EY Tax Practice Caught in Crosshairs in Battle for Firm’s Future

As EY leaders rethink dividing the firm’s $11.3 billion global tax practice, time is running short to alter a significant piece of the planned restructuring ahead of partner votes targeted for May.

The firm’s top leaders have yet to reach a consensus on how to parse its roughly 3,500 tax partners, who have become a bargaining chip as negotiations continue over the future of EY’s legacy businesses.

On the table is whether to pad the audit practice with a greater share of tax partners after US leaders objected to a key aspect of the planned split. A majority of the firm’s tax advisory and tax managed services had been expected to join the firm’s $14 billion consulting practice to create a stand-alone, public venture while providing a smaller workforce of tax compliance professionals to support the audit practice.

But parsing EY’s tax business has proved especially challenging, taking months to divide the firm’s tax partners among the audit and consulting practices.

“This will be the single hardest change that the Big Four have ever gone through,“ said Allan Koltin, a consultant to accounting and law firms on how to manage their businesses. “And the question is: how much will the tax and consulting partners have to give to the audit partners to win their love, which means voting yes.”

EY had already placed all but 100 or fewer partners when the US firm objected earlier this month, according to a source familiar with the firm’s internal deliberations.

EY’s global leaders however believe they can resolve the US firm’s concerns and continue marching toward an expected initial public offering of its lucrative consulting arm. Still, the earliest partners might get the chance whether to approve the restructuring would be May, said the source, who acknowledged that negotiations could push back those country-level votes.

“Everybody is at the table and working on a path forward,” the source said.

Top partners from the US and UK affiliates along with regional and other leaders of the firm’s global arm are among the small group of top EY executives negotiating, the source said.

EY’s global arm declined to comment. The firm has previously said that it was committed to the carve out and that the complex deal would reshape the profession. “It is important we get this right.”

The impasse underscores the complexity of divvying up partners and severing business lines spread across 75 affiliates. To secure a yes vote, leaders will have to convince 13,000 shareholders that they will be fairly compensated for the loss of a business or for shouldering the risks of a new venture. Partners would expect that any successor business will be set up to succeed post-split.

An Existential Threat

EY’s leaders face tremendous pressure to balance competing factions and motivations—“a really difficult task,” said Mathieu Shapiro, managing partner and a complex commercial litigator for Obermayer Rebmann Maxwell & Hippel LLP.

Despite the hurdles, Koltin, the management consultant, is confident EY will solve that complex calculation to compensate partners, paving the way for its Big Four competitors to follow suit.

Still, the delays only add to the uncertainty about the firm’s future and could ultimately weaken the EY brand, said Shapiro, who specializes in business divorces.

Messy intrafirm squabbles could spill over to the courtroom—and any litigation would likely be costly and time-consuming. In the meantime, clients might take their business elsewhere, he said.

“It doesn’t matter whether this deal succeeds or not. Either way, there is a great deal of harm being done to the value of the EY brand and the EY structure, and its serious enough that this could present an existential threat to EY,” said Jim Peterson, former in-house attorney for Arthur Andersen, the former accounting giant which separated from its consulting practice after a court battle more than two decades ago.

Underpinning the tax debate is the need to ensure that EY’s remaining audit practice, set to be led by the US chair and managing partner Julie Boland, will have the resources to staff the audits of its largest multinational clients including Apple, General Motors, and ConocoPhllips.

Tax staff in the US support auditors as they assess corporate income tax expenses and related liabilities, one of the most challenging areas to audit because of the uncertainty of the estimates. In Europe, however, restrictions on what services firms can provide their audit clients scope out most tax work.

“EY US is 100% dependent on its practices in all those other countries in order to execute these audits and that’s why the capacity of the big international networks to operate successfully in all the countries is critical to their survival,” Peterson said. “If you can’t practice everywhere, then you cannot practice anywhere.”

Still the fight over the fate of the tax practice doesn’t surprise Erin Towery, an associate accounting professor at the University of Georgia. Tax professionals don’t fit neatly into audit or consulting because their work can routinely involve both compliance work like filing tax returns or advising clients on how to set up deals and other transactions to minimize tax costs.

EY’s breakup also may have longterm ramifications for the firm’s youngest staff members—altering their career trajectory and retirement expectations—including her students who are committed to begin working at the firm this summer and fall, Towery said. “These are people that are about to start their careers and I’ve got students that don’t know which firm they are going to work for.”