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“Breaking up is hard to do,” sang heartthrob crooner Neil Sedaka in 1962, clearly unaware of life as an Ernst & Young partner in 2022.
According to internal plans obtained by The Wall Street Journal, a proposed split of the professional service company’s audit and consulting businesses could net millions for the company’s partners. They’re calling it a divorce made in heaven.
Crunching the Numbers
The big accounting firms — Deloitte, PricewaterhouseCoopers, KPMG, and Ernst & Young — have come under intense pressure in the US and the UK. Regulators are particularly keen for them to square how they deal with conflicts of interest when selling consulting services to companies while also claiming to be independent auditors of companies’ finances.
UK regulators fined EY £2.2m last year for failing to scrutinize Scottish transport group Stagecoach when auditing its accounts in 2017. They’re also investigating EY’s handling of audits of hospital group NMC Health and investment firm London Capital & Finance, both of which went bankrupt amid fraud claims (EY is being sued by NMC’s administrators for $2.7 billion). To get a jump on the regulatory pressure, last month EY partners began drafting plans to split their business. Accountants who audit companies will split into one firm, while the consultants who advise companies on taxes, deals, and spending will split into another. After crunching the numbers, the proposal looks pretty good for EY partners:
- The consulting business would go public, with 15% of the company sold for $10 billion while it borrows $17 billion, according to a version of the proposal viewed by the WSJ. Partners would own 70% of the company and the remaining 15% would go to stock awards for employees.
- A huge chunk of the money raised and borrowed through the IPO would be used to pay off the partners at the accounting business. They would each get two to four times their annual pay of about $850,000 to $900,000. Senior partners would, of course, get a lot more.
The new consulting firm would inherit some 60% of EY’s $42.5 billion in projected revenue for the 2022 fiscal year, with the rest going to the audit firm. The split and IPO could come late next year.
Independence Day: EY plans to make a “go or no go” decision in principle about a split before the July 4 weekend, according to the WSJ. Here’s guessing some executives will be working the long weekend.