September 9, 2022

Non-Audit Services: EY Partners to Vote on Breakup

Yesterday, EY announced that it is moving forward with partner votes to separate the firm into two distinct organizations, which it has been considering for several months and is aimed at helping avoid conflicts of interest between consulting and audit work. As I blogged in May, the breakup would be a big deal if it happens – but it is not completely novel. This NYT article explains how the split could be effected:

One way EY can achieve a split is by spinning off its consulting arm into a company that could file for an initial public offering. The auditing business would probably remain a private partnership.

One outcome of the split may be that, once separated from the accounting business, the advisory and consulting operations will be more profitable as they’re less constricted by conflict-of-interest rules that could limit the services they can provide to clients.

This WSJ article gives more detail on the dollars involved:

The firm’s 13,000 partners are expecting multimillion-dollar payouts from the split. To pay for that, EY is planning to raise about $11 billion in a public sale of a 15% stake in the consulting company, which will also borrow some $18 billion, according to Mr. Di Sibio. He said a large portion of this money would be used to pay partners, but declined to specify the amount.

It sounds straightforward, but this is going to be an exceedingly complex transaction due to auditor independence rules. Just last week, the SEC’s Acting Chief Accountant Paul Munter issued a statement about “critical points to consider when contemplating an audit firm restructuring” – so the SEC is watching. It’s not clear yet whether EY audit clients would have any reason to be skittish – there are probably decks already in the works to reassure everyone.

To move forward, in addition to regulatory approvals in some countries, EY’s 13,000 audit partners also need to approve the breakup. It will take some time to get the vote, but people are probably somewhat on board already since this has been socialized for several months. The WSJ reports that, at this time, the rest of the “Big 4” accounting firms are not planning to follow EY’s lead.

Liz Dunshee