Ernst & Young’s leaders are expected this week to give the green light to splitting its auditing and consulting businesses, paving the way for the biggest shake-up in the accounting profession in more than 20 years, according to people familiar with the matter.
The accounting giant’s global executive committee, which oversees the firm’s 312,000-person worldwide network, met on Labor Day to put the finishing touches to the plan for a worldwide breakup, the people familiar with the matter said. The committee is expected to approve the plan later this week, which will trigger votes on the deal by EY’s roughly 13,000 partners, who stand to make windfalls averaging more than a million dollars each.
The split, penciled in for late next year, would separate EY’s accountants who check the books of companies such as Amazon Inc. from its faster-growing consulting business of advising on technology, deals and other issues.
EY’s move could radically reshape the accounting landscape if it goes to plan, industry watchers said.
An EY spokeswoman said that discussions were continuing and that “at this time, no decision has been made on moving to the next phase.”
EY is one of the Big Four firms that dominate auditing in major financial markets and whose multibillion-dollar consulting arms compete with the likes of Accenture PLC and International Business Machines Corp.
“There’s a good chance it will cause other big firms to follow suit,” said Martin White, a senior analyst at Source Global Research, a consulting-industry research company. “Who doesn’t want a massive payday if you think it’s there and it’s not going to cause [your business] longer-term harm?”
EY’s rivals say they intend to keep auditing and consulting under one roof. Deloitte held exploratory talks with bankers after news of the EY plan emerged, The Wall Street Journal previously reported, but says it isn’t planning a split. A spokesman said Deloitte “will not separate and split our businesses and we will not monetize our collective life’s work.” KPMG said in a statement that its current model brings a “range of benefits,” and PricewaterhouseCoopers said it is “fully committed” to its multidisciplinary strategy.
EY’s planned split would divide its $45 billion revenue global network roughly 60:40 between the consulting business and the audit-focused partnership, which would retain the EY brand, according to a May version of the proposal reviewed by the Journal. The new consulting company was forecast to raise some $10 billion by selling a 15% stake to the public at the time of the split, in addition to borrowing $17 billion to help fund partner payouts.
EY’s partners have a strong financial inducement to back the deal. The audit partners are in line for cash payouts, which were in June expected to average two to four times annual compensation. Those multiples may have declined as markets have fallen in recent weeks. Still, the windfalls are expected to be worth well over a million dollars for the typical U.S. and U.K. partners, who earn on average $850,000 to $900,000 a year, according to people familiar with the matter.
On the consulting side, partners are promised shares in the new company, which were in June expected to be worth typically seven to nine times their annual compensation, paid out over five years.
Carmine Di Sibio, EY’s global chairman and chief executive who has spearheaded the proposed split, is in line for a windfall of tens of millions of dollars, the people familiar with the matter said.
EY’s leaders are expected to say the split will be good for the firm’s finances, as well as their own, according to the people familiar with the matter. They hope the breakup will free the consultants to win billions of dollars of new business, unfettered by independence rules that restrict the work accounting firms can do for audit clients, the people said.
EY checks the books of a raft of Silicon Valley giants, including Amazon, Salesforce Inc., Workday Inc. and Google parent Alphabet Inc. That limits its ability to compete in the fast-growing area of consultants teaming up with tech giants to sell outsourced services to companies.
Once the carefully choreographed “go” decision has been announced this week, the firms that make up EY’s roughly 140-country global network are expected to vote on the plans this fall and early next year, according to the people familiar with the matter. The decision, originally scheduled for June, was delayed to make sure the leaders of the U.S. and other big member firms were happy with the proposal, the people familiar with the matter said. The sticking points included the treatment of around $10 billion of promised payments to retired partners, the Journal previously reported.
The decision is also expected to signal the start of negotiations with the Securities and Exchange Commission and other regulators worldwide who will need to sign off on the deal.
The watchdogs are expected to be pleased by the reduction of potential conflicts of interest, a longstanding problem in the industry. They will want to be assured that EY’s audit-focused firm will be sufficiently resilient to withstand potential blockbuster litigation damages, despite its sharply reduced size.
EY is facing multibillion-dollar legal claims in Germany and the U.K. over its allegedly failed audits of two corporate blowups, fintech company Wirecard AG and hospital operator NMC Health PLC. EY has said it stands by its audit work.
Another issue that needs clearance by the regulators is branding. Paul Munter, the SEC’s acting chief accountant, said last month that after an accounting firm sells off part of its business, the new entity shouldn’t profit from the accounting firm’s name or logo. The two businesses can’t share any marketing or advertising, he added.
The new EY consulting company will have to spend heavily to build up its new brand, according to Tom Rodenhauser, managing director at Kennedy Research Reports, which analyzes the consulting industry.
Andersen Consulting, the consulting arm of the former Big Five firm, spent “millions and millions and millions of dollars” on its successful rebranding as Accenture, Mr. Rodenhauser said. “EY consulting will have to make that same kind of investment.”
