EY Breakup Plan Stalled on Partners Split

The contingency plan puts pressure on the U.S. partners at the 390,000-person firm. They are demanding that the future audit-focused firm get a bigger piece of the firm’s lucrative tax business.

EY’s U.S. leaders Tuesday responded with a new plan for the split, which would move more of the tax practice to the audit side, one of the people familiar with the matter said. That proposal is now under negotiation with the rest of the firm, the person added. 

The horse trading is a result partly of EY’s convoluted ownership structure. EY’s global network is made up of separate country partnerships, each of which has its own rules for approving the sale of the consulting business it owns. Executing the deal requires approval from partners in each of the 75 countries due to take part, all of which operate under different legal, regulatory and tax systems. 

EY’s leaders in the fall gave the green light to the split, dubbed Project Everest. But hammering out the terms of the deal is proving harder than the leadership expected. The plan had already been delayed last year by disputes, including over how to pay unfunded pension obligations to retired U.S. partners. Rising interest rates and fears of a slowing economy further complicated the deal.

Votes on the split, originally due to start last year, were rescheduled for next month. That timing is now up in the air.

The latest, and potentially most serious, roadblock is centered on the firm’s $11 billion in revenue tax practice and stems from regulatory differences and a fight for the spoils of the breakup.

Some U.S. audit leaders want the new audit-focused partnership to have a much greater share of the tax practice than the one-third envisaged in the proposal, according to people familiar with the matter. 

U.S. rules allow auditors to sell tax advice to their clients, giving a significant boost to revenues. Google parent

Alphabet Inc.,

for example, paid EY more than $1 million in tax fees in 2021, on top of $24 million in audit fees, filings show. 

Elsewhere in the world, notably Europe, regulations generally bar auditors from selling tax advice. That means there isn’t the same business rationale for an audit firm to retain a lot of tax advisers as there is for U.S. clients. 

The split is also about money. Under the plan, the consulting business would raise $11.5 billion in an initial public offering and borrow $18.5 billion. That $30 billion would fund multimillion-dollar cash windfalls to the audit partners to compensate them for helping grow and giving up the consulting business. Partners in the new consulting company get equity handouts. 

In the U.S. those staying with the mostly audit business were in line for a cash windfall worth three times their annual compensation, a higher multiple than for partners at some other EY firms, the people familiar with the matter said. U.S. partners going to the new consulting company were set to get shares in it worth nine times their annual compensation, paid out over a five-year period, and accompanied by a significant cut in their cash pay, the people said.  

With just a small remnant of the firm’s tax business, some U.S. audit partners were concerned that their business wouldn’t generate the revenue they hoped. 

No agreement has been reached on any alternative deal, including any that excludes the Americans, the people said. Still, the fact senior executives are prepared to contemplate pushing ahead without the U.S., which accounts for some 40% of global revenue, shows the deep rifts that have opened up within the firm. 

Julie Boland, head of the U.S. firm, upset some other senior EY leaders when she this month told her 4,000 partners of a “pause” in the deal, according to people familiar with the matter. 

“Even pretty senior partners are holding up their hands in horror and going, ‘What the hell’s going on here?’” one U.K. partner said “They’ve really messed this up.”

Many partners at the U.S. firm are angry their leadership is endangering a deal that could land them big payouts. “It’s a small group running the fight and they’re about to get hammered by a lot of angry partners,” one U.S. partner said.

The deal has already cost EY more than $100 million including staff time, the people said. The firm had largely completed the knotty process of deciding which firm each of its 13,000 partners would work for after the split. Only 50 to 100 partners had still to be assigned to one firm or the other, including fewer than 10 of the 1,000 or so partners in the U.S. tax practice, according to an internal webcast earlier this year viewed by The Wall Street Journal. 

Carmine Di Sibio,

the EY global leader and designated head of the new consulting company, as recently as last month told the Journal’s CFO Network Summit there were “no tremendous hurdles” to getting the deal done, short of a deep economic downturn.

But the deal’s momentum stalled at a three-day meeting in New York that exposed sharp disagreements on the executive committee of the U.S. firm, according to people familiar with the matter. A minority of the committee, representing the auditors, refused to sign off on the proposed agreement, the people said. The marathon talks broke up without reaching a consensus.

Ms. Boland, the U.S. head and nominated leader of the new audit-focused business, refused to override the dissenting partners, the people familiar with the matter said. Instead, she agreed to insist on a review of the plan, the people said, ultimately throwing the firm into its current state of turmoil. 

It isn’t clear if any new agreement on a deal will quell dissent within the firm.

A group of retired U.S. partners continues to raise concerns about Everest, particularly its impact on EY’s audit business. A statement by four former EY leaders this week took direct aim at Mr. Di Sibio.

“There are significant issues with the proposed transaction that go well beyond poor market conditions. The original design was developed by future [consulting business] leadership and had basic flaws,” the statement said, according to a copy of a memo Tuesday to some retired partners viewed by the Journal. 

—Mark Maurer contributed to this article.

Write to Jean Eaglesham at Jean.Eaglesham@wsj.com and Alexander Saeedy at alexander.saeedy@wsj.com

Corrections & Amplifications
An earlier version of this article misspelled reporter Mark Maurer’s last name as Mauer. (Corrected on March 16.)

