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EY Charts Course to Split Firm, Seek Partner Support (2)

Sept. 8, 2022, 3:48 PMUpdated: Sept. 8, 2022, 10:31 PM

Global accounting firm Ernst & Young’s top leaders have agreed to advance plans to break the firm into two, creating a $20 billion audit firm and a separate publicly traded consulting business that it said would be valued at $100 billion.

More than 13,000 partners worldwide will have the final say on whether the firm should become what EY described as “two distinct, multi-disciplinary organizations” — a breakaway move not yet replicated by the rest of the Big Four firms. Voting is slated to begin late this year and extend into 2023, it said.

“This really is not about the financial economics,” said Steve Krouskos, EY Global Managing Partner. “It’s about what we think is right for the profession and right for the growth of both business and right for the employee opportunities and job creation across both businesses.”

EY’s global leadership has been working on the restructuring strategy since November. If completed the move would represent the largest shake-up in the accounting industry since Arthur Andersen collapsed 20 years ago.

Decoupling EY’s lucrative consulting arm from its audit practice— currently slated for late 2023— would give the firm a leg up on competitors, securing a larger market share, it has said previously. It would also address pressure from regulators, from the US to India, to keep audit and advisory clients separate and avoid conflicts of interest that could undermine corporate financial reporting.

In a webcast with partners Thursday, the firm’s top leaders spelled out the economics of the deal, the strategies for the two new organizations, and next steps, Krouskos said.

That $100 billion estimated enterprise value includes $11.5 billion in equity raised from the public markets plus $13 billion in debt. Consulting partners will own 70% of the new global company, and staff will be able to buy into the company as part of their compensation, Krouskos said.

Audit partners will receive a cash buyout that will vary based on their country’s affiliate in lieu of an ownership stake in the new company. And there will be no revenue sharing between the two entities—a key aspect if the deal is to pass muster with US regulators.

“This will be a complete separation,” Krouskos said.

The stand-alone audit firm will be focused on core audit and assurance services, but the practice will still provide some consulting work, he said.

The audit practice will draw from services that currently support financial statement reviews, including substantial portions of EY’s financial accounting advisory and climate and sustainability practices. Smaller pieces of other services lines also will join the firm, including technology teams to support audit tools and systems, tax, valuations, actuarial, and forensic accounting.

EY leaders expect globally the audit practice will be more profitable than it is currently, and they hope to be able to provide more “attractive” compensation to staff. Auditors and consultants alike should find it easier to climb the promotional ladder, Krouskos said.

Audit brought in $13.6 billion in fee revenue last year globally, compared to the $40 billion in total fees the combined firm earned. EY is set to report out its 2022 revenue later this month.

Some of the largest US companies, including Apple Inc. and Google parent Alphabet Inc., hire EY to serve as their auditor. The firm is currently facing hefty financial penalties and litigation payouts related to its audit work for international clients Wirecard AG and NMC Health Plc.

Firm leaders have previously looked to bundle the consulting services arm into a stand-alone public company, leaving 40% of its business with the audit practice. Such a separation would allow the audit and consulting businesses to compete freely for work and unshackle them from strict limits—in the US and elsewhere—on the types of advisory services that firms can provide to audit clients.

Competitors Deloitte, KPMG and PwC have repeatedly said they will stick with their current operating models, which rely on a mix of tax, audit and other professional services.

Deloitte, which brought in $59.3 billion in revenue last year thanks in part to its booming advisory side, said that its multi-line model is “core” to its work. “Our results speak for themselves,” Deloitte’s global CEO Punit Renjen said in a statement. “We will not monetize our collective life’s work (or that of the generations that preceded us).”

(Updates with remarks from Steve Krouskos in third graph and additional reporting from paragraph six. Previously added Big Four reaction. )

To contact the reporter on this story: Amanda Iacone in Washington at aiacone@bloombergtax.com

To contact the editors responsible for this story: Jeff Harrington at jharrington@bloombergtax.com; Michael Ferullo at mferullo@bloomberglaw.com