EY Goes Back To The Drawing Board, Halts Its Break-Up Plan After Facing Months Of Internal Dissent And Revolt By U.S. Leaders

EY has halted its plan for splitting its auditing and consulting arms, which led to bitter infighting at the firm, thus marking a dramatic and positive retreat from a proposal meant to reshape the accounting profession.

The company, which is one of the Big Four accounting giants, had declared its plans for a split in September after regulators expressed concerns that the audit arm may not do its job fairly for its client if it also employed EY as a consultant.

Global leaders said Tuesday they were stopping work on the project because the heads of Bernstein Young’s U.S. Arm, the biggest member of the worldwide network, had decided not to move forward.

In the interim, instead of creating two dynamic firms, EY is now struggling with a possible leadership vacuum and thousands of angry partners are split between its U.S. In overseas partnerships and confused clients.

This would come as a big blow considering EY spent over a year and roughly over $100 mn on doing a split only to see it disrupted by a small group of senior U.S. executives.

However, in a note to partners, global leaders said they remained committed to separating the auditing and consulting businesses; however, it remains to be seen how a split could be redesigned in a manner that achieves the desired consensus, given the collapse of intense negotiations over recent weeks to rescue the deal.

The plan, code-named “Project Everest”, faced tough resistance from some of EY’s partners, and the company revealed its U.S. Executive Committee decided not to proceed with the split.

Had the split been approved, it would have been the most important overhaul in the accounting sector since the 2002 collapse of Arthur Andersen, the auditor that was embroiled in the Enron scandal and whose collapse reduced the Big Five to Big Four.

The project’s failure marks a humiliating rebuff for global chairman and chief executive Carmine Di Sibio, who championed the planned split.
He had originally been scheduled to retire in June but was granted a two-year extension to see the proposal through and was nominated to lead the newly created consulting firm. His plans were undone by a revolt among U.S. Audit leaders who complained that the consulting business was getting the bulk of the firm’s lucrative tax business.

The auditors, joined by an influential group of retired partners, were concerned that the split would leave the audit business too weak to compete, leaving EY to now face a potential leadership crisis at the top of the 390,000-person firm.

Di Sibio, the CEO who supported the break-up, have lost credibility for failing to deliver on it. Staff members are equally angry about the uncertainty the plan created and the cost cuts imposed on them to boost profitability.

Julie Boland, the chief of EY’s U.S. Arm and a potential firm leader may struggle to command global support. She was due to head the new audit focus partnership but could not unite her executives behind the break-up plan.

The split entailed getting approval from partners in dozens of countries and relying on a complicated plan to raise cash to pay millions of dollars to audit partners for giving up the consulting business. That plan faced headwinds from rising interest rates and volatile markets.

EY had planned for the consulting business to borrow billions of dollars and raise billions more from an IPO to pay auditing partners and fund pensions for retired partners. Boland and other U.S. Leaders have maintained that they would support a break-up at the right time but, at the same time, have also laid out their demands for change.

EY’s effort was closely watched in the accounting industry, which has moved aggressively into consulting operations, despite potential conflicts of interest.

EY hoped to create a template that other leading firms would be forced to follow; however, rather than creating a model for the profession’s future, EY may just have proven its doubters right.

Rival Firms may now hawk in and will likely try to poach disaffected EY partners now that multimillion-dollar bonuses promised under the split have evaporated.

According to people familiar with the matter, cost-cutting to boost profit margins in the U.S. Firm, including suspending the mid-air bonus employees hoped to receive earlier this year, has increased staff frustration.

Differences over the plant split have torn EY’s U.S. Firm, which contributes some 40% of the firm’s dollar 45 billion in annual global revenue, according to people familiar with the matter. Most of the executive committee backed the proposed deal. The people said, but U.S. Managing partner, Bowlin, refused to override the objections of a handful of senior audit leaders.

The CEO, Sibio, launched the plan known as Project Everest to address a longstanding limitation on the growth of the firm’s consulting business. Many countries prevent firms from consulting for companies they audit, and it remains just as urgent an issue to resolve.

The break-up plan created uncertainty among the thousands of new graduates EY recruits annually.
According to an accounting professor at the University of Texas at Austin, some of his students graduating with Masters’s degrees in accounting and job offers from E&Y have been concerned about the implications of the split and its related turmoil. The students hadn’t received start dates at EY, unlike their peers at the other big four firms, he said.