Ernst & Young’s tax experts bring in lots of cash and are highly valued by the firm’s clients. Many members of the 70,000 strong group don’t know where they will be working next year, or if they will be competing against each other.
The proposed breakup of EY into a steady firm focused on auditing companies and a faster-growing consulting business has reached the nitty-gritty phase after its top executives approved the split.
More than any other large group at the firm, the tax team will be dismembered in the split. Carving up that unit “will probably be the trickiest part” of EY’s breakup, according to Mark O’Connor, chief executive of Monadnock Research, which analyzes the consulting industry.
Getting the tax split right is crucial to the success of the breakup. The tax group employs nearly a quarter of the firm’s staff and generated $11.4 billion of the firm’s $45 billion in revenue in the fiscal year that ended in June. Each EY tax employee generated on average around one-fifth more revenue than the typical audit employee for the 2021 financial year, according to Monadnock’s data.
Wrangling over the split of the tax division was one reason EY’s breakup plan was delayed this summer, people familiar with the matter said.
For the tax experts, the split will mean either going to work for a traditional, slow-growth auditing firm or for a consulting firm that will compete in the open market against powerful rivals. Partners at the audit firm will likely get multimillion-dollar windfalls, while staffers could see pay increases. On the consulting side, the upside could be far greater but the risk is higher too.
EY’s leaders are also haggling over whether and how the two firms will compete for the same tax work, the people familiar with the matter said. A so-called noncompete agreement, setting out areas where the audit-focused firm will agree to stay off the consulting company’s turf for an initial period, is still being negotiated, the people said.
EY is facing this difficulty because it isn’t planning a clean split. The audit-focused firm will still get around a third of its initial $20 billion revenue from tax and other non-audit functions, according to the people familiar with the matter.
EY plans to send roughly one quarter of its tax practice to the audit-focused firm, although the proportions will vary markedly between different countries, according to the people familiar with the matter.
Those specialists are needed to help with complicated tax, valuation and other issues that affect the audits of many big companies. Carmine Di Sibio, EY’s global chairman and chief executive, said regulators vetting the deal “want to make sure that [the mostly audit firm] will have the right skill sets to perform high-quality audits.”
Some of EY’s 70,000 tax professionals do both audit-related work, such as checking companies are complying with tax rules, and consulting work, like advising on tax avoidance. Tax specialists are also involved in the firm’s fast-growing technology side, helping companies to outsource routine tax matters.
Rival firms are poised to poach any disaffected EY tax specialists, said Isaac Heller, chief executive of accounting software company Trillion. “Those guys are all over this.”
The restructuring is complicated but it is the type of thing EY does for clients all the time, according to one person familiar with the matter, who said the firm’s tax professionals are positive about the split.
EY’s draft noncompete agreement would allow some areas of tax consulting to be targeted by both new firms from day one, according to one of the people familiar with the matter. But Mr. Di Sibio played down the prospect of a serious fight, saying “we don’t view this as a big risk.”
Despite the inevitable risks of disruption from the impending breakup, the firm’s tax partners have been told they need to keep increasing revenues in the run-up to the split, penciled in for late 2023, according to people familiar with the matter.
A thriving tax practice is also baked into EY’s ambitious post-split targets of around 21% a year revenue growth for the new consulting company in its first three years, and 7% to 8% a year for the audit-focused business.
Rules in many countries restrict the tax advice that accounting firms can give to companies whose books they audit. In the U.S., “the tax advice given by the big accounting firms to audit clients is a big problem, with a ton of conflicts of interest,” said Monte Jackel, a tax adviser who teaches at Catholic University Law School and has worked at three of the Big Four accounting firms, the Internal Revenue Service and the Treasury Department.
The U.S. audit watchdog, the Public Company Accounting Oversight Board, appears to have limited in-house tax expertise, Mr. Jackel said, and may well just be rubber stamping the accounting firms’ approach. A PCAOB spokesman said the regulator monitors firms carefully and “will not hesitate to take action when rules are violated.”
