2,447100%2,412100%

Source: EY Transparency Report 2019

Audit

In a year where the audit profession has been under scrutiny, EY has not been unscathed by the fallout from corporate failures; it faces a Financial Reporting Council (FRC) probe into the audit of Thomas Cook, which collapsed in October. However, it has avoided any major FRC fines and sanctions over the reporting period.

EY increased its investment in audit quality to £25m per annum, while the number of people working on its audit quality programme grew by 25% over the last 12 months.

Over the last 12 months, it has won a number of new audit contracts, including FTSE 100 listed SSE, Standard Chartered and Vodafone, as well as the giant mining conglomerate BHP, which it won from KPMG. FTSE 100 audit fee income was £143m for 2018-19 year end audits, down slightly year on year from £147m.

However, the firm has not been immune to problematic audits and is conscious of the need to overhaul the current audit status quo.

EY performed reasonably well in the FRC’s annual audit quality inspection (AQI) reviews, released in July, with 78% (prior year 67%) of EY audits inspected graded as requiring no more than limited improvements, although one audit was given the lowest score, requiring significant improvements. EY said it was ‘disappointed that one of our FTSE 350 audits was identified as requiring significant improvements and we recognise the further efforts that we need to make to deliver consistent high audit quality and achieve the FRC’s new targets’.

As a result, it is reviewing all its audit engagements to ensure that governance standards at client companies are not jeopardising the audit relationship.

In the EY transparency report 2019, Hywel Ball, head of EY UK audit, said: ‘In response to these dynamics we are evaluating our audit engagements in the UK to ensure that the economic returns support the level of work, investments and financial resilience the firm need to deliver consistent high-quality audits.

‘This includes reviewing the risk profiles of the companies we audit, with an increased focus on whether we should continue as the auditor of companies that have weak corporate governance and control procedures. When deciding whether to respond to a tender request, we will factor in the sufficiency of a company’s governance standards and the availability of our resources to deliver the audit.’

Pressure from government, regulators and politicians will see a radical overhaul of the audit market, with 2020 set to be a year of significant change for the profession.

Steve Varley, EY’s UK chairman said: ‘We are very clear about the crucial role that our work plays in building and sustaining trust and confidence in the capital markets.

‘This year alone we’ve hired over 2,600 people, with more than a third of all roles in our regional business, invested around £31m in training and development, and have made significant investments in our tech capabilities.

‘After multiple years of strong UK growth, we have continued to prioritise the infrastructure needed to deliver high quality audits by investing in compliance, our people and new technologies. While there’s more to do, I’m encouraged by the improvements in our latest audit quality scores from the Financial Reporting Council (FRC). The FRC inspections looked at 18 of our audits this year, with 89% of the nine FTSE 350 audits rated in the top category.

‘We audit around 5,000 organisations in the UK and are increasing our focus to ensure that every one of these audits meets the highest standards. I’m confident that we are taking the steps needed to build on these results in the future.’

In view of calls for a breakup of the Big Four, the EY transparency report outlined how its audit teams worked with multidisciplinary service lines as well as offshoring up to 15% of audit work. It noted: 'On our audit engagements we work closely with our specialists from other service lines. Multi-disciplinary organisations with global reach are needed to allow the seamless access to non-audit specialists that is necessary for high-quality audits today and in the future. Specialists’ work can form around a quarter of audit activity.

'In addition, using resources from our offshored Global Delivery Services (GDS) can account for around 15%. For instance, one large bank audit involved specialists in areas such as IT, tax, financial accounting, risk (including credit, conduct, capital, regulations), economists, valuation and business modelling (forecasts and pensions), actuaries, data analytics, fraud (including anti-money laundering).'

Training for audit teams was also critical and the firm said that all audit specialists are subject to a mandatory audit training curriculum rolled out annually. This included training sessions with actuarial partners and managers, and audit senior managers to reiterate expectations regarding actuarial working papers and what detail should be included in audit files. In addition, it developed a standard list of the actuarial working papers that specialists and audit teams should expect to include in the audit file. 

Improving partner diversity

Earlier this year, EY set targets to double the proportion of female and black and minority ethnic (BME) partners in its UK business to 40% female and 20% BME within six years as part of a strategy to radically accelerate its progress on diversity and inclusiveness.

Unusually for the accounting profession six of the 10 positions on EY’s UK LLP board are now held by women. EY also appointed 57 new UK equity partners in July, of which 34% were women (compared to 19% in 2018) and 22% BME (17% in 2018). As of 1 July 2019, EY’s UK partnership overall stands at 22% female and 11% BME. This is an increase of 2% and 1% respectively since 2018.

To achieve the 2025 target, EY has also increased investment in its Accelerate and Future Leadership programme for senior female and BME talent, and CareerWatch, a sponsorship programme for mid-career talent. It also runs the EY Reconnect programme, which provides a bridge for professionals re-entering the workplace after an extended career break, and are seen as key to attracting and retaining talent.

Varley said: ‘I’m proud of the steps we are taking to build diverse and inclusive teams. We’ve made positive progress but want to accelerate the speed of change, which is why we set ourselves ambitious new UK diversity targets at the start of the year. We see this as a business imperative and a key part of our future growth.

‘Our approach to diversity and inclusion extends beyond gender and ethnicity targets. We’re committed to opening the doors of the profession to a broad spectrum of talent. In recent years we’ve launched new apprenticeship programmes such as a digital degree apprenticeship. This year alone we hired 918 graduates and apprentices across the UK.’

The transparency report highlighted negative feedback from staff about the ‘long hours culture’ and EY said it would look to improve the work-life balance, although it did not detail how it would address this issue.

EY has continued to invest in its regional business, with 31% of its 2,600 new recruits and 55% of its graduate and student hires based outside of London. It is also growing its Scotland practice, with plans to up staff numbers by 25% over the next year, and new office space in Aberdeen.

Sara White

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