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Possible windfall for EY partners opens fault line

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EY’s partners may soon vote on whether to split the firm and sell its advisory business, but as the bounty leans heavily towards senior staff, the plans are meeting resistance internally.

23rd Jun 2022
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EY’s proposed split of its audit and advisory functions is opening rifts within the company between those who stand to benefit significantly from the selloff and those who have been locked out. 

The Big Four firm’s partners could land $8m in shares should the firm take its consulting business public, however employees not at partner level will be unable to make the leap before the deal goes through.

The move to separate both operations will also stop newer recruits from exploring the same lucrative avenues of audit, tax and advisory work as their more experienced colleagues.

Given the firm will have to vote on the matter, reports from inside EY reveal factions emerging with competing interests.

“It’s worth watching for impact on EY law practice and managed legal services,” said Ron Friedmann, senior director and analyst at Gartner. 

Consulting opportunities

EY is known for its work auditing Silicon Valley and technology luminaries like Amazon, Google, Oracle, Salesforce and Workday, and a split would open the door for its consulting business to take on the wealthy firms as clients, which is currently forbidden under US conflict rules. 

Accounting experts believe the move is intended to help EY cleanse its reputation as it seeks refuge from a string of lawsuits and reputational damage, but the firm strongly denies this is the case.

Regulators and lawmakers have long bemoaned audit quality and a perceived conflict between firms’ auditing and consulting operations. While trying to protect investors, why rely on an auditor’s independence to decide when and where to put their funds. 

Auditors must hold management to account over their numbers, while consultants provide advice in partnership with clients. Any such split would not solve the lingering conflict of auditors being paid by the clients they are auditing. It would also free EY’s consultants to target managed services and outsourcing more aggressively.

Reward for failure

Media reports of EY’s plan, code-named Project Everest, is based on internal documents distributed to top EY executives in May and reviewed by The Wall Street Journal and Financial Times, and people familiar with the matter.  

There are about 312,000 employees at EY worldwide, with partners in more than 150 countries. Each jurisdiction must decide on any proposal, and whether their expected individual windfall is worth the risk and opportunity of a carve-up. The internal document claims both firms will grow faster and be more profitable independently.

EY audit partners are in line for a cash pay-out of around $2m ($2.2m), while consulting partners may receive shares in a newly public advisory company worth up to $8m (£6.5m).

Senior staff below partner level would get a more modest sum, which has caused friction, the Financial Times reported, quoting an insider as stating the managers “are deeply unhappy because the partner door is now closed”. 

“I don’t think I’d want to be a consulting partner in this situation,” a financial services partner at PricewaterhouseCoopers told AccountingWEB. ‘It’s very risky, and while there’s so much pressure on all of us [Big Four firms], the optics may make it look like they are rewarding themselves for failure, being bad at their jobs.”

Accounting failures

EY is battling litigation around the globe in relation to accounting failures, which critics say could end up being borne by the independent audit unit. The firm’s German arm is being sued by several parties for its audits of collapsed payment provider Wirecard, which went bust in 2020 following extensive fraud by managers who tried to hide a missing £2bn of assets. 

The Big Four firm is also handling a claim for $2.7bn (£2.2bn) from the administrator of hospital operator NMC Health PLC, which filed for bankruptcy in 2020 after billions of dollars of undisclosed debt was unearthed. 

EY was also the auditor for China’s Luckin Coffee Inc, which allegedly used fake orders to artificially inflate sales. EY lost Commerzbank AG and Deutsche Bank AG’s asset-management arm as clients after Wirecard’s implosion. The firm said it stands by its work, and partners are briefing on background that liability for alleged audit negligence isn’t a factor in the potential divide.

Seven-figure payoffs

Citing an internal document from May, The Wall Street Journal understands that the firm proposes floating the consulting business and selling a stake of about 15% of that new company for more than $10bn (£8.1bn).

The firm would have to borrow about $17bn (£13.9bn) to compensate the partners in the remaining auditing arm, which internal projections indicate will grow slower than the independent consulting arm.

The partners would keep about 70% of the shares in the new consulting company with about 15% of the shares reserved for staff.

A typical pay-out to UK and US audit partners would be two to four times annual pay, estimated to be $2m (£1.6m) or more, with senior partners expected to pocket a much larger sum.

The firm’s consulting partners would receive shares worth as much as seven to nine times annual income, estimated by the Financial Times to be worth as much as $8m (£6.5m). 

The shares for the consulting partners would be paid out over five years, as it did when it sold off its consulting arm to Cap Gemini (now Capgemini) in 2000.

That 2000 deal was branded a “value destroying” move, according to former leaders at both firms, as the shares sank while in lockup. Cultural clashes between the EY and Capgemini executives and an economic downturn led to swingeing job cuts less than two years after the deal. 

Justifying the deal

Optimistic projections for growth are being spun alongside promises of multimillion-pound payoffs in order to justify the deal, experts believe. 

Industry watchers made comparisons with the breakaway of Accenture from the doomed auditor Arthur Andersen, which is worth more than three times its $50.5bn annual revenue (£189bn). It was priced at less than £6bn after its 2001 initial public offering (IPO).

“In the Andersen split, the consultants left the company after a bitter fight with the auditors. In the EY plan, the consultants will effectively pay off the auditors to let them leave,” said Danielle DiMartino Booth, CEO of Quill Intelligence LLC and former Federal Reserve analyst. 

A proposal for the firm’s approximately 12,000 partners to decide on is expected by the end of August, according to internal briefing notes seen by media in the UK and US. The Wall Street Journal quoted a source saying a “go or no go” decision could be made before July 4.

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