FORMERLY KNOWN AS ERNST AND YOUNG
Matt Oliver
Sun, 20 August 2023
EY
EY’s staff could reasonably ask: who’s steering this ship?
Having tumbled from the lofty heights of “Project Everest” – a plan to break the business in two that collapsed after internal disagreement – bosses at Ernst & Young (EY) are asking searching questions about their future.
“We will inevitably, in the next year or so, go through a strategic review,” says Hywel Ball, chairman of EY’s UK arm and a partner of more than 25 years.
“One of the things they’ll look at is the dynamics that made us think about this transaction [Project Everest], what’s right, what’s wrong, and what lessons we need to learn… because we’ve obviously learned a lot.”
The soul searching must be put on hold for now. The Big Four consultant has been forced to fend off interest from private equity and must contend with a global downturn that has seen fees dry up just as the bill for its costly break-up plan comes due.
It has triggered a fresh round of belt-tightening, with British staff told this week that some jobs are at risk. Those who stay will see their bonuses shrink.
The gloomy outlook is par for the course as a weak global economy dents fees across the industry. But the situation at EY is more challenging given its botched demerger has left it rudderless in the storm.
Carmine Di Sibio, EY’s global chair who unsuccessfully spearheaded Project Everest, is preparing to retire next year, creating a power vacuum and an extended succession battle.
Carmine Di Sibio is set to leave the firm after his plan to split its consulting and accountancy arms fell apart - News Scan
At the same time, EY now faces a bill that reportedly runs to hundreds of millions of dollars for the work done on the abandoned deal.
Insiders are questioning which direction the business should go in next and how it should tackle everything from artificial intelligence (AI) to more humdrum regulatory issues.
Project Everest was a plan to split its consulting business from its auditing operations. A major aim was to unleash the full potential of EY’s consulting and other non-audit services, which are the most profitable and fastest-growing parts of the business.
Fast growth in the firm’s consulting businesses helped boost average pay for UK partners to a record £803,000 in 2022.
However, conflict of interest regulations in many countries prevent EY from providing both audit and non-audit services to the same client.
This means a multinational company doing a global IT project may want to work with the firm’s consultants across the world – but cannot do in certain jurisdictions if it already uses EY’s auditors there.
The rules are in place to remove the incentive for auditors to “go easy” on clients that a firm wants to sell further non-audit services to.
EY’s complicated global structure – a network of affiliated partnerships, rather than a single, unified corporate structure – also makes working on international projects more complicated than bosses would like.
To address these issues, Project Everest would have completely separated the operations into a standalone audit business and a new consultancy business that would have been listed on the stock market – potentially with a value north of $100bn (£79bn).
The consulting “Newco” would have boasted $25bn in annual sales and 7,000 partners, with the auditing side representing $20bn and 6,000 partners.
Their separation would have cleared the way for consultants to take on more work, unencumbered by worries about conflicts.
Partners also stood to make large gains. Under the scheme, partners who stayed at the audit business would receive payouts for their shares in the advisory business worth up to four times their annual salary.
At the same time, the newly-separated advisory business would be listed on the stock market and partners handed equity worth up to nine times their salaries.
But the offer met stiff resistance from EY’s US office, led by Julie Boland, which represents 40pc of the firm’s global revenues.
Julia Boland abruptly announced in April that she was shelving Project Everest following opposition from other US partners - LinkedIn
The Americans were concerned that the split would leave either one side or the other with less in-house expertise on a vitally important (and highly lucrative) topic: tax.
Boland abruptly announced in April that she was shelving work on the demerger, following opposition from other US partners, in a move that stunned international colleagues and eventually forced Di Sibio to follow suit – killing off the deal.
But with the split plans abandoned, EY still faces the same dilemmas.
“You have challenged the status quo, you can’t stay the same, so what is your plan B?” one partner told Financial News earlier this year.
Somewhat understatedly, Ball says: “Once a global chairman gets elected, they need to review the global strategy.”
There is continuing debate about whether to pursue a separation by other means. Supporters argue that the rationale for the deal still holds.
TPG, a private equity firm, recently offered to take a stake in a separated consulting business, the Financial Times reported last week. EY’s bosses have so far rebuffed the bid.
For now, the most pressing question is who will take charge and set the tone for the sprawling giant.
Having dealt the fatal blow to Project Everest – a move that reportedly left some colleagues “livid” – Boland is not expected to put herself forward as Di Sibio’s replacement though she may play a kingmaker role.
That could prove troublesome for Andy Baldwin, EY’s global managing partner and a Brit, who is seen as the leading candidate to take on the global chairman position but may be seen as tarnished by his prominent role pushing the demerger plan.
EY Canadian chairman Jad Shimaly is seen as a potential unity candidate. Marie-Laure Delarue, who leads the global assurance practice, has also been touted as a contender.
Other names floated as potential runners include Janet Truncale, boss of EY’s American financial services business, Ryan Burke, its head of private client business, and Julie Teigland, the firm’s head of Europe, the Middle East, India, and Africa, according to reports.
Ball, EY’s UK chairman, rules himself out but says the potential candidates “are all great alternatives, and they are very talented people”.
For now, the most pressing question is who will take charge and set the tone for the sprawling giant - Simon Dawson/Bloomberg
Whoever emerges victorious, the process will take time. Ball says: “Partnerships are all about collaboration… We don’t just anoint leaders. We have to go through a process to make sure that there’s broad backing.”
EY’s network structure also means the new leader will not be able to decisively push through big changes without building broad support first, something that eluded Di Sibio to his cost.
For UK chairman Ball, an urgent issue the new global chief will have to address is what to do about circle private equity funds.
San Francisco-based TPG’s recent approach – which did not put a value on EY’s consultancy business – may have been rejected but it is unlikely to dampen broader interest in the sector.
Ball says that his rivals will “be getting similar approaches for some of their businesses and, as you know, private equity can be quite a big disrupter of a sector once they think there are opportunities there”.
“We’ll need to come to a view now – what will this private equity interest mean?”
KPMG and Deloitte have both sold restructuring businesses to private equity, while PwC offloaded its global mobility business.
In the background, the issue of what to do about conflicts between auditing and far more lucrative consulting work remains.
“In some ways, what we were trying to do with [Project Everest] was address some of these questions upfront, to be in control of our own destiny,” Ball argues.
“They do need to be addressed, in some shape or form. I think everyone agrees it doesn’t have to be now.
“But that will need to be addressed at some point. And that’s probably a challenge not just for EY but for the whole profession.”
With Di Sipio’s successor not expected to be chosen until November, however, partners across EY’s offices face an uncertain few months yet.
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