The contingency plan puts pressure on the U.S. partners at the 390,000-person firm. They are demanding that the future audit-focused firm get a bigger piece of the firm’s lucrative tax business.

EY’s U.S. leaders Tuesday responded with a new plan for the split, which would move more of the tax practice to the audit side, one of the people familiar with the matter said. That proposal is now under negotiation with the rest of the firm, the person added. 

The horse trading is a result partly of EY’s convoluted ownership structure. EY’s global network is made up of separate country partnerships, each of which has its own rules for approving the sale of the consulting business it owns. Executing the deal requires approval from partners in each of the 75 countries due to take part, all of which operate under different legal, regulatory and tax systems. 

EY’s leaders in the fall gave the green light to the split, dubbed Project Everest. But hammering out the terms of the deal is proving harder than the leadership expected. The plan had already been delayed last year by disputes, including over how to pay unfunded pension obligations to retired U.S. partners. Rising interest rates and fears of a slowing economy further complicated the deal.

Votes on the split, originally due to start last year, were rescheduled for next month. That timing is now up in the air.

The latest, and potentially most serious, roadblock is centered on the firm’s $11 billion in revenue tax practice and stems from regulatory differences and a fight for the spoils of the breakup.

Some U.S. audit leaders want the new audit-focused partnership to have a much greater share of the tax practice than the one-third envisaged in the proposal, according to people familiar with the matter. 

U.S. rules allow auditors to sell tax advice to their clients, giving a significant boost to revenues. Google parent

Alphabet Inc.,

for example, paid EY more than $1 million in tax fees in 2021, on top of $24 million in audit fees, filings show. 

Elsewhere in the world, notably Europe, regulations generally bar auditors from selling tax advice. That means there isn’t the same business rationale for an audit firm to retain a lot of tax advisers as there is for U.S. clients. 

The split is also about money. Under the plan, the consulting business would raise $11.5 billion in an initial public offering and borrow $18.5 billion. That $30 billion would fund multimillion-dollar cash windfalls to the audit partners to compensate them for helping grow and giving up the consulting business. Partners in the new consulting company get equity handouts. 

In the U.S. those staying with the mostly audit business were in line for a cash windfall worth three times their annual compensation, a higher multiple than for partners at some other EY firms, the people familiar with the matter said. U.S. partners going to the new consulting company were set to get shares in it worth nine times their annual compensation, paid out over a five-year period, and accompanied by a significant cut in their cash pay, the people said.  

With just a small remnant of the firm’s tax business, some U.S. audit partners were concerned that their business wouldn’t generate the revenue they hoped. 

No agreement has been reached on any alternative deal, including any that excludes the Americans, the people said. Still, the fact senior executives are prepared to contemplate pushing ahead without the U.S., which accounts for some 40% of global revenue, shows the deep rifts that have opened up within the firm. 

Julie Boland, head of the U.S. firm, upset some other senior EY leaders when she this month told her 4,000 partners of a “pause” in the deal, according to people familiar with the matter. 

“Even pretty senior partners are holding up their hands in horror and going, ‘What the hell’s going on here?’” one U.K. partner said “They’ve really messed this up.”

Many partners at the U.S. firm are angry their leadership is endangering a deal that could land them big payouts. “It’s a small group running the fight and they’re about to get hammered by a lot of angry partners,” one U.S. partner said.

The deal has already cost EY more than $100 million including staff time, the people said. The firm had largely completed the knotty process of deciding which firm each of its 13,000 partners would work for after the split. Only 50 to 100 partners had still to be assigned to one firm or the other, including fewer than 10 of the 1,000 or so partners in the U.S. tax practice, according to an internal webcast earlier this year viewed by The Wall Street Journal. 

Carmine Di Sibio,

the EY global leader and designated head of the new consulting company, as recently as last month told the Journal’s CFO Network Summit there were “no tremendous hurdles” to getting the deal done, short of a deep economic downturn.

But the deal’s momentum stalled at a three-day meeting in New York that exposed sharp disagreements on the executive committee of the U.S. firm, according to people familiar with the matter. A minority of the committee, representing the auditors, refused to sign off on the proposed agreement, the people said. The marathon talks broke up without reaching a consensus.

Ms. Boland, the U.S. head and nominated leader of the new audit-focused business, refused to override the dissenting partners, the people familiar with the matter said. Instead, she agreed to insist on a review of the plan, the people said, ultimately throwing the firm into its current state of turmoil. 

It isn’t clear if any new agreement on a deal will quell dissent within the firm.

A group of retired U.S. partners continues to raise concerns about Everest, particularly its impact on EY’s audit business. A statement by four former EY leaders this week took direct aim at Mr. Di Sibio.

“There are significant issues with the proposed transaction that go well beyond poor market conditions. The original design was developed by future [consulting business] leadership and had basic flaws,” the statement said, according to a copy of a memo Tuesday to some retired partners viewed by the Journal. 

—Mark Maurer contributed to this article.

Write to Jean Eaglesham at Jean.Eaglesham@wsj.com and Alexander Saeedy at alexander.saeedy@wsj.com

Corrections & Amplifications
An earlier version of this article misspelled reporter Mark Maurer’s last name as Mauer. (Corrected on March 16.)