EY Breakup Plan’s Fate May Rest on Executive Showdown This Week

EY this month paused its preparations for the multibillion-dollar breakup, after its U.S. arm demanded a blueprint for the deal be reworked to give auditors a bigger share of the lucrative tax practice. The unexpected revolt, putting the deal in jeopardy, has provoked infighting and rifts within the 390,000-person firm, according to people familiar with the matter.

This week’s meeting in Palo Alto, Calif., sets the stage for a potential showdown between the breakup plan’s architect, EY’s global leader

Carmine Di Sibio,

and the person most likely to derail it, EY’s U.S. leader

Julie Boland.

Tensions between the two senior executives have escalated sharply in recent weeks, the people familiar with the matter said.

Ms. Boland, EY’s U.S. chair and managing partner, last week said the firm still needed to resolve questions affecting the financial strength of both businesses that will be created by the split. Mr. Di Sibio responded with a direct appeal to EY’s 13,000 partners, telling them in an email they had “the right to vote on whether to proceed with a transaction,” according to a copy of his message reviewed by The Wall Street Journal. 

The power struggle between the duo reflects the unusual structure of EY and other big accounting firms. Mr. Di Sibio runs EY’s global network, but needs approval from dozens of independent firms for the breakup. Ms. Boland, as the head of the most powerful of those member firms, effectively holds sway over some 40% of EY’s global revenues. 

There is also no guarantee the warring factions of EY can agree to a compromise deal. The U.S. demands to strengthen the audit-focused firm, at the expense of the new consulting company, could affect the amount raised by the split. That in turn could reduce the windfalls for partners, making the deal less attractive to the U.K. and other overseas EY firms that lined up behind the original blueprint.

U.S. opposition to the deal, and criticism of Mr. Di Sibio, has also come from scores of retired EY partners, including former leaders of the firm. 

Retired EY partners don’t get to vote on the deal. But they are an influential contingent. Many retain connections to the firm via friends or family, such as retired partner Jim Boland, who is Ms. Boland’s father. Some retired partners serve as executives or board members at major companies, making them valuable as clients or potential clients. 

Their central concern involves money. EY has around $7 billion of promised payouts to its retired U.S. partners that aren’t backed by a specific pot of money. Retired partners worry the audit-focused firm, weakened by the sale of the consulting arm, may not generate sufficient earnings to meet these pension-style commitments in future, according to memos reviewed by the Journal.

“We are the largest creditors of the company and want to make sure our rights are protected,” one retired U.S. partner said.

EY’s leadership has pledged to use some of the estimated $30 billion that would be raised by the deal to increase the funding for retired partners, according to people familiar with the matter. The firm has set up a committee to represent the retired partners, and agreed to pay for lawyers and actuaries to advise them, the memos reviewed by the Journal show.

But that may not be enough to quell the retirees’s revolt, which has morphed from concerns about pension obligations to questioning the benefits of doing a deal at all. Four former EY leaders this month said there remained “significant questions…around the necessary strength EY must have” after any spinoff, according to a copy of their joint statement seen by the Journal.

Even if EY’s leaders succeed in overcoming the current impasse, retired partners could prove a continuing roadblock to getting a deal done. One group, who are organizing opposition to the deal online via Facebook and emails, recently appointed a law firm to advise on their rights, according to a memo reviewed by the Journal. The start of that legal work has been delayed, while work on the deal itself is paused, the memo said. 

— Alexander Saeedy contributed to this article.

Write to Jean Eaglesham at [email protected]

EY this month paused its preparations for the multibillion-dollar breakup, after its U.S. arm demanded a blueprint for the deal be reworked to give auditors a bigger share of the lucrative tax practice. The unexpected revolt, putting the deal in jeopardy, has provoked infighting and rifts within the 390,000-person firm, according to people familiar with the matter.

This week’s meeting in Palo Alto, Calif., sets the stage for a potential showdown between the breakup plan’s architect, EY’s global leader

Carmine Di Sibio,

and the person most likely to derail it, EY’s U.S. leader

Julie Boland.

Tensions between the two senior executives have escalated sharply in recent weeks, the people familiar with the matter said.

Ms. Boland, EY’s U.S. chair and managing partner, last week said the firm still needed to resolve questions affecting the financial strength of both businesses that will be created by the split. Mr. Di Sibio responded with a direct appeal to EY’s 13,000 partners, telling them in an email they had “the right to vote on whether to proceed with a transaction,” according to a copy of his message reviewed by The Wall Street Journal. 

The power struggle between the duo reflects the unusual structure of EY and other big accounting firms. Mr. Di Sibio runs EY’s global network, but needs approval from dozens of independent firms for the breakup. Ms. Boland, as the head of the most powerful of those member firms, effectively holds sway over some 40% of EY’s global revenues. 

There is also no guarantee the warring factions of EY can agree to a compromise deal. The U.S. demands to strengthen the audit-focused firm, at the expense of the new consulting company, could affect the amount raised by the split. That in turn could reduce the windfalls for partners, making the deal less attractive to the U.K. and other overseas EY firms that lined up behind the original blueprint.

U.S. opposition to the deal, and criticism of Mr. Di Sibio, has also come from scores of retired EY partners, including former leaders of the firm. 

Retired EY partners don’t get to vote on the deal. But they are an influential contingent. Many retain connections to the firm via friends or family, such as retired partner Jim Boland, who is Ms. Boland’s father. Some retired partners serve as executives or board members at major companies, making them valuable as clients or potential clients. 

Their central concern involves money. EY has around $7 billion of promised payouts to its retired U.S. partners that aren’t backed by a specific pot of money. Retired partners worry the audit-focused firm, weakened by the sale of the consulting arm, may not generate sufficient earnings to meet these pension-style commitments in future, according to memos reviewed by the Journal.

“We are the largest creditors of the company and want to make sure our rights are protected,” one retired U.S. partner said.

EY’s leadership has pledged to use some of the estimated $30 billion that would be raised by the deal to increase the funding for retired partners, according to people familiar with the matter. The firm has set up a committee to represent the retired partners, and agreed to pay for lawyers and actuaries to advise them, the memos reviewed by the Journal show.

But that may not be enough to quell the retirees’s revolt, which has morphed from concerns about pension obligations to questioning the benefits of doing a deal at all. Four former EY leaders this month said there remained “significant questions…around the necessary strength EY must have” after any spinoff, according to a copy of their joint statement seen by the Journal.

Even if EY’s leaders succeed in overcoming the current impasse, retired partners could prove a continuing roadblock to getting a deal done. One group, who are organizing opposition to the deal online via Facebook and emails, recently appointed a law firm to advise on their rights, according to a memo reviewed by the Journal. The start of that legal work has been delayed, while work on the deal itself is paused, the memo said. 

— Alexander Saeedy contributed to this article.

Write to Jean Eaglesham at [email protected]