Ernst & Young leaders are expected this week to give the go-ahead to split the audit and consulting businesses, paving the way for the biggest shakeup in the accounting profession in more than 20 years, according to people familiar with the matter.
The accounting giant’s global executive committee, which oversees the firm’s global network of 312,000 people, met on Labor Day to put the finishing touches on the plan for world collapse, informed people. The committee is expected to approve the plan later this week, triggering a vote on the deal by around 13,000 EY partners, who will windfalls averaging over a million dollars each.
The split, planned for late next year, will split EY’s accountants, who audit the books of companies such as
from its faster-growing consulting business for advice on technology, deals and other matters.
EY’s move could radically change the accounting landscape if it goes according to plan, industry observers said.
An EY spokeswoman said discussions were ongoing and that “no decision has been made at this time to move to the next phase”.
EY is one of the Big Four firms that dominate auditing in major financial markets and whose multibillion-dollar consulting divisions compete with the likes of Accenture PLC and International Business Machines Corp.
“There’s a good chance this will cause other big firms to follow suit,” said Martin White, senior analyst at Source Global Research, an industry research consultancy. “Who doesn’t want a massive salary if you think it’s there and it’s not going to hurt.” [your business] long-term harm?’
EY’s competitors say they intend to continue doing audit and consulting under one roof. Deloitte held exploratory talks with bankers after news of EY’s plan broke, The Wall Street Journal reported earlier, but said it was not planning a split. A spokesman said Deloitte “will not separate and unbundle our businesses and we will not monetise the work of our collective lives”. KPMG said in a statement that its current model brings “a range of benefits” and PricewaterhouseCoopers said it is “fully committed” to its multidisciplinary strategy.
The planned EY split would split its $45 billion global network roughly 60:40 between the consulting business and the audit-focused partnership, which would retain the EY brand, according to a May version of the proposal reviewed by the Journal. The new consultancy was expected to raise about $10 billion by selling a 15 percent stake to the public during the split, in addition to borrowing $17 billion to help fund partner payouts.
EY’s partners have a strong financial incentive to support the deal. Audit partners are in line for cash payouts that in June were expected to average two to four times annual compensation. Those odds may have declined as markets fell in recent weeks. Still, the windfall is expected to be worth more than $1 million for typical U.S. and U.K. partners, who earn an average of $850,000 to $900,000 a year, according to people familiar with the matter.
On the part of the consultants, the partners have been promised stakes in the new company, which in June were expected to be worth typically seven to nine times their annual compensation paid out over five years.
Carmine Di Cibio, EY’s global chairman and chief executive who spearheaded the proposed split, is in line for a windfall of tens of millions of dollars, people familiar with the matter said.
EY leaders are expected to say the split will be good for the firm’s finances as well as their own, according to people familiar with the matter. They hope the breakup will free up the consultants to win billions of dollars in new business unfettered by independence rules that limit the work accounting firms can do for audit clients, the people said.
EY is examining the books of a number of Silicon Valley giants, including Amazon,
working day Inc.
and Google Parent
That limits its ability to compete in the fast-growing field of consultants teaming up with tech giants to sell outsourced services to companies.
After the carefully choreographed go-ahead decision was announced this week, the firms that make up EY’s global network of about 140 countries are expected to vote on the plans this fall and early next year, according to people familiar with the matter. The decision, originally planned for June, was delayed to make sure U.S. leaders and other major member firms were comfortable with the proposal, people familiar with the matter said. Obstacles included the treatment of approx $10 billion in promised payments to retired partnersthe newspaper previously reported.
The decision is also expected to signal the start of negotiations with the Securities and Exchange Commission and other regulators around the world, which will have to sign off on the deal.
Regulators are expected to be pleased with the reduction of potential conflicts of interest, a long-standing problem in the industry. They will want to be sure that EY’s audit-focused firm will be resilient enough to withstand potentially heavy litigation damage, despite its sharply reduced size.
and hospital operator NMC Health PLC. EY said it stood by its audit work.
Another issue that needs regulatory approval is branding. Paul Munter, the SEC’s acting chief accountant, said last month that after an accounting firm sells part of its business, the new entity should not profit from the accounting firm’s name or logo. The two businesses cannot share any marketing or advertising, he added.
New consultancy EY will have to spend a lot to build its new brand, according to Tom Rodenhauser, managing director of Kennedy Research Reports, which analyzes the consulting industry.
the consulting arm of the former Big Five firm, spent “millions and millions and millions of dollars” on its successful rebrand as Accenture, Mr. Rodenhauser said. “EY consulting will have to make the same investment.”
Write to Jean Eaglesham at [email protected]
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