September 24, 2022

Partners Stand to Make Millions (Maybe) If EY Breaks Up

The big hurdle in EY’s plan to split audit and consulting lies in whether or not its partners want to take the risk per earlier Wall Street Journal coverage in which people familiar with the matter told WSJ its roughly 12,000 partners will need to vote to approve the spinoff. Well according to this it probably won’t be too hard to get partners on board.

WSJ reports:

Ernst & Young’s plan to split its audit and consulting businesses would give thousands of its partners multimillion-dollar payouts and relies on optimistic assumptions for growth to justify the deal, according to internal company documents and people familiar with the matter.

The plan would split up the firm’s accountants who audit companies like Amazon.com Inc. from its faster-growing consulting business, which advises businesses on tax issues, deals and technology, among other things.

The internal documents show that EY believes both firms could grow faster and be more profitable on their own. The breakup of the 312,000-person firm could happen as soon as late next year.

Last year, EY reported a “solid” $40 billion ($39,959,000,000, to be exact) in revenue for the year ending June 30, 2021 a 7.3% increase over 2020’s $37.2 billion. Audit brought in the biggest chunk but growth is lagging behind:

  • Audit and assurance: $13.6 billion (up 5.8%)
  • Consulting: $11.1 billion (up 6.4%)
  • Tax: $10.5 billion (up $7.2%)
  • Strategy and transactions: $4.8 billion (up 14.6%)

All that revenue is flying out the door fast though. EY just announced a $1 billion investment in audit technology, part of a larger $10 billion investment to get regulators off their backs for audit failures fund initiatives including staff training and improving its ability to detect fraud. It is currently dealing with the aftermath of multiple audit failures across the world, most notably German payments company Wirecard but also transport firm Stagecoach, conglomerate Zeromax, UAE healthcare group NMC Health, Chinese coffee company Luckin…

The EY split — which is code named Project Everest — would use a consulting IPO to distribute audit partner payouts:

Under a May version of the internal proposal, the consulting business would go public, hoping to sell a stake of around 15% of the company for more than $10 billion, while borrowing $17 billion, the people said. The current partners would own around 70% of the company with around 15% reserved for stock awards mostly for staff.

Much of the money raised in the IPO and borrowed by the consulting firm would go to pay off the firm’s auditing partners, who would remain in the traditional but slower-growing business of examining and signing off on companies’ financial statements.

The split could happen as early as late 2023.

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