EY bosses approve radical break from Big Four company

EY bosses have approved a plan to split the Big Four firm into separate audit and consultancy businesses, with the radical severance proposal now up for a vote by 13,000 partners.

The move, which would reshape the accountancy industry, follows a summer of delays and internal disagreements over how a spin-off will work as EY aims for a stock market listing of its consultancy arm at the end of next year.

Like its four big rivals – Deloitte, KPMG and PwC – EY is a network of national member firms in around 150 countries. Leaders of EY’s 15 largest members, which account for about 80% of its $45 billion in annual revenue, were “unanimous” in wanting to put the breakdown to partner votes, said Carmine Di Sibio, global chairman and chief executive. General Manager of EY.

Executives at the 312,000-person firm are betting the audit and consulting arms can grow faster as separate businesses unconstrained by conflicts of interest that prevent its 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 revenue of around $18 billion, would remain under the existing partnership structure. A separate, larger consultancy business would be spun off into a stand-alone company, with up to a 15% stake sold to outside investors.

EY’s plan assumes aggressive revenue growth in both businesses – up to 7% a year in the audit business and 18% in the consulting business, according to people familiar with the matter.

The partners are likely to be pitted against their former colleagues post-split, as the audit business will retain some advisory capabilities and its growth will depend in part on strengthening its advisory business.

EY partners, who have been promised big payouts in the event of a breakup, will now be asked to vote country by country on whether to back the deal between November and January before a final vote by the global board of the company and ratification by its board of governance.

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

EY’s Chinese operations have been excluded from the deal, meaning consultants in the country will remain tied to the firm’s auditing business.

“The only country in the top 15 that we will have to work on more is China,” Di Sibio said. EY has so far failed to design a transaction structure deemed satisfactory by Chinese regulators.

Consultants and auditors from any EY member firm that reject the split will remain with the global audit firm.

Certain parts of the new activities will be subject to a non-competition clause. “We are still debating the timeline – probably three years,” Di Sibio said.

The audit business would retain the EY brand while the consulting business would receive a new name. “It hasn’t been totally decided, but that’s the presumption,” Di Sibio said.

If continued, the breakup would result in multi-million dollar windfall gains for the current crop of partners, but doubts remain as to how the need to generate returns for outside shareholders in the consultancy business would affect the outlook. remuneration and promotion of future generations.

Consulting partners would be awarded a 75% share of the consulting business, which could be worth up to seven to nine times their annual salary, depending on the company’s eventual valuation.

However, the shares would be awarded over five years, thus tying the financial fortunes of the partners to the success of the new venture. The revenues of the new company’s partners would be significantly reduced in the meantime and a cost reduction program would be launched.

Audit partners are expected to receive cash payments, modeled at two and four times their annual earnings.

Audit partners had been pushing for a better deal to account for about $10 billion in unfunded pension liabilities and potential legal payouts stemming from litigation over audit scandals at collapsed companies such as the German Wirecard and the British company NMC Health.

Auditor payments and audit firm debt are expected to be largely covered by a sale of equity to outside investors and $17 billion in borrowing by the consultancy firm, people with knowledge said. the plans.

Regulators who must approve the deal are likely to seek to ensure that the downsized audit firm would be able to withstand potential large 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 people familiar with the matter. Mercer, the consultancy, has offered advice on how payments should be split between partners, according to another person familiar with the matter.

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

Deloitte, KPMG and PwC have rejected their own split, but could come under increasing pressure from their own partners to find a strategy that can match the near-term payouts offered by EY if its split continues.

EY bosses approve radical break from Big Four company

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