EY bosses approve radical split of Big Four firm

EY bosses have approved a plan to split the Big Four firm into separate audit and advisory activities, with the radical dissolution proposal now being approved by a vote of 13,000 partners.

The decision, which would reform the accounting industry, follows a summer of delays and internal disagreements over how a demerger should work as EY aims to list its advisory arm on the stock exchange by the end of next year.

Like its Big Four rivals – Deloitte, KPMG and PwC – EY is a network of national member firms in approximately 150 countries. The leaders of EY’s 15 largest members, who account for about 80 percent of its $45 billion annual revenue, were “unanimous” to give the split to partner votes, said Carmine Di Sibio, EY’s global chairman and CEO. .

Leaders at the 312,000-strong firm are betting that both the audit and consulting businesses can grow faster as separate companies unconstrained by conflicts of interest that prevent the consultants from working with audit clients. The split would give customers “more choice,” Di Sibio said.

Under the plan, EY’s audit-focused business with approximately $18 billion in revenue would remain in the existing partnership structure. A separate, larger consulting firm would be turned into a standalone company, with up to a 15 percent stake sold to outside investors.

EY’s plan envisions aggressive revenue growth in both companies — up to 7 percent a year in the audit-led business and 18 percent in the consulting firm, according to people familiar with the matter.

It is likely that after the split, partners will compete against their former colleagues, as the audit firm will retain some consulting capabilities and its growth will depend in part on expanding its consulting business.

EY’s partners, who have been promised large payouts if the split takes place, will now be asked to vote by country on whether to support the deal between November and January, ahead of a final vote by the global board of directors of EY. the company and ratification by its board of directors.

Di Sibio declined to say whether he was sure of the partners’ support. “[Our] leaders wouldn’t bring this up unless we thought it was the right thing to do,” he said.

EY’s Chinese operations are excluded from the deal, meaning the country’s consultants will remain associated with the company’s auditing activities.

“The only country in the top 15 that we will have to do more about is China,” said Di Sibio. EY has so far failed to come up with a deal structure that is considered satisfactory by Chinese regulators.

Both the consultants and auditors of an EY member firm who reject the split will remain part of the global audit firm.

A non-competition clause applies to parts of the new companies. “We are still discussing the timetable – probably three years,” Di Sibio said.

The audit firm will retain the EY brand, while the advisory firm will be rebranded. “That’s not completely decided yet, but that’s the conjecture,” said Di Sibio.

If it continues, the breakup would lead to multimillion-dollar windfalls for the current crop of partners, but doubts remain as to how the need to deliver returns to outside shareholders in the advisory industry will affect the remuneration and promotion prospects of future generations. would affect.

Consulting partners would receive a 75 percent share of the consulting business, possibly up to seven to nine times their annual salary, depending on the firm’s final valuation.

However, the shares would be awarded over a five-year period, effectively linking partners’ financial wealth to the success of the new venture. The revenues of partners in the new company would be significantly reduced in the meantime and a cost-saving program would be launched.

Audit partners will receive cash payouts modeled at two and four times their annual revenue.

Audit partners had pushed for a better deal to account for about $10 billion in unfunded pension obligations and potential legal payouts from lawsuits related to audit scandals at bankrupt companies such as Germany’s Wirecard and UK-listed NMC Health.

The disbursements from the accountants and the debts of the accounting department are intended to be largely covered by a sale of equity to outside investors and $17 billion in loans from the advisory department, people with knowledge of the plans said.

Regulators required to sign the deal will likely seek reassurance that the scaled-down accounting firm will be able to withstand major potential lawsuits in the future.

EY Global is advised by Goldman Sachs and JPMorgan, while Rothschild, Lazard and Evercore have advised individual member firms on the implications of a split for their partners, according to those in the know. Mercer, the consulting firm, has advised how to split payouts between partners, according to another person familiar with the matter.

Simpson Thacher & Bartlett and Linklaters are providing legal advice, according to people familiar with the case. Slaughter and May advises EY UK.

Deloitte, KPMG and PwC have rejected a split of their own, but may come under increasing pressure from their own partners to find a strategy that can match EY’s short-term payoffs if the split goes through.