Ernst & Young’s effort to split its audit and consulting businesses has been slowed by a change in its U.S. leadership, as well as complications over its multibillion-dollar debts, according to people familiar with the matter.
A “go or no go” decision by the Big Four accounting firm’s senior executives, originally scheduled for June, is now expected mid-August at the earliest, according to internal EY documents and the people familiar with the matter.
Carmine Di Sibio, EY’s global chairman and chief executive officer, said Thursday on a webcast with the firm’s 300,000 partners and employees the firm had record revenue of more than $45 billion for the fiscal year that ended June 30. That is up13%from the $40 billion the previous year, Mr. Di Sibio said.
EY’s leadership wants to convince partners the deal is being done from a position of strength, rather than from concerns about potential litigation or other financial issues, according to one person familiar with the matter.
The leadership is still trying to hammer out the final details of proposals that will be put to a vote of partners. Negotiations over the package were slowed by the departure of Kelly Grier, the U.S. chairman and managing partner who left the firm in June, one person familiar with the matter said. Ms. Grier didn’t immediately reply to a request for comment.
One of the thorniest issues that is still being negotiated affectshow much the partners who will stay with EY’s auditing business will get paid, the people said. The audit partners are expecting multimillion-dollar average payouts for agreeing to let the more lucrative consulting business go off on its own. But those payouts will be affected by how much cash is used to reduce the firm’s debt.
That debt is around $10 billion in promised payouts to retired partners, which is effectively an unfunded pension plan, according to the people familiar with the matter. U.S. audit partners are concerned that the obligation—some $7 billion in the U.S.—would fall mostlyon their firm, which will be much smaller after the split, the people familiar with the matter said.
A portion of auditors’ payouts would come from the proceeds of an initial public offering of EY’s consulting business, which would then borrow to raise the remaining funds. The more cash that goes to pay the pension obligations, the less available for the audit partners. EY’s leaders are confident the pensions issue can be resolved, according to a senior person involved in the deal.
Other aspects of the deal still up in the air include the length of the so-called noncompete agreement, which would stop the mostly audit firm going after the same business as the new consulting company, according to the people familiar with the matter.
There is also no final decision on the branding, although the assumption within the firm is that the mostly audit firm will keep the EY name.
The U.S. firm has huge bargaining power in the talks. It produces more than 40% of EY’s global revenues, so the proposed worldwide deal isn’t viable without its partners’ agreement. Other leading EY firms include Australia, Canada, China, France, Germany, India, Italy, Japan, the Netherlands, Singapore, Spain, Sweden and the United Kingdom.
Once the global executive committee has hammered out the nitty gritty of the deal with the heads of the biggest member firms, it will need to convince partners in the roughly 140 countries that make up its global network. Votes in each member firm are penciled in for the fall and winter. In the U.S., two-thirds of partners who are accountants need to vote yes for the deal to be approved, the people familiar with the matter said.
EY’s leaders are trying to reassure the firm’s roughly 13,000 partners that their forecast windfalls would have some protection against market volatility caused by an economic downturn. The firm’s proposed sale of a stake of around 15% in the consulting company, forecast to raise some $10 billion, isn’t due to take place until late 2023, when the economy could be on the rebound. If plunging markets mean the IPO would raise much less than expected, the split would be postponed or canceled.
The debt issue could also concern regulators, including the Securities and Exchange Commission, which could quash the deal. Regulators don’t want the accounting industry to fall from four major firms to three. So they don’t want the EY auditors to be burdened with an unsustainable amount of debt, especially because the firm is facing lawsuits from a spate of recent failed audits.
EY is currently facing multibillion-dollar legal claims in Germany and the U.K. over its allegedly failed audits of two corporate blowups, fintech company Wirecard AG and hospital operator NMC Health PLC. EY has said it stands by its audit work.
EY U.S. leaders had preliminary discussions on the split with SEC Chairman Gary Gensler a few weeks ago, according to an EY spokeswoman. The regulatory chief declined to be drawn on his potential view on the proposed split in advance of a formal proposal by the accounting firm, said people familiar with the matter.
“Regulators will want to be assured the audit-focused firm will have a strong enough capital base to withstand any risk it faces,” said Lynn Turner, a former SEC chief accountant.
