EY’s global leadership will formally ask the partnership to vote on whether to split the firm into separate auditing and consulting businesses overnight, a move that would lead to multimillion-dollar paydays for many of the firm’s 13,000 partners.
Any split would be the biggest shake up in the accounting profession in more than two decades, with EY’s leadership group betting their big four consulting rivals – Deloitte, KPMG and PwC – will over time be obliged to follow suit and split their operations to get around global regulatory rules that prevent the firms providing non-audit services to audit clients.
A slide from an internal briefing about the potential EY split.
EY’s global executive committee told an all-partner meeting held overnight that a detailed proposal for the split, known as Project Everest, would be provided to them over the coming months. This would include details of the exact structure of the separated firms and their individual payouts, with the country-by-country vote expected to be held during December and January.
If the partners vote to split the firm, the actual separation would not happen until the end of 2023 at the earliest.
“The global executive have been looking at this opportunity since November 2021 … we have a very strong culture that we are very confident of that will continue on in the separated businesses, as we call them at the moment ‘AssureCo’ and ‘NewCo’,” said Patrick Winter, EY Asia-Pacific area managing partner.
EY Asia-Pacific area managing partner Patrick Winter.
The firm has cited multiple reasons for the split, including that the separated firms would each have more growth opportunities than they would under the existing single structure.
EY auditors would be free to tender for work from clients that they currently provide consulting services to, while EY consultants would be freed of the regulatory concerns about the conflict that arises from the firm providing non-audit work to audit clients.
EY consultants also want to be able to provide managed services, also known as outsourcing, to clients using technology from companies EY currently audits including Salesforce, Google, Amazon and WorkDay.
None of firm’s big four rivals audit the same number and concentration of Silicon Valley heavyweights as EY, so they already have a freer hand in the range of technology services they can offer clients.
Big four consulting rivals Deloitte, KPMG and PwC have all previously said they remain committed to their multidisciplinary model.
“It’s going to provide a greater choice for our clients, whether it’s from an assurance perspective, or it’s a consulting perspective … for both AssureCo and NewCo there is a huge growth opportunity and upside growth opportunity in both businesses and this is on now unleashed because of the separation,” Mr Winter said.
AssureCo would provide a range of services including auditing and sustainability reporting services, retain the EY brand and be completely owned by the existing auditing partners. It is expected to generate revenue of between $US18 billion ($26.6 billion) and $US20 billion when it begins operating, with growth forecast at 7 per cent a year, Mr Winter said.
NewCo would provide consulting, strategy and transaction, corporate taxation and outsourcing services and be rebranded. This business is expected to start operating with between $US25 and $US27 billion of revenue and grow at between 20 and 25 per cent a year. NewCo would be floated on the sharemarket, with existing partners (who would become executives in a corporate structure) retaining 75 per cent of shares.
As a “rule of thumb” the separated firms will inherit any legal or pension liabilities that originated in their business, Mr Winter said. This means AssureCo would be responsible for ongoing multibillion-dollar claims over its allegedly botched audits of fintech company Wirecard and hospital operator NMC Health. EY has previously denied any wrongdoing in its audit work.
Partners have a strong financial incentive to vote for the split, with audit partners set to receive cash payouts and consulting partners set to receive equity in the newly floated company that would be locked up for between three and five years.
AssureCo partners will be paid in cash calculated as “multiples” of their current annual income, Mr Winter said. The exact figures have yet to be calculated, but this means that most audit partners would be in line for seven-figure payouts. Earlier reports stated that the typical payout for audit partners would be $US2 million in cash.
NewCo executives (the former EY consulting partners) would receive shares worth higher multiples of their annual income than their audit colleagues. These shares would be “locked-up” and unable to be sold for between three and five years. Again, the exact figure is yet to be calculated, but earlier reports stated they would receive shares worth as much as seven to nine times their annual income, estimated to be worth as much as $US8 million.
“We say we haven’t finalised the multiples yet, but obviously AssureCo are getting cash and NewCo partners are getting shares, and obviously there is potentially more risk for a NewCo partner in receiving shares,” Mr Winter said.
“So there’s a risk element … one group is getting cash and one group is getting shares. And so with the receipt of stock in the NewCo company, there is a level of risk weighting that would be put to the fact that they’re getting issued shares and not cash.”
AssureCo partners are expected to receive income commensurate with their current income, while NewCo executives would see a cut to their annual pay, but this would be offset with equity payments in the floated company.
Mr Winter said the firm’s leadership had not finished assembling “Partner Information Documents” that will outline the payout they will receive from the split. Those documents will be distributed in the “last quarter of this year”, he said.
The firm was exploring the idea of incentive payments to staff, but these details had yet to be finalised.
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